Coming Apart: WTO fiasco highlights urgency for the U.S. to lead the global trading system

India’s torpedoing last week the WTO’s trade facilitation agreement, struck at the last minute between the United States and India in the December 2013 WTO Ministerial in Bali, is a death blow to the world body and adds to growing disarray in the global trading system.

Two threats are emerging. The first is disintegration of the trading system. The core of the system until the mid-1990s, the WTO is utterly dysfunctional: deals require unanimity among 160 members, making any cantankerous player like India a veto. Aligning interests has been impossible, turning all action in global trade policymaking to free trade agreements (FTAs), first kicked off by the North American Free Trade Agreement (NAFTA) in 1994. By now, 400 FTAs are in place or under negotiation. FTAs have been good cholesterol for trade, but the overlapping deals and rules also complicate life for U.S. companies doing global business. One single deal among all countries would be much preferable to the “spaghetti bowl” of FTAs, but it is but a pie in the sky. So is deeper liberalization by protectionist countries like India.

The U.S.-led talks for “mega-regional” agreements with Europe and Asia-Pacific nations, the Trans-Atlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP), are the best solution yet to these problems. They free trade and create uniform rules among countries making up two-thirds of the world economy. Incidentally, they would create a million jobs in America. Yet both hang in balance thanks to inaction on Capitol Hill to pass the Trade Promotion Authority (TPA), the key piece of legislation for approving the mega-deals, now stuck in a bitter political fight as several Democrats and Tea Party line up in opposition. TPA is key for the Obama administration to conclude TPP and TTIP talks: Europeans and Asians are unwilling to negotiate the thorniest topics before they know TPA is in place to constrain U.S. Congress to voting up or down on these deals, rather than amending freshly negotiated texts.

The second threat in world trade is the absence of common rules of the game for the 21st century global digital economy. As 3D printing, Internet of Things, and cross-border ecommerce, and other disruptive technologies expand trade in digital goods and services, intellectual property will be fair game – why couldn’t a company around the world simply replicate 3D printable products and designs Made in the USA? Another problem is data protectionism – rules on access and transport of data across borders. Europeans are imposing limits on companies’ access to consumer data, complicating U.S. businesses’ customer service and marketing; emerging markets such as Brazil and Vietnam are forcing foreign IT companies to locate servers and build data centers as a condition for market access, measure that costs companies millions in inefficiencies. A growing number of countries claim limits on access to data on the grounds of “national security” and “public safety”, familiar code words for protectionism.

Digital protectionism risks balkanizing the global virtual economy just as tariffs siloed national markets in the 19th century when countries set out to collect revenue and promote infant industries – a self-defeating approach that took well over a century to undo, and is still alive and well in countries like India. The biggest losers of digital protectionism are American small businesses and consumers leveraging their laptops, iPads and smart phones to buy and sell goods and services around the planet. Trade policymakers however lag far behind today’s trade, which requires sophisticated rules on IP, piracy, copyrights, patents and trademarks, ecommerce, data flows, virtual currencies, and dispute settlement. The mega-regionals, especially the TTIP, are a perfect venue to start this process.

Disintegration of trade policies risk disintegrating world markets. Just as after World War II, the global trading system rests in America’s hands. Three things are needed.

The first is the approval of TPA, which unshackles U.S. negotiators to finalize TPP and TTIP. Most interesting for U.S. exporters, TPP and TTIP almost de facto merge into a superdeal: the United States and EU already have bilateral FTAs with several common partners belonging in TPP – Peru, Colombia, Chile, Australia, Singapore, Canada, and Mexico to name a few. What’s more, gatekeepers to markets with two-thirds of global spending power, TPP and TTIP will be giant magnetic docking stations to outsiders; China and Brazil, aiming to revive sagging growth, are interested. Once this happens, the TTIP-TPP superdeal will cover 80 percent of world’s output and approximate a multilateral agreement – and have cutting-edge common trade rules that could never be agreed in one Big Bang at the WTO.

Second, also needed is a shift negotiation of plurilateral agreements – broad-based agreements among sub-sets of WTO members now negotiated in trade in services and in environmental goods and services, and proposed for investment and data security, and now also for trade facilitation sans India. The coalitions of the willing driving plurilaterals include the United States, EU, Japan, and many Latin American and Asian emerging markets disillusioned by India and its accomplices, Cuba, Bolivia, and Venezuela. A pivot in trade politics, China is looking to join the services plurilateral. Plurilaterals not only help American companies to export more; they enable Washington and its friends and allies to call the shots in global trade rulemaking – and isolate India, proving its policies self-defeating.

The third deal that is needed is Washington Consensus II, for the global digital economy. In the 1990s, the Washington Consensus set off a wave of deep trade and investment liberalization across the developing and post-communist world, paving the way for a tidal wave of globalization. The digital economy has no equivalent. A broad group of stakeholders and thought-leaders – governments, international organizations, companies, and think-tanks – need to come together to articulate guidelines for nations’ behavior in the global digital economy. Given its infamous connotations, the digital deal could be called “Seoul Consensus”, highlighting Korea’s leap to a leader in digitization from a rural economy just a couple of decades ago.

U.S. leadership is urgently needed to integrate the rapidly changing global trading system. It is time for Congress to step up to the plate.

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