Why all the fuss? A brief history of the WTO

15th March 2019

Outside Fortress Europe Excerpts
This Global Business Strategy Blog post is based upon unabridged excerpts from Chapter One, Ten Years That Shook the (Capitalist) World: 1988-1998, in Outside Fortress Europe: Strategies for the Global Market. Short passages from the Prologue, 1843, and Chapter Two, Strategic Planning and Organizational Design for Global Business Strategy: An Historical Perspective on an Emerging Science, are also included.

Additional commentary reflecting current ‘hot topics’ and global strategic management challenges is presented in the Context section.

Context

Daily news bulletins are dominated by pitiful claims from supposedly well-educated business leaders that there is way too much ‘uncertainty’ in the current economic climate to allow reasonable long-term strategic decision making. It seems that they clamour for stability and surety, a comforting status quo. (Note here Ronald Reagan’s famous aside, ‘status quo is nothing more than Latin for the mess we’re in’). These uncertainty mantras currently arise most vocally amongst executives from global corporations in the United Kingdom and its EU partners as Brexit processes follow their long and winding road to who knows where. Small and medium-sized enterprises (SMEs), meanwhile, are genuinely suffering from the political inertia plaguing both Government and Parliament.

(See the Inaugural GBS  Blog Post essay, Risk, uncertainty, the strategy challenge and organizational response, for an in-depth discussion of uncertainty and the associated risks it poses for companies developing and/or managing global business strategies).

Amongst the most surprising facets of the daily Brexit discussion is the constant equating of a ‘hard’ Brexit with WTO rules, frequently expressed in demonic caricature by vested interests spreading blatant untruths, from one side or the other, intentionally or in seemingly blissful ignorance. In this GBS Blog post we discuss the origins and purpose of the WTO from an objective, apolitical perspective.

 


Outside Fortress Europe Excerpt

Why trade at all?
In 1991 hikers in the Austrian Ötztal Alps discovered a mummified body protruding from a melting glacier. Archaeologists dated the frozen remains as being 5,300 years old and gave him the nickname Ötzi, ‘the Iceman’. They were able to demonstrate that he was travelling between two locations and to speculate that he was on the move with the purpose of exchanging goods, one community to another. Consequently, we can argue with some confidence that the oldest proven profession in history is trading, not prostitution, and that Ötzi was engaged in a ‘go-to-market’ strategy, the first international marketing manager!

The arguments supporting the political and economic benefits of free trade between nations were touched upon in Chapter One, especially the principles laid down by Adam Smith (1776), and we develop them further here, albeit briefly. In the passages which follow we continue the discussion of international business, but the emphasis will shift from why countries should engage in international trade towards a rationale for why companies should consider conducting enterprise beyond their own national boundaries. En route, we must discuss the historical political economy of international trade, particularly given the context of the déjà vu contemporary chatter of trade wars and protectionism stirred up by President Donald Trump’s daily chirps.

Time to stop talking: multilateral, rules-based ‘free’ trade is (belatedly) born
More than two years since the Brexit referendum in the UK there is still a protracted discussion relating to whether there will be a ‘hard’ or ‘soft’ Brexit, and there is a ‘deal’ or ‘no deal’ mindset which resembles the tawdry ‘reality’ TV programme (or is it a quiz show?) which has that cheap title. Regardless of her political skills or tenuous (self-inflicted) parliamentary situation, British Prime Minister Theresa May (and/or her advisors) made a kindergarten negotiation error by playing her strongest hand at the start of the divorce discussions with the EU, stating very publicly that the UK would prefer ‘no deal’ rather than a ‘bad deal’. In the context of this Chapter’s focus, and from the perspective of international trade rather than UK-domestic or EU politics, a ‘bad deal’ or a ‘hard Brexit’, at its fundamental level, simply means conducting trade within the framework of the World Trade Organization (WTO).

Until 1st January 1995 international business managers and investors would have loved to have this luxury, i.e., the certainty of conducting trade in global markets which in large measure could be undertaken without political interference (but see Economist, 2018, March 10th, The threat to world trade: The rules-based system is in grave danger, for observations on President Donald Trump’s roughshod riding over this hallowed institution).

Prior to the WTO the framework for the conduct of international business was the General Agreement on Tariffs and Trade (GATT), known by aficionados of international business as the General Agreement to Talk and Talk (haha). The origins of GATT were rooted in failure: the attempt by many countries through a United Nations conference on trade and employment to create the International Trade Organization (ITO), an idea heavily debated during the Bretton Woods negotiations with an explicit acknowledgement that tariffs and other forms of protectionism had contributed to the Second World War and had significantly influenced the origins of the First (Steil, 2014). As David Ricardo had observed a century or so earlier, free and open international trade has benefits for all country-participants whereas mercantilism (the predominant international business modus operandi of his day), which is effectively rooted in parochial market closure, treasure accumulation and selfishness, is a zero-sum game, winner takes all trade policy. Economic interdependence between nations, in contrast, has a happy side effect: world peace.

GATT got-going in 1947 on October 30th, 1947 with 23 nations as signatories and became operationally effective on January 1st, 1948. Its remit was expanded over time – as was its membership – during a protracted series of ‘rounds’ of negotiation talks:

  1. Geneva I (1947).
  2. Annecy (1949).
  3. Torquay (1951).
  4. Geneva II (1955-56).
  5. Dillon (1960-62).
  6. Kennedy (1962-67).
  7. Tokyo (1973-79).
  8. Uruguay (1986-1994).

Each round had different agendas and the cumulative outcomes achieved were extraordinary given that they progressed relatively smoothly against a geopolitical backdrop that included the still-unresolved Korean War (1950-1953), the complex second Indochina War – more generally known as the Vietnam War – which spanned two decades from 1955, the Cold War (and its proxies) and multiple military skirmishes (e.g. the Falklands War) which tested international relations between countries and continents.

And factor in the collapse of the USSR, the Chinese economic reform hiatus of the early 1990s discussed above and the creation of the European Single Market to underline how the patient persistence of GATT participants and negotiators led to a degree of unprecedented stability for international trade. The final pieces of this complex jigsaw during the Uruguay Round addressed the specific concerns of ‘developed countries’, the twin issues of trade in services and the protection of intellectual property in all its forms.

The most comprehensive, informative and apolitical historical resource for exploring the origins of multilateral trade and the creation of the World Trade Organization are to be found in the institution’s official site (opens in a separate window). The following paragraph is taken from the page titled History of the Multilateral Trading System, accessed on May 1st, 2018:

From the early days of the Silk Road to the creation of the General Agreement on Tariffs and Trade (GATT) and the birth of the WTO, trade has played an important role in supporting economic development and promoting peaceful relations among nations.

It continues in a positive tenor: “This page traces the history of trade, from its earliest roots to the present day”. And further, in introducing one of its many resource documents ’What the WTO can do’:

The world is complex. The World Trade Organization is complex. This booklet is brief, but it tries to reflect the complex and dynamic nature of trade and the WTO’s trade rules. It highlights benefits of the trading system, but it doesn’t claim that everything is perfect. Were it a perfect system, there would be no need for further negotiations and for the system to evolve and reform continually.

And the following numbered list outlines the ten major things which fall within the WTO’s remit:

  1. Cut living costs and raise living standards
  2. Settle disputes and reduce trade tensions
  3. Stimulate economic growth and employment
  4. Cut the cost of doing business internationally
  5. Encourage good governance
  6. Help countries develop
  7. Give the weak a stronger voice
  8. Support the environment and health
  9. Contribute to peace and stability
  10. Be effective without hitting the headlines

The WTO goes on to comment:

Nor does this booklet claim that everyone agrees about everything in the WTO. That’s one of the most important reasons for having the system: it’s a forum for countries to thrash out their differences on trade issues.

Lovers of standard English will find the language a tad colloquial which is exactly why we produce it here verbatim. While it may also sound utopian it should be acknowledged that these lofty goals represent the desired outcomes of 164 member countries and provide the ‘round-table’ context for the discussion forum the WTO refers to. And we do so to put into context the fears of those fearing a ‘hard Brexit’ as compared to the tumultuous business environment uncertainties faced by executives during the early 1990s. And we do so without stating any support or otherwise for any form of Brexit, hard, soft or, most likely, fudgy in the time-honoured fashion of realpolitik political pragmatism in international relations, not least within the tortuous machinations of the European Union.

The message to business is that companies should follow the grand tradition of the British Boy Scouts movement motto: Be Prepared. Specifically: appoint a WTO / international trade expert and support team; enjoy the luxury and relative certainties in the global business environment that early 1990s executives could only dream about; instil scenario analysis and contingency planning as an embedded business process (but, nota bene, as one beleaguered executive advised the author, to have a contingency plan, you need a plan!). Of course, this is a gross over-simplification and is presented with a strong hint of ‘tongue-in-cheek’. The real world of business is way more challenging and organizational complexity typically confronts strategic rationality, as we conclude in the Epilogue to this book.

Addressing the organizational challenge
Organizational life is such a pervasive feature of modern society that it has attracted scholars from a wildly disparate range of academic disciplines. From the Marxist scholar seeking explanations of appropriation to the industrial geographer advising retail companies on optimal location decisions, the study of organizations and how they are managed is enjoying exponential growth. In developing its focus this book addresses a fundamental concern, that of organizational survival and prosperity in a context of unprecedented turbulence and discontinuity in global business market environments. Organizations are not living entities, but they do die. Within this paradox lies an abundant cavern of imperfect knowledge for researchers and charlatans to scavenge and plunder. Herein lies the rub. What possible sense can be made of such senseless material? How many exceptions to the rule must we have before the rule itself is redundant? How can we predict and plan and make and manage when uncertainty creates our context?

Before offering solutions, we must acknowledge the limitations represented by such rhetorical questions. Shouldn’t we? Of course, but we must also be aware that within paradox lies discovery and that discovery, in turn, requires an openness of mind. In a vigorous defence of the application of scientific inquiry to the subject of management, Professor John Kay (1993) highlights the myopic character of many of the discipline’s critics and draws on a powerful precedent to make his point: “The Inquisitors who visited Galileo refused to look through his telescope since what he claimed to see could not be there.”

The simplest observation we will make throughout the pages of this book is that organizations, in their struggle for survival and prosperity, demonstrate a range of coping behaviours and adaptability, almost always a combination of ‘old’ and ‘new’ formulations. It is our contention that, if we understand the context of this struggle, we can go some way toward suggesting more appropriate organizational behaviours, both in a generic sense and for quite specific global business environments in a post-Bretton Woods, post-Brexit new-new world order. Companies are not passive receivers of Darwinian natural selection since, to a substantial extent, they can craft their genetic code and genetically engineer their future.

Outside Fortress Europe Excerpt References

Economist. (2018, March 10th). The threat to world trade: The rules-based system is in grave danger. The Economist, 68-69.
Kay, J. (1993a, April 24th). Art or science? can the study of management be ‘scientific’? The Economist.
Ricardo, D. (2018). On the Principles of Political Economy: And Taxation (Classic Reprint). London: Forgotten Books.
Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. Edinburgh: Strathan & Cadell.
Steil, B. (2014). The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order. Princeton, NJ: Princeton University Press.

 


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All content © Colin Edward Egan, 2019