Mis‐thinking globalisation: The case for WTO 2.0

Richard BaldwinGraduate Institute, Geneva & University of Oxford

26 September 2012, WTO Forum

Mis‐thinking globalisation• Conventional view:

– Globalisation = no trade to free trade, slowly.

• But pervasive sense that today’s globalisation is different …

10

11

11

12

12

13

13

14

14

15

15

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.918

7018

7518

8018

8518

9018

9519

0019

0519

1019

1519

2019

2519

3019

3519

4019

4519

5019

5519

6019

6519

7019

7519

8019

8519

9019

9520

00

Source: David , Meissner, and Novy (2011)

Conventional view: Globalisation  trade costs  (1870‐1980)

Source: Gravity model based estimates of trade costs (Jacks, Meissner, Novy 2011).

1950

1870

1914

1921

1939

1980

1889

Global trade costs

10

11

11

12

12

13

13

14

14

15

15

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.918

7018

7518

8018

8518

9018

9519

0019

0519

1019

1519

2019

2519

3019

3519

4019

4519

5019

5519

6019

6519

7019

7519

8019

8519

9019

9520

00

Source: David , Meissner, and Novy (2011)

Conventional view (1870‐1980): Globalisation all about trade costs

Source: Gravity model based estimates of trade costs (Jacks, Meissner, Novy 2011).

1950

1870

1914

1921

1939

1980

Global trade flow (right

scale in logs)

1889

1870

1914

1921

1939

1950

1980

10

11

11

12

12

13

13

14

14

15

15

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.918

7018

7518

8018

8518

9018

9519

0019

0519

1019

1519

2019

2519

3019

3519

4019

4519

5019

5519

6019

6519

7019

7519

8019

8519

9019

9520

00

Source: David , Meissner, and Novy (2011)

Then something changed…

Trade kept growing

Despite flat trade costs

Globalisation impact changed

1991, 52%

20%

30%

40%

50%

60%

1948

1958

1968

1978

1988

1998

2008

G7 exports

1990, 65%

40%

50%

60%

70%

80%

1970

1975

1980

1985

1990

1995

2000

2005

2010

G7 manufacturing

1950, 55%

1988, 67%

45%

50%

55%

60%

65%

70%

1948

1958

1968

1978

1988

1998

2008

G7 GDP

1990

7.27.47.67.88.08.28.48.68.89.09.2

1970

1975

1980

1985

1990

1995

2000

2005

2010

logs

World manufacturing

Global manufacturing shares

1990, 65%

G7, 47%

4%

17%China

+ Korea

3%

5% five risers

RoW

0%

10%

20%

30%

40%

50%

60%

70%

80%

1970

1975

1980

1985

1990

1995

2000

2005

2010

Korea

India

TurkeyIndonesia

Poland

Thailand

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1970

1975

1980

1985

1990

1995

2000

2005

2010

Wor

ld m

anuf

actu

ring

shar

e

KoreaIndiaTurkeyIndonesiaPolandThailand

US

ChinaJapan

Germany

Korea

ItalyUK

France0

200

400

600

800

1000

1200

1400

1600

1800

2000

1970

1975

1980

1985

1990

1995

2000

2005

2010

$ bi

ll 20

05

The tight geographical clustering of manufactures export swings

Change in national export manufacturing share, 1980s to 2007-08 (percentage points)Philippines 59% Mexico 46% China 44% Malaysia 42% Thailand 40% Sri Lanka 35% Turkey 29% Morocco 28% Bangladesh 23% Tunisia 22% Poland 20% Pakistan 18% Hungary 17% US 10% Romania 9% Netherlands 7% Denmark 6% UK 5% India 5% France 5% Spain 5% Greece 1%

Italy -1%Portugal -1%Switzerland -2%Korea -2%Canada -2%Germany -2%Sweden -2%Austria -4%Japan -5%Hong Kong -6%

Trade changed

US-EU25

1986

Intra-Asean

Japan-Asean

US-China

0%

10%

20%

30%

40%

50%

60%

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

Index of intra-industry trade

G7

1990

Asia

LatAm

0

1

1

2

2

3

3

4

4

519

6719

7019

7319

7619

7919

8219

8519

8819

9119

9419

9720

0020

0320

06

Vertical specialisation index

Reimporting/reexporting takeoff

-70% -35% 0% 35% 70%Poland

AustraliaJapanSpain

NorwayNL

FranceGermany

AustriaSwitzItaly

SwedenIndia

UKBrazilRussiaKorea

S.AfricaIndonesia

ChinaArgentina

CanadaMexico

USUS, 1995

Reexports

Reimports

-70% -35% 0% 35% 70%Poland

AustraliaJapanSpain

NorwayNL

FranceGermany

AustriaSwitzItaly

SwedenIndia

UKBrazilRussiaKorea

S.AfricaIndonesia

ChinaArgentina

CanadaMexico

USCanada, 1995

Reexports

Reimports

-70% -35% 0% 35% 70%Poland

AustraliaJapanSpain

NorwayNL

FranceGermany

AustriaSwitzItaly

SwedenIndia

UKBrazilRussiaKorea

S.AfricaIndonesia

ChinaArgentina

CanadaMexico

USMexico, 1995

Reexports

Reimports

-70% -35% 0% 35% 70%Poland

AustraliaJapanSpain

NorwayNL

FranceGermany

AustriaSwitzItaly

SwedenIndia

UKBrazilRussiaKorea

S.AfricaIndonesia

ChinaArgentina

CanadaMexico

US US, 2008

Reexports

Reimports

-70% -35% 0% 35% 70%Poland

AustraliaJapanSpain

NorwayNL

FranceGermany

AustriaSwitzItaly

SwedenIndia

UKBrazilRussiaKorea

S.AfricaIndonesia

ChinaArgentina

CanadaMexico

USCanada, 2008

Reexports

Reimports

-70% -35% 0% 35% 70%Poland

AustraliaJapanSpain

NorwayNL

FranceGermany

AustriaSwitzItaly

SwedenIndia

UKBrazilRussiaKorea

S.AfricaIndonesia

ChinaArgentina

CanadaMexico

USMexico, 2008

Reexports

Reimports

US Canada Mexico

1995

2008

Chinese reimport/reexport1995 2008

-10% 0% 10% 20%

SpainPoland

NLUKUS

FranceAustriaCanada

ItalySwitz

SwedenNorway

GermanyMexico

JapanIndia

Korea

AustraliaBrazil

S.AfricaRussia

IndonesiaArgentina

China, 2008

ReexportsReimports

-10% 0% 10% 20%

SpainPoland

NLUKUS

FranceAustriaCanada

ItalySwitz

SwedenNorway

GermanyMexico

JapanIndia

Korea

AustraliaBrazil

S.AfricaRussia

IndonesiaArgentina

China, 1995

ReexportsReimports

Global supply‐chain trade, 2009

Source: Baldwin and Lopez‐Gonzales (2012).

Compare total vs supply‐chain trade

Source: Baldwin and Lopez‐Gonzales (2012).

I2P '09 UK

Ger

man

y

Fran

ce

Itlay

NL

Bel

gium

Aus

tria

Pola

nd

Cze

ch

Den

mar

k

Spai

n

Portu

gal

Finl

and

Gre

ece

Irela

nd

Turk

ey

Swed

en

Bra

zil

Rus

sia

Indi

a

Indo

nesi

a

Aus

tralia

Taip

ei

Chi

na

Japa

n

Kor

ea

US

Mex

ico

Can

ada

RoW

UK 0% 0% 0% 0% 1%Germany 0% 1% 0% 0% 0% 1% 0% 2%France 0% 1%Itlay 1%NL 1% 0% 0%Belgium 0%AustriaPolandCzechDenmark 0%Spain 0%PortugalFinlandGreeceIreland 0%Turkey 0%Sweden 0%Brazil 0%Russia 1%India 0%Indonesia 0%Australia 1% 0%Taipei 1% 0%China 1% 0% 1% 1% 2% 4%Japan 1% 0% 0% 2%Korea 1% 1%US 0% 0% 0% 1% 0% 1% 1% 4%Mexico 1%Canada 2%RoW 1% 1% 1% 1% 1% 0% 0% 0% 1% 0% 0% 0% 4% 2% 1% 3%

2009 total

gbr

deu

fra ita nld

bel

aut

pol

cze

dnk

esp

prt

fin grc

irl tur

swe

bra

rus

ind

idn

aus

twn

chn

jpn

kor

usa

mex

can

RoW

UK 1% 0% 0% 1%Germany 1% 1% 1% 1% 1% 1% 0% 0% 1% 1% 1%France 0% 1% 1% 1% 0% 0%Itlay 1% 1% 0%NL 0% 1% 0% 0% 1%Belgium 0% 1% 1% 1%Austria 1%Poland 0%Czech 0%DenmarkSpain 0% 0% 0%PortugalFinlandGreeceIreland 0% 0%TurkeySwedenBrazil 0%Russia 0%India 0%IndonesiaAustralia 1% 0%TaipeiChina 1% 1% 1% 0% 0% ## 0% 0% 2% 1% 4% 0% 0%Japan 0% 2% 1% 1%Korea 1% 0% 1%US 1% 1% 0% 0% 1% 1% 0% 2% 2%Mexico 2%Canada 3%RoW

Supply‐chain trade Total trade

International trade politics changed

South Asia

Sub-Sahara

n Africa

Middle East & North Africa

East Asia & Pacific

0

5

10

15

20

25

30

35

40

45

50

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Applied tariffs, simple mean, all goods (%)

New BITs

signed

1988

FDI

0

500

1000

1500

2000

2500

0

50

100

150

200

250

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

1986

0

5

10

15

20

25

30

35

40

45

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

Number of deep provisions in new RTAs

‐ Developing nations seek out liberalisation of policies that foster supply‐chain industrialisation. ‐ Unilateralism on tariffs, Take‐off in BITs, FDI, and soaring deep RTAs provisions

Trade governance changed• Supply‐chain trade needed new disciplines.

– More interconnected policy; trade‐investment‐services‐IP ‘nexus’

• Deep N‐S RTAs around outsourcing HQ economies partly filled the gap.– US, Japan and Germany (EU).

• Mega‐Regionals & mega‐bilats start to harmonise the bilateral rules.– TPP, TAP (EU‐US), EU‐Canada, Japan‐EU, Canada‐Japan (old Quad + offshoring partners).

– ISA?

WTO did not change

Looking forward• Harmonised rules on supply‐chain trade likely to be written by 2020;

• Most likely negotiated in mega‐regionals & mega‐bilats;

• WTO unlikely to be involved (DDA stuck).So what is the future of the WTO?

Three premises• For traditional trade, WTO is in excellent health. 

• Status quo is comfortable for WTO members whose trade is booming.

• On current trajectory, status quo will be destroyed by 2020; – mega‐regionals & mega‐bilats will have transformed world trade governance.

ERGO• The WTO’s future:

– A) Stay on the 20th century  side track;• Allow fragmentation of global trade governance & exclusion of some major WTO members.

– B)  Seek to multilateralise the new supply‐chain‐trade disciplines. 

Case for WTO 2.0• In future status quo, firms from 3 of the world’s 4 manufacturing giants (US, China, Japan, and Germany) will have been involved in negotiating the harmonised supply‐chain rules. 

• The 3 will have to be convinced that multilateralisation will improve things.

Structure of WTO 2.0• Key questions:

– What structure (number of members, S&D, etc.)?– Which issues?

• Economic logic of S&D– Primarily import substitution industrialisation (ISI).– Secondarily vulnerable groups.

Structure of WTO 2.0• Production unbundling destroyed ISI, so much weaker economic rational for S&D for supply‐chain rules.

• Logic for vulnerable groups unaffected.• ERGO: Need WTO 2.0

– WTO 1.0 keeps S&D, WTO 2.0 doesn’t.

S&D in WTO 2.0: Politics • US, inter alia, likely to demand elimination of special and differential treatment for all major supply‐chain players as a price for multilateralising supply‐chain trade rules.

• This cannot happen in WTO 1.0, so need WTO 2.0– (maybe World Supply Chain Organisation??)

Universal membership• WTO 1.0 logic: free market most efficient

– non‐discrimination with universal members is natural implication.

• Supply‐chain trade is more highly concentrated and not a ‘free market’ outcome.

• Logic of universality is weaker.• Politics suggests membership only for those heavily engaged in supply‐chain trade.

Which issues covered in WTO 2.0?

Which issues covered in WTO 2.0?Revealed preference evidence from US RTAs (share with given provision)

0% 80%AD

CustomsCVM

Export TaxesFTA Agriculture

FTA IndustrialGATS

Public ProcurementSPS

State AidSTETBT

TRIMsTRIPs

AgricultureAnti-Corruption

Approximation of…Audio Visual

Civil ProtectionCompetition Policy

Consumer ProtectionCultural Cooperation

Data ProtectionEconomic Policy Dialogue

Education and TrainingEnergy

Environmental LawsFinancial Assistance

HealthHuman Rights

Illegal ImmigrationIllicit Drugs

Industrial CooperationInformation SocietyInnovation Policies

InvestmentIPR

Labour Market RegulationMining

Money LaunderingMovement of Capital

Nuclear SafetyPolitical Dialogue

Public AdministrationRegional Cooperation

Research and TechnologySME

Social MattersStatisticsTaxation

TerrorismVisa and Asylum

US LE frqUS AC frq

Provision in WTO 1.0 but deeper commitments in the RTAs

Provision not in WTO 1.0 (maybe in WTO 2.0)

Legally enforceable

Legally enforceable

Source: WTO database on RTA provisions

Ditto for US, Japan, EU & RoW

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RoW ACfrq

RoW LEfrq

US Japan

EU All others

80%

Only beyond WTO measures

0% 50% 100%

AgricultureAnti-Corruption

Approximation of LegislationAudio Visual

Civil ProtectionCompetition Policy

Consumer ProtectionCultural Cooperation

Data ProtectionEconomic Policy Dialogue

Education and TrainingEnergy

Environmental LawsFinancial Assistance

HealthHuman Rights

Illegal ImmigrationIllicit Drugs

Industrial CooperationInformation SocietyInnovation Policies

InvestmentIPR

Labour Market RegulationMining

Money LaunderingMovement of Capital

Nuclear SafetyPolitical Dialogue

Public AdministrationRegional Cooperation

Research and TechnologySME

Social MattersStatisticsTaxation

TerrorismVisa and Asylum RoW legally

enforceable

EU legallyenforceable

Japan legallyenforceable

US legallyenforceable

Visa

IPR

Movement of capital

Competition policy

Investment

At least 2/3rd of US & Japan RTAs have legally binding provisions

• Tariffs to zero, • Beyond TRIPs, • Beyond AD, • Beyond CVM, • Beyond Customs, GATS, TRIMs, • Investment, • Movement of Capital,

Don’t have the answers!Time to start thinking ahead on trade

• Global trade governance is at turning point.• Status quo likely to evaporate by 2020.• Need global thinking on what comes next.• Voice of all nations needs to be added to the conversation among manufacturing giants.

• Design issues need research.• Content issues need research.

Thanks for listening• My paper “WTO 2.0” will be soon posted on

http://www.voxeu.org/