With the Doha Round negotiations of the World Trade Organization (WTO) proving to be drawn out and difficult, WTO ministerial conferences plagued by discord inside negotiating rooms and violent protests outside, and preferential trade agreements growing at an unprecedented rate, has the multilateral system of rules that has governed international trade in the postwar era outlived its usefulness?

Our answer is no. But, as for much of the postwar international architecture, the strength of the multilateral trading system cannot be taken for granted. The system is facing significant challenges, and two issues lie at their core: the increased role of developing countries and the sensitivity of the unfinished liberalization agenda. The picture is further complicated by the proliferation of preferential trade agreements. How these challenges are met will determine whether international trade will continue to be governed by multilateral disciplines or characterized by competing trade blocs and escalating disputes.

Falling transportation costs and other technological innovations have been key drivers of trade growth, but declining barriers to trade have also contributed. Between 1983 and 2003, average applied tariffs on manufacturing in developing countries dropped from slightly less than 30 percent to about 9 percent (World Bank, 2007). Some two-thirds of this liberalization was undertaken unilaterally, and about one-fourth through multilateral agreements.

The trading system embodied in the General Agreement on Tariffs and Trade (the GATT, the WTO’s predecessor) and now in the WTO has underpinned this liberalization in five important ways.

First, it has ensured that progress is locked in, guarding against backsliding, even as circumstances change. China’s growing clout in the global economy has prompted calls for tariff increases in importing countries, but WTO rules have held increases in check. Lock-in matters: if Japan had bound its rice tariff in 1955 (bound tariffs, duty rates that countries commit to under the WTO, are difficult to raise), that tariff would still be 46 percent rather than more than 500 percent.

Second, the principle of nondiscrimination (most favored nation, MFN), which lies at the heart of the system, has helped ensure that new trade opportunities arising from tariff reductions under the GATT/WTO have been available to all countries participating in the system and not just to a favored few.

Third, the system’s predictability and transparency have encouraged reform because countries know the parameters within which their trading partners operate and because of demonstration effects. Multilateral negotiations center on bound and not applied tariffs (the duty actually levied on an imported good, generally lower than the bound tariff), allowing countries to liberalize at their own pace, knowing that they would not waste negotiating chips as they reduced their applied tariffs.

Fourth, WTO accession has permitted countries to negotiate MFN treatment in exchange for liberalization commitments. China’s accession in 2001 underpinned far-reaching domestic reforms and helped China become the world’s third largest exporter. Accession of such countries as Vietnam, Saudi Arabia, and, prospectively, Russia may imply less far-reaching commitments but has brought, or is expected to bring, almost 250 million people into the mainstream of world trade.

WTO rules grant "special and differential treatment" to developing countries, with additional flexibility for the least developed countries. But there is no further generalized differentiation by income level among developing countries.

Fifth, the WTO’s dispute-settlement mechanism has enabled smaller, poorer countries to achieve changes to trade policies in much larger and more powerful countries. More than 300 disputes have been resolved, about one-third of them brought by developing countries (Messerlin, Zedillo, and Nielson, 2005). Moreover, a number of disputes never make it to court because of the mechanisms the WTO provides for countries to negotiate solutions.

Central to the WTO’s success has been the fact that countries have multiple interests that they are constantly balancing against each other. A suboptimal outcome in one area can be accepted in the context of gains in other areas. These trade-offs make consensus possible.

But many of the poorest WTO members may not see a balance of gains across the system. Their immediate gains may be limited to a handful of products, reflecting the lack of diversification in their exports. For them, it may be worth blocking consensus on a broader deal over the outcome on a single issue.

Even developing countries with broader trade interests may feel they cannot benefit from the system. The WTO can reinforce domestic reforms, but reforms are not without adjustment costs, and some developing countries may struggle to provide safety nets. Others may be unable to invest in the machinery necessary to reap the benefits from some WTO agreements (for example, related to standards). Critically, they may be unable to take advantage of new market access.

High costs and delays from inefficient customs, ports, and transportation constrain exports from developing countries. The location of labor-intensive apparel production, traditionally an important export for poor countries, is increasingly determined by lead time and reliability requirements. Costs per operator hour in Kenya may be more than 10 percent lower than in coastal China, but lower productivity and less efficient supply chains eliminate that advantage (Werner International; World Bank, 2007). Shifts into higher-value-added products are also constrained by weak infrastructure.

Some of the poorest countries fear that the system may even harm their interests. Those that have received unilateral preferences for particular products fear that liberalization by trading partners will erode the value of these preferences. They oppose not only their own liberalization, but also liberalization by others because of the adjustment costs.

This greater activism has occurred in parallel with the decision to make development the focus of the current negotiations. But negotiations under the Doha Development Agenda have struggled, in part because of differences over what a "development round" means. There is general agreement that rich countries should reduce trade barriers, but some think the development round means a focus on developing countries’ own reforms, and others feel that development is best served by additional flexibility not to reform. Considerable debate has focused on how much flexibility should be extended and to whom.

WTO rules grant "special and differential treatment" to developing countries, with additional flexibility for the least developed countries. But there is no further generalized differentiation by income level among developing countries. The 18 low-income countries that are not classified as least developed receive no additional special treatment beyond that extended to all developing countries. Developing countries also self-designate in the WTO and include some high-income (Singapore) countries. This has complicated negotiations because developed countries are reluctant to extend to China the special treatment they may grant to Cameroon.

There is pressure for greater differentiation among developing countries, both from some developing countries—such as small economies—that want their special problems recognized and from developed countries that want to limit flexibility for more advanced developing countries. However, most developing countries resist greater differentiation, in part because, despite their diverse interests, it undermines their power as a group. For the system to remain relevant beyond the Doha Round, it is likely that reforms will need to be considered to increase the speed and flexibility of the negotiating apparatus.

Agricultural protection. Fifty years of the multilateral trading system has seen limited progress in reining in agricultural protection. In all regions, tariffs remain significantly higher in agriculture than in manufactures, and trade-distorting subsidies, banned in manufacturing, continue to be a feature of the agricultural sector. According to the Organization for Economic Cooperation and Development, rich-country taxpayers (in the form of subsidies) and consumers (in the form of higher prices because of trade barriers) pay about $268 billion a year to support agriculture, with the European Union ($134 billion), Japan ($47 billion), and the United States ($43 billion) leading the pack.

Meanwhile, in developing countries, 73 percent of the poor live in rural areas, and agriculture and agroprocessing account for 30–60 percent of GDP and an even larger share of employment. But agricultural protection is also high in developing countries, to the detriment of their own poor consumers, exporters, and other poor countries, which are increasingly their trading partners.

Bringing agriculture into line with trade rules for other sectors is an important test of the WTO’s ability to deliver for development—all the more because the multilateral system is the only forum in which agricultural subsidies (which cannot be reduced on a preferential basis) can be tackled.

But market opening in services is complex because new regulations or institutions may be needed to ensure that liberalization strengthens competition and that important public policy goals—such as universal service—are met. Aid for trade may be needed for the design of regulations and financing of new institutions in developing countries. Regulatory and political challenges are also entailed in an area of key offensive interest for developing countries in the Doha Round: the temporary movement of people to supply services. Greater coordination between trade and migration authorities will be required to realize the potential for win-win outcomes for both developed countries with aging populations and developing countries with large numbers of young job seekers.

Current WTO commitments on services are significantly less liberal than the regimes being applied, and narrowing this gap will be an important objective of the current negotiations. Progress in binding services liberalization is a further quid pro quo for the industrial countries in return for their politically difficult reforms in agriculture.

Pressure to include new issues. Notwithstanding this unfinished agenda, some of the most advanced WTO members are seeking rules in new areas, reflecting the sophistication of their economies. Many of these areas (such as competition policy) require investments in domestic institutions, investments that may not represent development priorities for resource-strapped countries.

The system is also under increasing pressure to address such issues as human rights, migration, labor, and environmental concerns. Part of the reason is the effectiveness of the WTO’s dispute-settlement system, but the absence of similar mechanisms in the other organizations that exist to address such issues suggests that the problem is one not of forum but of political will.

This pressure also reflects the fact that globalization has seen large trends in the global economy (often understood as trade) affecting people’s lives more directly than ever before. While the system may find it difficult to resist the pressure to address new issues, WTO members’ energies would be better spent addressing those outstanding trade issues, such as egregiously high protection on agriculture, that lie at the core of what the system can deliver for development.

Managing these challenges is further complicated by the proliferation in recent years of reciprocal preferential trade agreements (PTAs): more than 200 PTAs are in force, a sixfold increase over the past two decades. By 2010, close to 400 PTAs are due to be implemented.