The transformation of world trade.

• Author: Pauwelyn, Joost

TABLE OF CONTENTS INTRODUCTION I. THE EXPLOSION OF THE GATT CLUB A. GATT 1947: The Politics of a Gentlemen's Club 1. Why Was a World Trade Regime Needed in the First Place? 2. The Original GATT Bargain: It's All Politics 3. GATT 1947 as a Bidirectional Interaction Between Law and Politics B. GATT's Quiet Mutation (1947-1994) 1. More Law: From a Political Enforcement Process to Gradual Legalization 2. More Politics: From Majority Voting to a Consensus Practice 3. GATT's Quiet Mutation as a Bidirectional Interaction Between Law and Politics C. The WTO Eruption (1994-2004) 1. Drastic Increase in Discipline and Law 2. Modest but Important Increase in Participation and Politics 3. The WTO as a Bidirectional Interaction Between Law and Politics D. The Law-and-Politics Curve of the World Trade System II. THE THREAT OF A WTO FORTRESS A. How Not to Reform the WTO 1. Facilitate Decisionmaking in the Political Process. 2. Revert to a GATT-like, Diplomatic Dispute Settlement Process 3. Further Legalize/Depoliticize the WTO B. A Better Framework for Reform 1. More Politics, Participation, and Contestation 2. Slightly Reduce Discipline and Maintain and Clarify Exit Options CONCLUSION INTRODUCTION

Conventional wisdom holds that the world trade system evolved from a power-based to a rules-based regime. "To a large degree," one of the pioneers of the academic study of international trade notes, "the history of civilization may be described as a gradual evolution from a power oriented approach, in the state of nature, towards a rule oriented approach." (1) In a steady, unidirectional process of legalization, the argument goes, trade law has gradually replaced trade politics. (2) In particular, the creation ten years ago of the World Trade Organization ("WTO") (3) is commonly portrayed as a constitutional moment when the stability of the rule of law finally eclipsed the caprices of politics and diplomacy. In support of this theory, proponents invariably point to the WTO's new dispute settlement mechanism,' (4) which, unlike that of its predecessor, the General Agreement on Tariffs and Trade ("GATT"), (5) is compulsory and fully automatic. (6) Combined with the WTO's expansion into a host of new regulatory areas, such as health and safety standards, services, trade, and intellectual property protection; (7) and its single package approach (all but two of the more than thirty WTO agreements are binding on all 148 member countries); (8) the conclusion that the WTO possesses a thickened legal-normative structure is, indeed, inescapable. The common perception is, therefore, that at the expense of member countries' sovereignty (less politics), the authority of the WTO gradually expanded (more law). (9)

Within this prevailing school of thought (from-politics-to-law) it is a prominent theme that for trade liberalization to occur the process must be unlinked from the horse-trading and instabilities of domestic politics and representative democracy. (10) For utilitarian proponents of this idea, much the way we rely on experts to cure diseases, or as most countries have a politically independent central bank to ensure price stability, so does the world need a trade regime that is sealed off from the excesses of domestic and international politics. (11) In the absence of an insulated regime, the argument goes, concentrated special interest groups commanding disproportionate leverage, in particular owners and workers in industries that are habitually injured by free trade, would overshadow more diffuse majority concerns that favor free trade, such as consumers paying less for imports. Since the resulting protectionism would inherently harm the majority, and in that sense not be democratic, WTO agreements tying the hands of domestic politicians to the mast of free trade "act to restrain protectionist interest groups, thereby promoting both free trade and democracy." (12) In other words, the argument concludes that, rather than a threat to sovereignty and representative government, the WTO is a fundamental and inherent guarantor of democracy. (13) Others base a similar approach not on utilitarian, welfare-maximization calculations, but on constitutional theory. Just as most countries have human rights and constitutional guarantees to protect against political dictatorship by the majority, so does the world require economic freedoms of a constitutional nature to protect citizens against economic abuse or failure of representative government. (14) From both this utilitarian and from the constitutional perspective, the commonly perceived trajectory of world trade from politics to law is, therefore, not simply a historical observation. It is a prescriptive, normative goal.

This Article contests the traditional view of the evolution of the world trade system. Rather than a unidirectional process of legalization focused exclusively on the system's normative structure, Part I of the Article, "The Explosion of the GATT Club," recounts the transformation from GATT to WTO as a bidirectional interaction between law and politics; in particular, between the system's legal-normative structure and its political, decisionmaking branch. Legal change in the world trade system has, indeed, been profound. Yet, it could only happen and is best understood in its interaction with the system's political process. My claim is that this law-and-politics narrative, as opposed to the conventional from-politics-to-law story, better explains the evolution of the world trade system. It better explains, in particular, how countries could ever agree to decisionmaking by simple majority in the original GATT, what reassured them to surrender their veto right in the WTO dispute process, and why today WTO members so vehemently defend the consensus rule for political decisions.

To tell this alternative story the Article borrows from the theoretical framework of exit and voice, introduced in 1970 by the economist Albert Hirschman (15) and later brilliantly applied by Joseph Weiler to the transformation of the European Community ("E.C."). (16) Crudely put, following Hirschman's insight, there is an inverse, bidirectional relation between exit and voice. In the context of this Article, slightly bending and extending Hirschman's concepts, "exit" is characterized by the lack of law or discipline or the thickness of a system's legal-normative structure, which offers easy options to defect from the cooperative regime. Similarly, "voice" is characterized by the broader notions of politics, participation, or levels of contestation in the political decisionmaking process, such as offering abundant opportunities for expressing preferences for cooperative decisions. Closure of exit options (more law or discipline) leads to higher demands for voice (more politics or participation). Conversely, higher levels of voice (more politics) are an absolute requirement for enabling and sustaining the closure of exit (more law).

Through this lens, my claim is that the world trade system evolved from a combination of high exit and low voice in the text of GATT 1947 to a combination of low exit and high voice in the WTO. That is, it evolved from low discipline or law, with many escape clauses and weak enforcement, and low participation or politics, with a highly technical and technocratic operation run by simple majority vote, to high discipline or law (stricter rules and automatic enforcement) and relatively high participation or politics, a globally contested organization strictly run by consensus. One major consequence of this claim is that increased legalization or discipline such as more supervision by the WTO and less exit, must not come at the expense of less politics in the form of less voice from member countries and their constituencies. Rather, more discipline and harder law (less exit) lead to and require more politics and higher levels of participation (more voice). Hence, both the WTO and its member states were strengthened. Most importantly, the WTO holds a stronger enforcement mechanism and the states retain a veto in the political process. Another crucial insight of this claim is that the often referred-to "institutional paradox" between the WTO's consensus-based, inefficient rulemaking procedures and its highly efficient, automatic dispute settlement system is readily explained. (17) Rather than a paradox or puzzle, the juxtaposition of a strong, automatic dispute settlement system (high discipline, low exit) and a tedious, consensus-based rulemaking process (high voice/participation) is a logical--although not necessarily optimal--phenomenon. High levels of legalization and discipline, such as a strong enforcement mechanism, entail limited exit options and naturally require and lead to high demands for voice via participation and political input, such as consensus decisionmaking.

Moving from the descriptive and analytical to the normative, Part II of this Article, "The Threat of a WTO Fortress," challenges the view that a choice must be made between politics and law or, put differently, between, on the one hand, democratic representation, participation, contestation, and the inherent flexibility that comes with it and, on the other hand, discipline, precommitment, and some degree of government by experts or export-driven interests shielded from capture and popular ignorance. On the contrary, my claim is that a legitimate and efficient trading system requires both politics and law, or more particularly, appropriate balances between participation and discipline, flexibility and precommitment, accountability and insulation, popular support and expertise, and input and output legitimacy.

At the time of writing, however, the world trade system is out of balance. Over the years it gradually moved beyond the technicalities of import duties to cover more politically sensitive areas such as health regulation and intellectual property. Now that it matters, in that it affects not...