Evolution of the International Economic System-1 | PSIR Optional for UPSC (Notes) PDF Download

Evolution of International Economic System from Bretton Woods to WTO

The Liberal International Economic Order (LIEO) was established after the Second World War as it was believed that it would be conducive to peace. The United States, in particular, played a crucial role in establishing this order, as its prosperity depended on free trade. Since then, the International Monetary Fund (IMF), World Bank, and General Agreement on Tariffs and Trade (GATT) have become the pillars of the new international economic order.

1. The Current Status of the Global International Liberal Economy

• In recent years, the United States has shifted its stance on globalization, free trade, and economic interdependence, adopting an "America First" policy. This policy is not only reflected in the country's strategic policy but also in its foreign trade policy. The United States has initiated a tariff war and made numerous unilateral decisions, such as imposing safeguard tariffs on solar cells and washing machines, and imposing tariffs on steel and aluminum imports.
• The trade war between the United States and China has escalated, with the US increasing tariffs on imports from China and threatening to withdraw from the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO).

2. The Background of US Actions

• The United States' actions should be viewed in the context of China's rising challenge to its hegemony. The US believes that China aims to displace the US and establish its own hegemony, and that stronger actions are needed before it becomes too late. 
• China is expected to surpass the United States as the world's largest economy in nominal GDP terms, and its integration with the international economy will make it difficult to avoid China in the future.

3. The Future of the Liberal International Economic Order

• While some scholars predict the end of globalization, others suggest a shift to "globalization 2.0." Given that China has benefitted from globalization, it has a vested interest in maintaining the liberal international economic order. 
• At the 2017 World Economic Forum, China proclaimed that it is ready to take on the burden of leadership in globalization. This has led to predictions of a transition from Pax Americana to Pax Sinica.
• However, it is doubtful whether China can truly replace the United States. China cannot provide as large a market to the rest of the world as the US can, and its growth is largely driven by exports. China's competitiveness is based on low wages, and if it were to increase its internal demand by raising wages, it would lose this competitive advantage.

The liberal international economic order has undergone significant changes since its establishment after the Second World War. The United States, which once championed globalization and free trade, has now adopted a protectionist and isolationist stance. In contrast, China's rise as an economic powerhouse has led some to predict a new era of globalization led by China. However, the future of the liberal international economic order remains uncertain, as it is unclear whether China can truly replace the United States as the dominant global economic power.

WTO – World Trade Organization

The World Trade Organization (WTO) is an international organization that regulates global trade between nations. It was established on January 1, 1995, as a result of the Uruguay Round of talks, replacing the General Agreement on Tariffs and Trade (GATT), which was limited to trade in goods. The WTO's main aim is to promote free trade and establish rules for international trade, making it a vital player in global economic governance.

Purpose of WTO

• The primary objective of the WTO is to establish the rule of law in international trade. Over time, international trade has expanded beyond manufactured goods to include agriculture, services, intellectual property rights (IPRs), e-commerce, fisheries, and other areas. 
• By providing a framework for trade rules, the WTO aims to create a fair and predictable trading environment that benefits all member countries.

Logic of WTO

• The WTO's rationale is based on Ricardo's theory of comparative advantage, which argues that free trade creates a win-win situation for all countries involved. 
• By engaging in trade, countries can specialize in producing goods and services in which they have a comparative advantage, thus increasing global production, GDP, and overall welfare. 
• The mantra "trade rather than aid" is often used to emphasize the importance of trade for poverty alleviation and economic development.

WTO Principles

To achieve the goal of free and fair trade, WTO members have agreed on the following fundamental principles:

• Promote free trade by reducing tariff and non-tariff barriers.
• Adopt non-discrimination through two key principles: Most Favored Nation (MFN) status and national treatment.
• Provide special and differential treatment for developing countries, allowing them some exemptions to promote free trade.
• Ensure transparency and predictability in trade policies and practices.

US Argument Against China

• The US has accused China of not adhering to the fundamental principles of the WTO. It claims that China has denied market access to foreign companies, leading to a negative trade balance with many countries. The US also alleges that China has forced American companies to transfer technology to Chinese firms, violating intellectual property rights norms.
• Furthermore, the US argues that China, as a rapidly growing economy with a large trade surplus, should not be classified as a developing country and receive special treatment under WTO rules. Lastly, the US accuses China of lacking transparency in its trade policy.

WTO Bodies

• Ministerial Council: The summit-level body where trade and commerce ministers meet to discuss and negotiate trade issues.
• General Council: The executive body responsible for the administration and management of the WTO.
• Trade Policy Review Board: Ensures transparency and predictability by reviewing the trade policies of member countries and identifying any violations of WTO norms.
• Dispute Settlement Body (DSB): A crucial innovation of the WTO to help countries resolve trade disputes peacefully. The Appellate Body, a part of the DSB, consists of seven members who adjudicate disputes between member countries.
• Specialized Councils: Various councils, such as the Council on Trade and Goods and the Council on Intellectual Property Rights, focus on specific areas of international trade.

The World Trade Organization plays a crucial role in facilitating international trade and fostering economic growth. By promoting free trade and establishing a rules-based trading system, the WTO aims to create a level playing field for all member countries, ultimately contributing to global prosperity. However, the organization faces challenges in ensuring that all members adhere to its principles, as evidenced by the ongoing trade disputes between the US and China.

Attitude of the USA towards the Dispute Settlement Body (DSB)

The Dispute Settlement Body is designed for all members, but the high cost of the dispute settlement process makes it difficult for developing countries to utilize the platform. As a result, the platform is primarily used by powerful countries, with the majority of disputes being between the US and China, and the US and India. The US has lost many cases in the DSB, leading to attempts to undermine the body. Currently, the US is blocking the appointment of new members to the DSB, leaving it defunct. The US has accused DSB members of corruption and has expressed concerns over the lack of transparency and corruption among WTO officials.

• Potential Solutions: The WTO Secretariat suggests that appointments can be made without US consent, as consent is only required for trade agreements and not administrative matters. However, the US does not accept this interpretation.
• WTO Round of Talks: Trade treaties are dynamic and require ongoing negotiations. Since the first ministerial meeting in Singapore in 1996, there have been several rounds of talks, with varying degrees of success. The last significant achievement was the agreement on trade facilitation at the Bali Ministerial in 2013.
• Doha Development Agenda: The Doha Development Agenda prioritizes development over trade, focusing on the development of countries in the global South. The agenda includes issues of interest to both developed and developing countries, with a single undertaking modality, meaning that nothing is agreed until everything is agreed. Developed countries initially agreed to the Doha agenda, but their interest has waned over time.

Ongoing Negotiation Areas

Some of the major ongoing negotiation areas include:

• Agreement on Agriculture (AOA): Agriculture is a contentious issue and the primary reason for the deadlock in negotiations.
• Non-Agricultural Market Access (NAMA): This area involves negotiations on market access for non-agricultural products.
• Trade in Services: Negotiations on liberalization and regulation of international trade in services.
• Trade-Related Aspects of Intellectual Property Rights (TRIPS): This includes negotiations on intellectual property rights and their impact on trade.
• Trade-Related Investment Measures (TRIMS): Discussions on investment measures that impact trade.
• Trade in Fisheries: Negotiations on rules and market access for fish and fish products.
• E-Commerce: Discussions on trade rules, market access, and regulation of e-commerce.
• Information Technology: Negotiations on trade in IT products and services.
• Gender issues: Addressing gender equality and women's empowerment in trade.

The attitude of the US towards the Dispute Settlement Body has been negative, leading to a defunct body and hindering progress in WTO negotiations. The ongoing areas of negotiations cover a wide range of topics, with agriculture being the most contentious issue. The Doha Development Agenda remains a priority for developing countries, but developed countries have become less interested over time.

Conclusion

In conclusion, the liberal international economic order has experienced significant changes since its establishment after the Second World War, with the United States shifting from a pro-globalization stance to a more protectionist approach. This has led to increased tensions with China and uncertainty regarding the future of the WTO. The WTO plays a vital role in facilitating international trade and fostering economic growth, but faces challenges in ensuring that all members adhere to its principles. The ongoing negotiations within the WTO cover a wide range of topics, with the Doha Development Agenda prioritizing development for countries in the global South. However, the United States' negative attitude towards the Dispute Settlement Body has hindered progress in negotiations and left the future of the liberal international economic order uncertain.