After decades of steadily increasing globalization, trade liberalization has slowed to a standstill. Congress has delayed ratification of the Trans-Pacific Partnership (TPP) indefinitely. And negotiations around the Transatlantic Trade and Investment Partnership (TTIP) have ground to a halt.
In both the United States and abroad, these agreements are dogged by widespread concerns over the nontransparent manner in which trade deals are negotiated. Critics argue that bargaining behind closed doors unfairly shuts out the voices of organized labor, advocacy groups and nonmember countries. But defenders argue that private negotiations are the only way to reach a deal.
In a recent study in the British Journal of Political Science, we looked at the consequences of private bargaining during World Trade Organization (WTO) disputes. The WTO encourages states to consult with one another privately before initiating formal litigation.
We investigated who gains the most from private bargaining
We use new data on trade in disputed products and on third-party participation. Our analysis contains two parts. First, we investigate whether complainant countries enjoy greater trade gains after early (private) settlements. The WTO requires that any individual state’s market concessions are extended to all members. So if complainant countries enjoy greater market access than nonparticipants, we regard this as evidence of trade discrimination.
Second, we test whether third parties — countries that participate as observers in disputes — prevent this discrimination. Having more observers in the room should reduce litigants’ opportunities to strike deals that disadvantage other members.
Our evidence suggests privacy is a mixed blessing. Shielding negotiators from public view does significantly increase the likelihood that the parties can reach an early settlement, precluding the need for costly litigation.
But these settlements come at a price. Private bargaining creates opportunities for states to strike deals that exclude other members. We show that, conditional on a settlement being reached, complainant countries gain relatively more than others do when negotiations are conducted in private. Specifically, complainants conducted 60 percent more trade with respondents than do other members. This disparity cannot be attributed merely to complainants having a larger stake in the dispute ahead of time.
This is a problem for the WTO.
This finding is worrying since the WTO specifically states that any concession made to one country is extended to all others. But, under private settlement, countries appear able to tailor deals that exclude those who are not in the room.
The good news is that the participation of third parties appears to prevent discrimination. Having more eyes in the room reduces the odds that countries strike deals that disadvantage other members. In practice, the trade gains from disputes are more even in the presence of third parties. But third parties also reduce the odds of an agreement being reached.
The results highlight a difficult trade-off. It’s true that privacy during trade negotiations promotes agreement. However, private settlement also generates uneven trade gains.
Our findings suggest that a review mechanism is required to scrutinize the outcome of trade negotiations. This is why ratification of trade treaties is such a harried process. Widespread opposition to TTIP, TPP and the Canada-E.U. Trade Agreement in the past year illustrates that countries wishing to retain the benefits of private negotiations must be prepared for the eventual pushback once deals are made public.
Being aware of potential pushback should encourage negotiators to reach deals that will satisfy a majority of their domestic constituents. In this light, the current controversy around trade agreements is thus not entirely a sign of failure. Rather, it’s a necessary counterpart to the privacy required to reach an agreement in the first place.
JEFFREY KUCIK
KRZYSTOF J. PELC