International negotiation as if it mattered: Send in the economists


To your right is a graph of carbon emissions – megatons of C02 equivalent per annum. We’ll get to them in a sec.

As Dani Rodrik observes, when a WTO dispute resolution procedure requires the US to do something it doesn’t want to do, guess what it does? It actually does it! So it will unwind subsidies for cotton farmers as it has unwound subsidies elsewhere when required to do by WTO dispute resolution procedures. (Though it will probably undo some of the good work it is being required to do with other policies.)

Whether you like it or not, the WTO is the only international organization in existence that actually makes the U.S. do what it would not otherwise have done on its own. No other organization has such power. I would love it if somebody would come up with a sensible story as to why the U.S. has ceded so much power in trade, while zealously guarding its sovereignty and right to unilateral action in every other domain.

Well I don’t know if it’s the only story, but this issue has struck me too in the context of climate change – where countries busily sign on to obligations and then don’t perform them with nary a sanction. Aid is another area in which this happens. No doubt it’s not a complete explanation, but one important point is that the WTO processes are ones in which economists have been instrumental in designing – and indeed the forerunner of the WTO was designed by economists including Maynard Keynes at Bretton Woods. (Another explanation is that it’s an area in which the US operated as a benign hegemon back in the old pre ‘neo-con’ days. ) As a result of the way Keynes and his American counterparts thought about things, the WTO is set up as a club. And one must submit to the collective disciplines of the club to gain the benefits of membership. That creates a healthy dynamic of collective decision making in which public goods (or if you like ‘club goods’ can be built with private sanctions where necessary.

Sadly, the multilateral trade liberalisation which is the raison d’etre of the the WTO is gradually being ground to dust by the incentives that members of such a large club each have to ‘free ride’ on the others and by the absence of a benign hegemon. However the WTO still maintains a healthy disputes and enforcement regime as Rodrik mentions.

Compare this with the farcical nature of the UNFCCC process which has always irked me. The members of the convention? Pretty much any country that wants to blow in. Then it gets down to commitments. Who’s going to make them? Well the developed countries are going to make them. There’s an overwhelming majority in favour of the developed countries making the commitments. I’ll say that a different way. There’s an overwhelming majority in favour of a small minority bearing the costs. Indeed, the overwhelming majority even decided that the minority making the commitments should pay compensation to any in the minority whose interests were damaged by the majority making good on their commitments.

In such a situation all the mid-developing countries – lots of middling rich countries in Asia like Korea, Singapore, Hong Kong, Taiwan for instance – all head for the door. And the vast bulk of genuinely poor developing countries – one of which will shortly overtake the US as the greatest emitter in the world – all get into North-South finger pointing positions. They don’t want any costs and indeed are so focused on the costs rather than the global task at hand that they don’t even try to get bribed into proper engagement like Russia did, they just want to be bribed for non-engagement.

And the developed countries display a symmetrical cynicism about the whole exercise. The Europeans forever playing the good guys to their green constituents call for sharp cuts in developing countries – 25-40% reductions. That would be great except that the Europeans are some of the most cynical negotiators around. (I’m referring to the main EU powers with the UK and particularly the Scandanavians being decidedly less cynical.) In the lead-up to Kyoto the Europeans fought emissions trading as a ‘loophole’ but of course wanted to preserve it for themselves within the EU ‘bubble’. They fought the trading of ‘hot air’ as a loop-hole by which Russia would be bribed into full engagement, but of course they wanted to keep their own hot air from East Germany. In negotiating Kyoto the EU insisted a uniform target of 15% for other developed countries during the negotiation while allowing itself to share a big reduction in the former East Germany to meet the 15% goal for the entire EU. And on it went.

Right now the Europeans don’t look too much like meeting their Kyoto targets – and their emissions trading system is in a shambles. So ‘hey’, they figure, ‘why don’t we just do what we do in foreign aid – promise to redouble our efforts to make up for our previous laxity? Then if we don’t meet up to those promises, we can always redouble the efforts again – at least we can redouble the words’.

And so it goes becoming more deeply dysfunctional with each day that passes. The WTO on the other hand works like most voluntary institutions that work in our own society which is to say people are invited to participate if and only if they pull their weight and there are some clear sanctions for not doing so.

And now for some good news. The economists are coming to the fore. Of course there have always been economists involved and interested. But Sir Nicholas Stern’s report to the UK Govt really got the economists into the centre of the action – which is where they belong. (And a good reason for Wayne Swan to be representing Penny Wong on Climate Change in the HoR – or perhaps I should say another good reason).

Likewise in Australia one of Australia’s most distinguished and thoughtful economists, Ross Garnaut is now the central éminence grise for the Australian Government on greenhouse.  And judging by his initial lecture the other day, is feeling his way towards a deep command of the subject matter and its possibilities. I hope to blog on his later, but in case I don’t, go and read the lecture here. A breath of fresh air in its deep consideration of the ways in which this is a ‘diabolically’ hard policy problem and its strategising about possible solutions . . . as opposed to the usual pep-talk.

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13 years ago

Was it the otherwise undistinguished US president Hoover..”the business of America is business” that might explain US compliance with WTO orders?
As to UNFCCC compliance maybe it will take a, hopefully temporary tipping point such as a winter time failure of teh Gulf Stream, throwing western Europe into a deep freeze to get the EU back on message with emissions caps. I hope you are right about economists leading he way, and more hopefuly that we don’t need a full blown tipping point to help concentrate the mind.
A good end-of-year tour de force Nicholas. Best wishes and thanks to all at the club.

Dave Bath
13 years ago

The EU admits it’s carbon trading system is flawed, and hopes the rest of the world avoids the stuffup caused by initial granting of freebie credits by individual nations to their own companies that caused collapse of the price.

It’s worth noting that the EU also has problems figuring out it’s stance: French and Italians have lighter cars, Germany makes heavy petrol guzzlers.

But, as The Economist notes this week (2007-12-22, p10) "However, as Bali showed, politics has a habit of undermining economics." That article concludes "But there will be an upside: when some future Bali really does produce an historic agreement to cut global emissions, greener companies of all sorts will be better placed to compete in a low carbon world."