Time for a WTO 2.0 to monitor global supply chains??

An out of box thinking by Prof. Richard Baldwin on the topic (a more detailed account here).

He says WTO is focused on multilateral trade based on trade between goods and services. However,  world trade is changing with evolution of global complex supply chains. Here, it is not simply about trade between two countries but one good being made partnering  with other countries before selling to customers. This requires a new organisation:

The cross-border flows of goods, investment, services, know-how and people associated with international production networks – call it ‘supply-chain trade’ for short – has transformed the world (Gereffi and Lee 2012). The WTO has not kept pace. It is time to change that, as I argue in CEPR Policy Insight No 64, posted today (Baldwin 2012). Before turning to the governance issue, consider the changes.

Since the 1990s, globalisation has been associated with a sharp drop in rich nations’ share of world income, world manufacturing and world exports (Figure 1). The big winners are developing nations that industrialised by joining, rather than by building, supply chains (Figure 2). The big share winners are all part of the supply chains of the US, Germany (Poland and Turkey), and Japan (China, Korea, Indonesia and Thailand). India is the exception. This rapid industrialisation also pulled up a wide range of developing nation commodity exporters like Brazil, Russia, Australia and South Africa.

The world of trade politics and trade governance also changed. If a high-tech firm is to locate production stages in a developing nation, the nation’s government must ensure the necessary free movement of goods, services, information and the protection of tangible and intangible property rights. Old fashioned protection, anti-FDI policies, or lax property rights almost guarantee that the offshored stages will go somewhere else. Developing nations that got the offshored factories became hyper-competitive and wiped out the exports of developing nations that clung to import-substitution industrialisation. In the world of supply-chain industrialisation, protectionism has become destructionism..

However, new rules are needed now:

The GATT/WTO’s success was based on win-win cooperation whose nature followed from the nature of traditional trade – i.e. goods crossing borders. With traditional trade, tariffs help the protecting nation while harming others, so the end result of individually rational protection is collective folly. The GATT/WTO flourished by solving this coordination problem – by disciplining selfish-but-harmful-to-others policies. The basic GATT/WTO bargain that underpinned the discipline was ‘my market for your market’. Negative third-nation effects were global, so universal membership was the natural outcome. Given vast market-size and income differences, ‘Special and Differential Treatment’ for developing nations was a natural part of the package.

Supply-chain trade poses radically different coordination problems, so it is natural that the structure of the organisation that solves it would be radically different. The cross-border flows that trigger supply-chain trade tend to be one-way. Advanced-technology firms offshore tangible and intangible assets, combining them with low-wage labour in developing nations. The firms get higher returns on their firm-specific assets; the developing nations get fast-track industrialisation.

As such, the basic deal in supply-chain cooperation is not ‘I’ll keep my market open if you keep yours open’, as in WTO 1.0. It is ‘I’ll offshore my factories and technologies if you assure my tangible and intangible assets are protected’. The negative third-nation effects are limited, so the logic of universal membership in WTO 2.0 is weak. The justification for SDT also disappears. The cooperation helps developing nations credibly commit to policies that are good for them. Allowing a poor nation to not assure protection of the assets that trigger supply-chain trade would harm rather than help. In the world of supply-chain trade, protectionism is destructionism as far as developing nations are concerned. Given that WTO 1.0 has universal membership and Special and Differential Treatment in its DNA, multilateralising supply-chain disciplines will require a new organisation – WTO 2.0 as it were.

Interesting idea..

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