World Trade Needs More Than a Nudge

January 17, 2018

Economists usually assume that people are rational.  This year’s Nobel Economics Prize winner Richard Thaler, however, argues that people don’t always make rational choices as it is too easy for them to succumb to short-term temptations. For example, he observed that, even economists, who of all people are supposed to be the most rational, would gobble up cashews while waiting for a full dinner. Thaler explains such seemingly irrational behavior with his insights on limited rationality and lack of self-control, but there are other possible explanations. One of them is the “gorging gene” theory, which suggests that the real culprit is the haphazard eating pattern of our ancestors that has been ingrained in our genes after numerous generations. As explained by Yuval Noah Harari in his bestseller “Sapiens: a brief history of humankind”:

 “It’s a puzzle why we binge on the sweetest and greasiest food we can find, until we consider the eating habits of our forager forebears. In the savannahs and forests they inhabited, high-calorie sweets were extremely rare and food in general was in short supply. A typical forager 30,000 years ago had access to only one type of sweet food – ripe fruit. If a Stone Age woman came across a tree groaning with figs, the most sensible thing to do was to eat as many of them as she could on the spot, before the local baboon band picked the tree bare. The instinct to gorge on high-calorie food was hard-wired into our genes. Today we may be living in high-rise apartments with over-stuffed refrigerators, but our DNA still thinks we are in the savannah. That’s what make sus spoon down an entire tub of Ben & Jerry’s when we find one in the freezer and wash it down with a jumbo Coke.

In other words, it is extremely hard for people to change their old behavior patterns even though their living environments have changed dramatically. The same also holds true for countries. As argued by Richard Baldwin in his book “The Great Convergence”, since the ICT revolution from the 1990s, it has become increasingly common for firms to divide their production process across many different countries so that they can fully exploit the national differences in endowments. Thus, industrial activities are no longer limited within the boundaries of nations but are instead defined by the outlines of international production networks. This makes it much more difficult to assess the impact of globalization. As noted by Baldwin,

Under the Old Globalization, nations could identify their ‘sunrise’ and ‘sunset’ sectors. No longer. Now we have sunrise and sunset stages and occupations in almost all sectors. As it turns out, one cannot accurately predict which stages and jobs will be affected next in a world where the contours of industrial competitiveness are defined by offshoring firms.

The New Globalization’s impact is also more individual in the sense that the winners and losers are no longer mostly grouped by sectors and skill groups. Globalization’s impact can vary across workers who possess the same skill sets and work in the same sectors. ‘Kaleidoscopic globalization’ is how Columbia University economist Jagdish Bhagwati describes it. No matter what job you have and no matter what sector you work in, you cannot really be sure that your job won’t be the next to suffer or benefit from globalization.

This presents major challenges for policy-makers, because it has become increasingly hard for them to identify which sectors or industries are winners or losers. Unfortunately, instead of adapting to the new reality, policy-makers in many countries simply choose to ignore such tectonic changes and just keep churning out policies for specific sectors or industries. In a way, their genes are also hard-wired with pre-21st century reflexes that automatically link economic development with the growth of entire industries or sectors within national boundaries. Instead of recognizing the potential for win-win brought by international production networks, they continue to view the word in the old binary zero-sum lens. There is no better illustration for such outdated mentality than the recent decision by the Trump Administration to slap a hefty 300% tariff on Bombardier, which is ostensibly a Canadian company. However, as Canada’s Minister of Foreign Affairs Chrystia Freeland pointed out, the action would hurt the US economy too as US component suppliers to Bombardier employed almost 23,000 workers in US states spanning Connecticut, Florida, and New Jersey.

Thaler’s insights on behavior economics has led to the establishment of “nudge units” by governments around the world to improve social policy and help people make better choices. At the international level, however, simple “nudging” might not be sufficient. The reason is that national governments are too powerful and their policy inertias are too strong to be overcome by soft, non-binding “nudges”. Instead, we need strong binding rules to steer the countries away from the road to mutual- or even self-destruction. As the primary international institution with mandate on trade, the WTO should take the lead in formulating new rules to better fit with the new reality of global value chains (GVCs). Such rules will help the countries to move towards the course of mutual-benefit and cooperation, which is also what the GVCs, and an increasingly larger share of the global economy, are built upon.

Where might the WTO, which was once called a “medieval organization”, find inspirations for such new rules? It turns out that the WTO does not have to look far, as there are many examples of new innovative rules in the Regional Trade Agreements. This is the value of an initiative like the RTA Exchange, which would provide examples of best practices of trade rules crafted in RTAs that the WTO can adopt. One example, as noted by Antoni Estevadeordal et al (2013), is the mechanism for expanding cumulation to third parties beyond an RTA, as Canada has done in its agreements with Peru and Colombia. Another example is the rules on e-commerce, which have been taken up by many RTAs. Hopefully, these rules will provide some ideas for WTO Members to take on at MC11 and beyond.

 

* The opinions of this article are only of the author and do not bind any of the institutions with which he is affiliated.

 

Prof. Henry Gao is Associate Professor of law at Singapore Management University and Dongfang Scholar Chair Professor at Shanghai Institute of Foreign Trade. With law degrees from three continents, he started his career as the first Chinese lawyer at the WTO Secretariat. Before moving to Singapore in late 2007, he taught law at University of Hong Kong, where he was also the Deputy Director of the East Asian International Economic Law and Policy Program. He has taught at the IELPO program in Barcelona and the Academy of International Trade Law in Macau, and was the Academic Coordinator to the first Asia-Pacific Regional Trade Policy Course officially sponsored by the WTO. Widely published on issues relating to China and WTO, Prof. Gao’s research has been featured in CNN, BBC, The Economist, Wall Street Journal and Financial Times. He has advised many national governments as well as the WTO, World Bank, Asian Development Bank, APEC and ASEAN on trade issues. He sits on the Advisory Board of the WTO Chairs Program, which was established by the WTO Secretariat in 2009 to promote research and teaching on WTO issues in leading universities around the world. He is also a member of editorial board of Journal of Financial Regulation, which was launched by Oxford University Press in 2014.

Topics: WORLD TRADE ORGANIZATION (WTO)

Authors: HENRY GAO

RTA

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