May 7, 2006

Creative Diplo-bureacrats and their Little Boxes

One obvious feature of the Multilateral Trade Regime is its mind-numbing, technocratic, outsider-baffling complexity.

It's ironic, actually, because when the worldwide trade regime was launched in 1947, one of its big selling points was supposed to be its simplicity. At the time, economists blamed the severity (if not the onset) of the Great Depression on the self-defeating trade policies of the 1930s, when countries tried to gain an edge on their neighbors through competitive devaluations and increased tariffs. Without a single, straightforward, universal set of rules for trade, there was no mechanism to stop that process. Rather than replicating the baffling jumble of overlapping bilateral and regional trade treaties of the 30s, John Maynard Keynes and the architects of the Bretton Woods system thought it would be much better to have just a single, general agreement on tariffs and trade to cover trade between all countries.

Sixty years later, the system we have is, if anything, way more complex than anything the world saw in the 1930s. It's not just that the jumble of bilateral and multilateral treaties is back (the so-called "Spaghetti Bowl" of Free Trade Agreements), it's that the WTO regime itself has grown incredibly complicated.

So what happened?! Well, six decades of letting trade creative diplo-bureaucrats swarm over the fine print of the original agreement, that's what happened. As the trade regime has grown to include more and more countries and deal with more and more issues, the agreements have inevitably gotten more and more complicated.

As more and thornier issues got thrown onto the WTO's plate, agreement became harder and harder to reach. Rather than accept deadlock, negotiators worked to finesse their differences creatively, by making finer and finer bureaucratic differentiations that allowed them to split the difference somehow. As the salami got sliced thinner and thinner, agreement became possible, but only at the cost of more or less giving up on the WTO's founding vision as a simple, straightforward, understandable set of rules for trade.

Archaeology of the Agriculture Deadlock
The clearest case of diplo-bureaucratic salami slicing is the whole, byzantine world of Agricultural Subsidy talks. The current, weirdly convoluted system dates back to the 1970s. It was already clear to trade negotiators back then that you couldn't liberalize trade in food just by lowering agricultural tariffs, because farm subsidies also played a major role in distorting markets. In fact, you can trace the heritage of the current deadlock in agricultural negotiations back at least 30 years. It all started in the Tokyo Round, the first time negotiators tried to strike a deal on farm tariffs and subsidies and failed.

Why? Well, at that time the point was fairly straightforward and understandable: rich countries subsidize farmers, the subsidies distort markets, therefore rich countries should stop subsidizing farmers. Only problem was, there was no way in hell rich countries would agree to that. So then the debate moved on to reducing farm subsidies, but that negotiation led to a deadlock as well. Discouraged, negotiators decided to focus on less controversial issues (industrial tariffs, mainly) and the Tokyo Round ended in 1978 with no agreement on agriculture at all.

By the time the next round of negotiations was launched in Uruguay in 1986, the debate on agricultural subsidies had been stagnating for eight years. This time, though, half the organization wouldn't agree to an overall deal unless there was some progress in agriculture, so pretty soon the diplo-bureaucrats realized they needed to get creative.

"Hmmmm," somebody thought, "this is a tough one. It's true that there are a lot of farm subsidies out there, but not all subsidies are created equal. Some farm subsidies really distort trade a lot - for instance, the ones that are paid on the basis of total output, and so create an incentive for farmers to overproduce outrageously. Those are bad, we want to get rid of those. But there are other ways countries subsidize farmers, for instance by paying them to maintain habitats for native wildlife. That doesn't distort trade! Maybe if we split subsidies into 'good' subsidies and 'bad' subsidies we can reach an accomodation where you limit the bad ones but leave the good ones alone."

Out comes the salami slicer, and in comes the first new classification. So they go back and negotiate on that basis for a while, and eventually realize it's still not leading to an agreement. So then another diplo-bureaucrat gets creative.

"Hmmmm, well, even the trade distorting subsidies aren't really all alike. Some are really trade distorting, and some are only kind of trade distorting. Maybe if we differentiate between those, you'd have a basis for agreement. Hey, we could 'color code' them like a traffic light: red for really bad subsidies, amber (which is what Brits call a yellow light) for kinda bad subsidies, and green for good subsidies."

Thinking inside the box
Thus the baffling-to-all-but-insiders WTO Subsidy "Box" system was born. Good subsidies would go in the "Green Box" and would not have to be cut. So-so subsidies would go in the "Amber Box" and would be limited but not eliminated. Bad subsidies would go in the "Red Box" and would be banned.

So then they go back into a little room and negotiate on that basis for a while. And, guess what, they still can't come to an agreement. Nobody likes the concept of a banned box, so the whole idea of a "Red Box" ends up getting tossed aside. The "Amber Box" comes to include all the highly trade distorting trade subsidies.

At the same time, all countries think they should have a minimal level of subsidies they can give without anyone being able to challenge them. Thus, the De Minimis Box is created.

So they go back and negotiate on that basis for a while. But pretty soon the gringos realize they spend so much on trade distorting agricultural subsidies that they can't accept an Amber Box/Green Box/De Minimis Box classification either.

So - you can already guess where this is going - they whip out the salami slicer again. This time they decide that maybe if they can create a new box to put some of the US subsidies into, then maybe they can reach an agreement.

Next thing you know, you have a Blue Box, notionally housing subsidies that are worse than Green Box subsidies but not as bad as Amber Box subsidies. Everybody can see that the Blue Box is a trick - the subsidies the US wants to put in the Blue Box are just about as bad as Amber Box subsidies. But, politically, there can be no overall agreement without this one last slice of the salami. So, grudgingly, they agree to that.

And so, finally, eight years after the Uruguay Round started, they get an agreement...except the deal is based on an Amber Box/Blue Box/De Minimis Box/Green Box classification that just makes no sense at all outside the context of the negotiating history of the Uruguay Round.

The current box scheme is just plain meaningless in economic terms, baffling to non trade diplo-bureaucrats, and miles and miles away from the principle of simplicity that the multilateral regime was founded on. Hell, even the original traffic light analogy has gotten all screwed up: who's ever come up to a stoplight with a yellow light, a green light, a blue light and a de minimis light? Just screwy.

What interests me is the way the nature of the negotiations inexorably generates complexity in the system. The WTO is a consensus based organization: all members have to agree for a trade deal to become binding. So when there's deadlock, your only alternatives are creative solution making or giving up on the whole crazy Rube Goldberg machine.

Time and again, the creative solution makers win, and some new category is made up to allow countries to finesse their differences. The cumulative outcome, however, is a multilateral regime that only adds one layer of complexity after another with each new set of negotiations. John Maynard Keynes is rolling in his grave...