Publicaties van de faculteit Rechtsgeleerdheid van de Universiteit Utrecht. Deze publicatie is beschikbaar via de publicatiewebsite van het G.J. Wiarda Instituut, Utrechts Instituut voor Rechtswetenschappelijk onderzoek.

Subsidiarity, sovereignty, democracy and the world trade organization

G. Faber

E-mail: g.faber@econ.uu.nl

1. Introduction

The time when national trade policies and multilateral trade negotiations were simply about tariffs and quantitative restrictions seems long ago, although it was only in the Tokyo Round (1973-1980) that first agreements on technical barriers to trade and on subsidies were reached. The Uruguay Round (1986-1994) brought about a sea change in the scope of the multilateral trade negotiations. Intellectual property rights, investment, sanitary and phytosanitary measures, agricultural policies, services and environmental protection were added to the areas of international trade negotiations. And some WTO members suggest to expand the scope of the WTO even more with multilateral agreements on competition policy and labour standards.

The expansion of the scope of the WTO has raised a lively discussion. As a result of the growing interdependence of nations and economies, this discussion does not address an isolated issue of the national economy but is about the heart of society: what can nation states still do to protect their consumers and workers, their environment, their domestic culture, the global commons, child workers in developing countries, to mention the most pressing concerns felt in many countries. There is a widespread feeling among public interest groups that the WTO and regional free trade organisations have absorbed the powers that nation states used to have to intervene in their economies. They fear that democratic policy making is substituted for opaque decision making in multilateral commissions consisting of technocrats, unhindered by scrutinising parliaments and media?

2. More or less powers for the WTO?

There are many public interest groups that question globalisation. Many of these groups argue that workers and other resources including the environment are overexploited by increasing openness to international trade and competition. Other groups resent the declining powers of nation states to determine domestic policies concerning the protection of the environment, public health, consumers, culture and the rights of workers. Many of these groups see a shift of powers from nation states towards international organisations: the WTO, NAFTA, IMF and multinational companies. This is a shift from lower levels of government to higher levels. In the perception of these groups it is also a shift towards organisations that cannot be monitored by their national democratic institutions. As a result, policy making in these areas is said to have come in the hands of anonymous, far-away bodies.

Economic history gives many examples of independent states that handed over part of their sovereignty to higher level bodies. In some instances these bodies eventually became full states, thus absorbing their founding fathers. It is striking that these federations, although they are stable societies, are characterised by continuous discussions about the distribution of powers between the federal government and the sub-federal units of government. The United States of America, Canada and Switzerland are examples. Academics have fed the discussions with theories of multilevel government, regulatory competition and fiscal federalism. In the European Union (EU), the same discussion is carried on: how far should the expansion of the scope and powers of the EU institutions go? Some EU member states had the feeling that there were no limits to the absorptive capacity of the common institutions. In order to structure this discussion, the EU member states included the subsidiarity principle into the Maastricht Treaty (now art. 5 of the Treaty on European Union) which says that " the Community shall take action only if and in so far as the objectives of the proposed actions cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community."

The issue of the distribution of powers over national states and international organisations is thus part of a broader discussion that takes place in federations and organisations for regional integration. The concepts, theories and experiences that can be gathered from these different settings can be used to enlighten the present discussion about the scope and powers of the WTO.

2.1 Arguments to regulate at a higher/lower level: subsidiarity

There are good arguments to regulate markets at the lowest level of governance. First, preferences for market regulation will vary over different regional entities. The higher the level of governance, the more preferences will tend to differ, making it impossible to have one policy that serves all preferences. Second, lower levels of governance will be easier to monitor, thus increasing the transparency of governance and legitimacy of policies. Third, decentralised policy making will lead to different policies which compete in terms of effectiveness and efficiency.

Despite these arguments, centralisation of regulation can bring gains that more than compensate for the loss of the above mentioned advantages of decentralised governance. This may be the case if there are positive or negative spillovers. Decentralised policies may shift part of the cost of production and consumption to other regions. Cross-border pollution is an example of such a negative spillover. The protection of the global commons is the extreme case, where global governance is required to find a proper solution for spillovers. Without some form of co-operation between regions or states, these spillovers will persist. This makes the level of welfare of the world at large lower. By negotiating bilateral and multilateral agreements countries show that it is possible to take away these spillovers, be it at the cost of a policy that diverges somewhat from the national preference and may have a lower legitimacy.

These arguments boil down to the choice between decentralisation, which produces regulatory competition between units of governance at the one hand, and centralisation, giving more powers to higher levels of governance at the other.

2.2 No easy solutions

Trade-offs have to be made, and that is precisely what policy makers do when they negotiate with other states, be it bilaterally or multilaterally. This trade off with respect to the regulation of markets is not simply between costs and benefits of international co-operation versus local or domestic solutions, using spillovers as the benchmark. Several complications arise in practice:

1.	preferences for regulation increasingly pertain to foreign jurisdictions without there being traditional spillovers (the urge to protect particular animals in foreign countries is a case in point); citizens consider their regulatory preferences as superior and want to force them on other countries; in the face of this opinion, the subsidiarity framework loses its power, as it is based on the thesis that local preferences prevail in the absence of spillovers.
2.	interrelated with the latter is the fact that states do not only use regulations concerning product norms, but tend to apply process norms as well; as far as these are applied to imported products, they are likely to interfere with the regulatory preferences and regimes of other countries.
3.	even if protectionist motives are absent and even if only product norms are applied, trade barriers are created. This lowers the gains from international trade.

So the problems are: is regulation necessary? If yes, at what level? Finally the regulatory measures themselves have to be formulated.

In many areas of public concern, the answer to the first question will be answered in the same way by many countries. Many people want to protect public health, want sustainable ways of production and consumption, would like to have minimum labour standards applied in their country. However, there is a difference of priority, which is often related to the level of income. Concern for the environment tends to be lower as long as there is widespread absolute poverty. If the opportunity cost of labour is low, which means that workers have no alternatives, the demands in poor countries for workers' rights that increase labour costs will be low. Furthermore, differences occur when more detailed questions are tabled: should a certain species be protected, even if it is not threatened by extinction; is it allowed to use hormones to produce beef, even if no residues can be shown in the final product, etc.

There is a clear distinction in the answers to the second question. Public interest groups that are critical of globalisation and international institutions, do not answer these questions in a uniform way. Some of them are primarily concerned about the protection of workers or the environment in the world at large. These groups argue that international trade exploits the human and natural resources of foreign countries or the global commons in a way that is not according to standards of human dignity or sustainable development. Free trade should be made conditional on the fulfilment of certain minimum standards. These preferences can best be gratified by international co-operation and reinforcement of international institutions. This means that the advantages of regulation at decentralised level, are at least partly foregone. Regulatory competition is ruled out as well. Increasing interdependence should go hand in hand with strong international institutions. A consequence might be that international standards are agreed that deprive countries of their comparative advantages. This latter effect depends on the strictness of these standards. It is only fair that if preferences for the protection of certain values is not shared, and if countries have different yardsticks to evaluate costs and benefits, international agreement can only be reached if side payments are made. Thus, if the US or the EU want to save the habitat of a particular species in a foreign country that does not have this preference (increasing the capacity for food production may be a higher priority for the country concerned), the demanding countries will have to pay for the gratification of their wishes.

Other public interest groups maintain that international institutions have become too powerful. These institutions are said to interfere with the room for policy making of national democracies in areas that belong to the core of national sovereignty, such as national culture and public health, intellectual property rights and social protection. So regulation should be brought back to the lower level of the nation state, where legitimacy will be much higher. The consequence would be more regulatory trade barriers distorting international trade and an increase of regulatory competition. To the extent that spillovers are not addressed, world welfare will decline.

The third question pertains to the kind of regulatory measure that should be taken. In the multi-level government system we are discussing, the decision to shift powers to the multilateral level does not automatically imply that this body will act as the omnipotent regulator. The international agreement or the international body can formulate a framework of objectives, principles, minimum and maximum standards that leave the participating states a certain amount of freedom with respect to the implementation in their jurisdiction. This may increase the legitimacy of the measures. It can only work properly if the participating states recognise the implementation by others as long as they stay within the agreed framework.

3. The WTO as a global regulator?

The foregoing discussion indicates that an international body - this can be an agreement among sovereign states or an international organisation - could operate as an international regulator once certain conditions have been fulfilled. Should the WTO act as a global regulator?

The WTO has been established to further an open international trading system. The fact that regulatory measures may constitute trade barriers might be construed as an argument to make the WTO the global regulator. The fact that international trade measures are the main sanction instrument in many international agreements, may also be used to underpin the same position. The WTO has played an active role in the area of regulatory trade barriers. However, this role did not encompass the formulation of regulation but the formulation of constraints and the settlement of disputes over the issue whether member states had kept within the room of the constraints. Art. XX GATT allows member states to introduces measures in order to protect or preserve certain values, resources and persons under the condition that this does not give rise to 'unjustifiable discrimination' and that the measures concerned are not 'a disguised restriction on international trade'. In the Agreements on Technical Barriers to Trade and the Agreement on the Application of Sanitary and Phytosanitary Measures, criteria and procedures have been laid down for the introduction of these regulations in international trade.

From these articles and agreements it is clear that the WTO itself is not the regulator. The WTO works at the interface of national regulation and international trade, without taking the responsibility of the member states for their regulatory regimes. The WTO agreements stimulate member states to accept the regulations of other members (so not to hinder products at the border) and arrive at international consensus over standards and to use scientific arguments when introducing standards. The WTO is a framework for its members to diminish the trade distorting effect of their divergent systems of regulation and to settle disputes over these regulations.

There are good reasons not to expand the task of the WTO into the substance of regulations and standard-setting.

Negotiations in specialised agreements or organisations (for endangered species, for global commons, for food safety standards etc.) will probably lead to results that have a higher legitimacy than would have been the case if the WTO had been the negotiating forum. Specialised organisations and agreements have to confine themselves to the substance matter; this makes it difficult to play political games of coalition formation over issues which diminishes transparency, and makes democratic monitoring easier.

The WTO/GATT has been established to foster an open, multilateral trading order. For this it has instruments in terms of manpower and legal powers. It has been successful in this area, particularly in the reduction of tariffs and quantitative restrictions, together with dispute settlement. To give the GATT/WTO the extra task of regulator is jeopardising the whole organisation and thus the multilateral trading order.

The role of the WTO should be limited to the application of principles that limit the trade distorting effect of differing regulatory systems and to stimulate multilateral co-operation in addressing cross-border externalities. The Dispute Settlement Body has proven to be a powerful instrument in this respect, particularly in restraining members to unilaterally expand their regulations over foreign jurisdictions.

1.	Conclusions

This exposition makes clear that there is no easy solution for the demands of the public interest groups that challenge the international trading order, as their demands point in opposing directions. So there is no easy solution for the appropriate powers of international organisations (including the WTO) that satisfies both groups of public interest groups while also maintaining a world trading order that stimulates international trade.

There are some principles that can be derived from the foregoing.