The changing face of global trade
In recent decades a combination of advancements in technology and communication and increasing trade liberalisation has resulted in an exponential increase in the volume of trade. This growth has been accompanied by a parallel increase in complexity of the global governance trade regime.
First, the significant rise in trade of intermediate goods and commodities through global value chains has resulted in intricate networks of firms that present new challenges in trade governance. Further, as traditional barriers to trade – such as tariffs – have fallen, a variety of ‘non-tariff barriers’ have gained ground, such as regulatory standards. Finally, the face of global trade has also changed with a sharp increase in trade in (digital) services.
Like trade itself, the governance of trade has a long history. And as trade itself has increased in volume and complexity, the governance of trade has attempted to keep pace – becoming more complex as more institutions, regulations and actors enter the trade governance field. This is intensified by the fact that trade is increasingly understood to have an impact on a number of other policy areas that had been considered separate from trade, such as sustainable development, protection of labour rights, or intellectual property rights protection. As a result, trade policy increasingly goes beyond ensuring market access to include a great number of so-called “non-trade issues”.
The trade regime complex
Trade governance has long been conducted at many levels by a diverse range of institutions, laws, treaties and actors (referred to as simply “institutions” from here), ranging from a handful of formal international organisations to hundreds of public-private and private governance initiatives.
The concept of the ‘regime complex’ is useful for understanding the dynamics of the overlapping, competing and parallel institutions which make up a governance regime. To draw on the description set out by Keohane and Victor (2011), a regime complex generally falls somewhere along a continuum between being made up of non-linked institutions with little coordination (‘fragmented’) and being made up of a leading institution that integrates subordinate institutions within a hierarchy (‘nested’).
Since the signing of the General Agreement on Tariffs and Trade (GATT) in 1947 and its reincarnation as the World Trade Organisation in 1995, the governance of trade was largely hierarchical, with most actors and institutions operating within the rules-based system set out by the WTO. Accordingly, for much of the 20th century, the trade regime complex would have been considered to be substantially ‘nested’.
Governance regimes, however, are dynamic. While the WTO is still the leading institution in trade governance, contestation against the WTO by major trading powers (especially the United States through the paralyzation of the WTO’s dispute settlement mechanism), internal governance challenges (the slow pace of multilateral negotiations – exemplified by the failure of the Doha Round), increasing power of developing countries, and major trading economies taking unilateral or plurilateral measures to fill perceived deficits in the WTO have brought significant changes to the trade regime complex.
Indeed, the trade regime complex has begun to flatten out – a process we have dubbed “de-nesting”. The result is a regime that is becoming less hierarchical, more fragmented and with institutions that do not keep neatly within old confines. In a more fragmented regime, the instances of institutional interactions that may contradict or substitute one another increase, creating additional obstacles in governance. Perhaps more importantly, whereas the regime was previously guided by a more or less consistent set of objectives set in place by a single institution, as the regime becomes increasingly de-nested, objectives are set by more institutions and are increasingly at odds with one another.
Institutions at odds: Challenges in Trade Governance
Each of the institutions making up the trade governance regime faces a number of challenges, which may occur within an institution itself or result from interactions between different institutions.
In taking stock of the major challenges within trade governance, we identified five primary categories. The first three – institutional structure, legitimacy and effectiveness – are internal challenges. The final two – institutional complexity and the geopolitical and economic context – are external challenges. Though most of these challenges are interrelated, for the sake of simplicity, we look at the categories individually below.
Several challenges relate to the way in which an institution is set up and governed. Challenges related to institutional structure include internal decision making (for instance, in the case of the WTO, every member has a de facto veto and reaching consensus has proven extremely difficult), organisational dynamics (such as what the United States sees as an illegitimate expansion of scope of the WTO dispute settlement mechanism), and lack of central decision making or oversight (as in the case of hundreds of individual VSS operating without centralised coordination).
A second category involves perceptions of an institution’s legitimacy, which is a critical component of gaining compliance with the rules, standards and guidelines set out by the institution, as well as maintaining or gaining membership, funding, and support. An institution’s legitimacy can be undermined by a perceived lack of inclusivity (in terms of membership or power) or the perception of a lack of transparency (for example, free trade agreement negotiations are generally conducted in secret, which may fuel contestation of such agreements by citizens and NGOs).
Effectiveness / Outcomes
A third category of challenges has to do with the implementation of governance activities and their outcomes. There are several recurring problems that reduce the effectiveness of governance measures in terms of output, including an institution’s inability to enforce compliance with its rules or failure to engage local institutions and rule-takers.
A challenge that is seemingly inherent in global governance and appears to affect, to varying degrees, a majority of the institutions that make up the trade regime is that of enforceability. For instance, though FTAs are legally enforceable in theory, they can be politically or diplomatically costly to enforce (especially chapters in FTAs on “non-trade” issues, like sustainable development) and therefore subject to geopolitical calculation.
Another frequent challenge stems from the disconnect between the international and local levels – policies adopted at the global level may not be sufficient or appropriate for the particulars of a local context, or the rules may not be adequately implemented on the ground due to a failure to engage actors with knowledge of the local situation. This challenge plagues VSS, which often set rules and conditions without sufficient attention to unique local contexts.
Another challenge arises when institutions attempt to engage in rule-making in other areas outside their original objectives or mandate. While an institution may normatively argue in favour of creating linkages between issues, such as by including human rights chapters in trade agreements, such linkages may ultimately undermine the institution’s effectiveness if they block an agreement from moving forward at all.
Our fourth category contains challenges that have developed due to increasing regime complexity resulting from the proliferation of institutions or an absence of central coordination between institutions. The interactions between different institutions can have positive, negative or neutral effects. We follow Lambin et al. (2014) and contend that interacting institutions can be seen as complementary, contradictory or substitutable.
Contradictory institutions are those for which interactions diminish the ability of one or both to achieve intended governance objectives. For example, in pursuing certain objectives such as consumer or environmental protection, private standards ratchet up rules and requirements for exporters. These additional rules and requirements – though voluntary – can be seen as a form of trade discrimination or barrier to trade, which conflict with a primary objective of the World Trade Organisation, namely the facilitation of trade through the reduction of trade barriers.
Complementary interactions are those that enable one or both to better achieve the intended governance objective(s) than they would have achieved otherwise. For instance, some governments’ trade policy has begun to recognise certain private sustainability standards as legitimate indicators that products meet a requisite set of criteria (for instance, South Korea’s Act on the Sustainable Use of Timber and the EU’s biofuel imports regulation). In these cases, the state benefits from the expertise of the private standards, and the private standards benefits from the legitimating effect of state recognition.
Substitutable institutions, on the other hand, are those with similar or redundant functions and objectives and which can reasonably replace one another. The presence of substitutable institutions may have effects such as fragmentation, competition, and confusion. For example, the dizzying array of various bilateral and plurilateral free trade agreements that crisscross parts of the world, most notably amongst members of the Association of Southeast Asian Nations (ASEAN), often overlap in terms of membership with the result that some agreements may become redundant, as the same preferences can be obtained through other agreements. A related challenge is that these FTAs can reduce the incentives for member states to support ASEAN’s efforts to establish a free trade area.
Global Political and Economic Context
Our final category is somewhat more broadly composed of challenges that result from the geopolitical and economic contexts within which the trade governance regime operates. Shifts in economic weight and global power influence the conditions under which institutions set and implement rules and also change the global governance problems to be solved. In many ways, these challenges are the product of change – that the world for which many governance institutions were originally built is no longer the world in which we now live. These challenges include, among others, a turn away from multilateralism by some major powers, increasing protectionism, meeting the differentiated needs of developing countries, rising multipolarity, and increasing power of non-state actors.
What is to be done?
Ultimately, and normatively, the preservation of an approach to trade that emphasises liberalisation in order to achieve sustainable and socially-inclusive economic growth will require like-minded institutions to work together to reconfirm these objectives for the future – but doing so will also require addressing the primary causes of increased fragmentation and contestation in the first place.
Kari Otteburn is a researcher in political economy, corporate accountability, and labour rights at the Leuven Centre for Global Governance Studies at KU Leuven.