The Hurdle of Free Trade
The perspective of political economy
Chen, Kung Chen1
Term Paper for
Case Study: International Political Economy
Professor HIWATARI
July 21, 2013

Abstract
The Doha Round is the latest trade negotiation of the World Trade Organization (WTO) thatcommenced in year 2001 and essentially stalled in year 2008. Although it was touted as thedevelopment round, today’s analysts generally have a slim hope of productive outcome fromthe Doha Development Agenda. Will the Doha deadlock persist? This paper argues that it
will persist as long as actors are rational and structural conflicts of interest exist, while
multilateral efforts or temporary compromises will have no lasting benefits. In order tosupport this argument, this paper introduces a “structure-versus-actor” framework to analyze
actors’ decision making in the WTO. By focusing on the structure of the free trading system,
this paper demonstrates how structural factors affect actors’ strategies and thereby result in
the persisting pitfalls in the Doha Round. On the other hand, it is also noticeable that free
trade is growing rapidly among Asian developing economies despite the WTO’s uncertain
future. By referring to the Asian experience, this paper further constructively proposes
alternatives for promoting trade liberalization and addressing the issue of global unbalanced
development which is the original mission of the Doha Round.

Author’s note: I am grateful for Professor HIWATARI’s guidance at the various stages ofthis paper and especially for his suggestions regarding the model building and future
directions of this research.

Chen, Kung ChenGraSPP MPP / IP 2nd year

Case Study: International Political Economy
Term Paper (Version 10, July 21, 2013)

Contents
1. Introduction--------------------------------------------------------------------------------------------01
1.1. The Doha Round1.2. The argument
2. Review of literature------------------------------------------------------------------------------03
3. Analysis------------------------------------------------------------------------------------------------05
3.1. The framework
3.2. Before joining the WTO
3.2.1. Structure: economic liberalism and the competitive perspective
3.2.2. Actor: the outsider game
3.3. After joining the WTO
3.3.1. Structure: the perspective of structuralism
3.3.2. The structural problem of fair competition
3.3.3. Actor: the compensatory outsider game
3.4. The big picture
4. The way to a better world----------------------------------------------------------------------------13
4.1. New possibility for free trade
4.2. Solution to the global unbalanced development
5. Conclusions--------------------------------------------------------------------------------------------15
ReferenceChen, Kung ChenGraSPP MPP / IP 2nd year

Case Study: International Political Economy
Term Paper (Version 10, July 21, 2013)

1. Introduction
The Doha Round is the latest trade negotiation of the World Trade Organization (WTO) thatcommenced in year 2001 and essentially stalled in year 2008. Although it was touted as thedevelopment round, today’s analysts generally have a slim hope of productive outcome fromthe Doha Development Agenda. Designed as a basic framework for contemporaryinternational trade, the WTO aims to promote global growth and enhance the standard ofliving around the world by promoting free trade. Unfortunately, its mission did not live up to
expectations and exposed weaknesses during tedious negotiations over the past decade.
Particularly, endless debates on agriculture and non-agricultural market access hindered
progress of the Doha Round. Briefly reviewing the development of the WTO provides
informative background for understanding the current deadlock.
1.1. The Doha RoundThe birth of the Bretton Woods System marked the success of economic liberalism after
WWII. It introduced principles of trade liberalization, open market and financial stabilization,
upon which international trade was rebuilt and embodied in the GATT in 1948. In the
Uruguay Round, GATT institutionalized the WTO which shaped today’s extensive global
free trading system. With an objective to improve standards of living, boost employment andutilize resources under the free trading system, the WTO devoted itself to eliminating tradebarriers to create a free trading environment based on fair competition. Five basic principles
constituting today’s WTO framework are: (1) Non-discrimination including most-favorednation and national treatment, (2) open market and free trade, (3) predictability and stabilityof trade, (4) promoting fair competition, and (5) encouraging development and economic
reform. These principles formed the contemporary international trade regime (Zweifel, 2006,
pp. 115-130).
In theory, the free trading system shaped by the WTO promises to promote global wellbeing.
In reality, the global poverty gap has widened as a result of unbalanced development throughthe growth of free trade. In year 2000, the poverty gap doubled from the 1960s, while theaverage income per capita of the top 20 wealthy countries was 37 times that of the poorest 20
countries. Although trade grew 1.6 times from 1990 to 1996 in Latin America and the
Caribbean, the poverty line remained as it was in 1987. During the same period, trade grew
more than 1.2 times in south Asia and 6.8% in Sub-Saharan Africa, but the poor population
increased by 26 million and 60 million respectively (“World Development Report
2000/2001,” 2011). Although global poverty seems to have been alleviated gradually since
the proposition of UN Millennium Development Goals, it still remains in a question why
there was no significant improvement of the poverty problem during the past trade booming
decades.
Developing countries answer by arguing that under the developed-versus-developing
structure, the WTO’s biased rules weakened their negotiation leverage and deprived them ofopportunities. Since November 2001, the Doha Round sought to reform the international
trading system by introducing lower trade barriers and revised trade rules to addressdeveloping countries’ appeal and focus on development. Unfortunately, progress has beenslow and uncertain. The interrelated conflicting interests of each member have left thedeadlock unresolved to this day.

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The tensions are two-fold: Non-Agricultural Market Access (NAMA) negotiations and tradein agricultural products. NAMA refers to all products not covered by the Agreement on
Agriculture, including manufacturing products, fuels and mining products, fish and fish
products, and forestry products that are sometimes referred as industrial products or
manufactured goods. Over the past few years, NAMA products accounted for almost 90% ofworld merchandise exports (“Understanding the WTO,” 2011). The major dispute about
NAMA is on tariffs. While developed countries reduced their average tariff from 6.3% to3.8% in the Uruguay Round, developing countries manipulated tariffs on NAMA products byincreasing the binding coverage from 21% to 73% and then approving certain concessions inreal execution, resulting in low transparency and unpredictable trade. On the international
bargaining table, developing countries are therefore required to reduce their effective tariffs
on NAMA products but this has generally led to fierce domestic opposition as it not only
reduces tariff revenue but also forbids protecting developing countries’ domestic producers.
In terms of trade in agricultural products, abolishing subsidies in developed countries has
always been an issue since the Uruguay Round. Negotiations are difficult due to opposinginterests among member governments: developed countries are under pressure from domestic
farmers and agricultural industries to subsidize their shrinking and less competitive
agricultural sectors. Inevitably, the subsidizing policies are criticized by developing countries
for violating the WTO’s principle of fair competition. Since many developing economies
depend on agricultural exports, they not only demand developed countries to cancel theirsubsidies, but also call for further liberalization of agricultural trade in the name of faircompetition. Although developing countries may take countervailing measures to alleviate
the impact of subsidies, but their effectiveness is limited as observed in the United States
Subsidies on Upland Cotton case.
Facing these challenges, developed countries argues that proposals for narrowing the northsouth gap should still be discussed and executed consistently with the five basic principles
under the WTO framework, even though they hypocritically violate these principles inagricultural trade. Developing countries, however, have already lost confidence that the WTO
framework is capable address fundamental disputes between the rich and the poor for threereasons. First, the issue of agricultural subsidies is accelerating the tension. Second,developed countries continuously justify their non-agricultural market expansions by
upholding the open market and non-discrimination doctrines. Third, regarding intellectual
property rights, developing countries must commit to more rigorous, complex protection and
expensive programs for those industries from which they rarely benefit, even though theymust pay high policy costs. The developing group chastises the game rules designed bydeveloped countries, which are alleged to work in their interests. As a result, the Doha Roundhas been trapped by these core disputes since its kickoff in 2001, not to mention more
complex and contentious topics such as Singapore Issues.
1.2. The argument
Will the Doha deadlock persist? Governments, politicians and WTO officials have called formore multilateral cooperation in response to the current challenges. Although their optimism
colors the gloomy Doha Development Agenda, most of the ongoing arguments are primarily
policy advocacies which merely examine superficial phenomena.
This paper argues that Doha’s deadlock will persist as long as actors are rational andstructural conflicts of interest exist, while multilateral efforts or temporary compromises will
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have no lasting benefits for solving the deadlock. Although it seems that the current deadlock
revolves around tariffs or market access, member governments in fact face something more
fundamental. Before the establishment of the contemporary free trading system, actors
competed based on their various endowments and comparative advantages. Since theestablishment of the WTO, rational actors have stroven for membership to seek potential
trade benefits or to preserve their relative competitiveness. Ironically, by advocating faircompetition, the WTO ended up consolidating the extant distribution of interests in the handsof its wealthy architects, whereas developing countries suffer from conflicting interests due tothe WTO’s “fair” competitive structure. As the WTO structure itself has pre-determinedwinners and losers in global trade competition, these systemic failures will naturally
challenge the WTO’s architecture. This is what happens in Doha. In fact, as countries act
rationally to protect their vested interests and fight for maximum gains, the Doha Round is amultiplayer battlefield with conflicting interests. While conventional minds believe that thecurrent deadlock can be solved through behavioral and mindset adjustments fromunilateralism to multilateral cooperation, they ignore the conflicts of interest under the
existing developed-versus-developing structure. In this regard, deadlocks will repeatedly
emerge under the conditions that the structural conflicts of interest exist and all actors arerational
In order to support this argument, a “structure-versus-actor” framework is introduced toanalyze actors’ decision making in the WTO. By focusing on the structure of the free trading
system, this paper demonstrates how structural factors affect actors’ strategies and result in
the persisting pitfalls in the Doha Round. On the other hand, it is also noticeable that free
trade is growing rapidly among Asian developing economies despite the WTO’s uncertain
future. The number of concluded FTAs has soared in the past decade along with the Asian
economies’ shifting focus from the world trade to FTA partners. In consideration of thestalled global trade regime, this bottom-up approach identifies a new possibility for the free
trade. In my point of view, the Asian experience proposes alternatives for promoting tradeliberalization and addressing the issue of global unbalanced development which is theoriginal mission of the Doha Round.
This paper is organized as follows. The next section reviews related research on global trade,
presenting perspectives on the Doha Round, discussions about free trade under the northsouth structure and lessons learned from the Asian experience. The third section develops thetheoretical argument of this paper; I explain rationales of actors’ strategies in their interaction
with the WTO and thereby demonstrate the big picture of the post-war international trading
system. Following the line of reasoning in the third section, the fourth section explores
alternatives for reaching Doha’s goal. The final section concludes.
2. Review of literature
Literatures contribute to this paper are composed of three parts: analyses on the Doha Roundper se, discussions about free trade under the north-south structure, and the Asian experience.
To begin with, Schwab (2011, pp. 104-117) declares the death of the Doha Round. As theformer Trade Representative of the United States, she poignantly emphasizes Doha’s
obstacles that jeopardized all the best intentions of negotiators and hindered this round fromprogress, such as conflicts on tariff issues and agricultural trade. More fundamentally, theDoha Round cannot address the respective roles and responsibilities of developed, emerging
and developing countries. Since a global trading system is needed to stabilize the world
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economy, “prolonging the Doha process will only jeopardize the multilateral trading systemand threaten future prospects for the WTO liberalization and reform.” she argued. Schwab
suggests that trade policymakers should admit the failure of Doha and launch new
multilateral initiatives to restore trust in the WTO.
Mattoo (2009, pp. 15-26) indicates that the Doha Round is not the panacea of today’s urgent
economic problems. Instead, we need a more comprehensive and unambiguous multilateralmechanism like Bretton Woods II. Mattoo discusses diverse issues including tariffs, foodsecurity, energy prices, environment protection, fair exchange, sovereign wealth funds andglobal financial stability. He argues that as the WTO is the sole official platform for thecurrent global trade, Doha has distracted our attention from these issues and their tradeconsequences. Multilateral cooperation among the WTO, state actors and internationalorganizations is needed to prevent protectionism. Mattoo believes that we must initiate a new
agenda rather than resuscitate the inconsequential Doha Round.
In terms of free trade under the north-south structure, Stiglitz and Charlton (2005, pp. 11-86)
posit that even though trade elevates economic growth, it does not bring development to thesouth. The problems of poverty, market risk and inequality in most developing countries
suggest that the assumption of economic liberalism hardly be applied to these economies. As
a result, some developing countries scarcely benefit from the current trading system andinstead eventually fail. On the other hand, Rodrik (2011, pp. 47-66 & 135-158) focuses on
the issue of distribution. He argues that the effects of trade are questionable, while there is ahuge gap between academic trading theories and real world practice. With a historical survey
from the Bretton Woods System to the WTO, Rodrik points out that the compromising natureof the WTO hinders the system from addressing unfair distribution issues.
As for the Asian experience, by reviewing the development of export sectors in East-Asian
economies, Wan (2007, pp. 237-276) concludes that the rapid growth of trade contributed to
the East-Asian economic miracle. His point on domestic political economy identifies how
domestic politics interacts with trade decision making, enlightening the model building of
this paper. Useful frameworks and abundant data in Wan’s work provide an excellent
overview of East-Asian economies’ growth path and strategies in the past sixty years. On theother hand, Kawai and Wignaraja (2011) conclude that economically important Asia has
emerged at the forefront of global free trade agreement (FTA). By examining key trends andchallenges in Asian FTAs, they point out the ‘‘noodle bowl’’ problem and provide a set ofpolicy recommendations.
Other works include: Evenett (2009, pp. 359-374) who concentrates on the WTO’s
negotiation-based, non-juridical and deliberative functions, Capling and Higgott (2009, pp.
313-325) who emphasize the WTO’s role as an institution for global governance by
providing public goods, Gilpin (2001, pp. 46-76 & 196-233) and Wallerstein (1974) who
devote themself to international political economic theories, and official reports from the
WTO and World Bank. Although not directly related to the core of this paper, these works
provide vast information on the WTO and a solid theoretical foundation for discussion.

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3. Analysis
Some literatures discussing the Doha Round provide false causality. They made conclusions
about causes of the Doha deadlock without coherent logic through analytical causal
connections. This paper argues that government positions on and reactions to specific issues
on the bargaining table are only a resulting phenomenon rather than the cause of disputes.
The following analysis explains why rational actors boycott each other and lead to a deadlock.
3.1. The framework
This paper theorizes actors’ decision making mindset in the WTO and further demonstrates
actors’ strategies and Doha’s deadlock by introducing a “structure-versus-actor” framework.
In terms of the former, the structure refers to intangible institutions, rules, regulations andtangible organizations that construct actors’ identities, shape their behaviors and, in theperspective of the realists, reflect the distribution of power and interests among them. As forthe latter, actors consisting mostly of sovereign states comingle with various non-state actors
within the structure. In the context of this discussion, the structure is the WTO institution,
including its principles, rules, agreements, mechanisms and organizations, and thecontemporary free trading system based on the WTO framework, where both state and nonstate actors trade with each other and react rationally to maximize their interests. Therefore,challenges to the WTO, if any, might come from either any other actor or the structure itself.
The analysis is divided into three parts: (1) before joining the WTO, (2) after joining theWTO, and (3) the big picture of the interaction between actors and the structure under the
WTO framework. In consideration of its theoretical nature, the framework and findings ofthis paper in fact can be generalized and applied to international conflicts beyond this
immediate scope.
Stage I
Before Joining
the WTO

Structure Economic liberalism The competitive perspective

Stage II
After Joining
the WTO

Structure The perspective ofstructuralism The structural problem offair competition→→

Actor’s decision making
 the outsider game

Reacting Strategy
 Actively striving for the→membership (to Stage II)

Actor’s decision making
 the compensatory
outsider game

Reacting Strategy
 Challenging the current
trading arrangement→
 Shifting concentrationfrom the WTO

3.2. Before joining the WTO
During the 7-year Uruguay Round, over sixty countries voluntarily executed tradeliberalization policies. To understand their incentives and the current deadlock in light of thisvoluntary nature, actors’ rationales for participating in and opposing the WTO should be
explained.
3.2.1. Structure: economic liberalism and the competitive perspective
Two perspectives are often mentioned. First, it is commonly believed that free trade promotes
growth. While potential profits generated by joining the WTO are attractive for any actors,
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Chen, Kung ChenGraSPP MPP / IP 2nd year

Case Study: International Political Economy
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trade liberalization seems to be the key to growth for developing countries especially in theera of globalization. This desire is well explicated by economic liberalism. Since Ricardo
introduced the principle of comparative advantage as the essence of trade, economic
liberalism has sublimated from a theory into an implementable policy. Assuming eachcountry applies its key industries to produce goods or services with better quality or lower
price, a free trading network provides a platform for mutually beneficial exchanges.
Therefore, people in every participated country of the exchanging network would consume
goods and services with minimum costs, whereby further maximize their wellbeing.
Economic liberalism evolved into a gigantic free trading system. Liberals argue that global
trade is a positive-sum game as reciprocal trade enhances production efficiency and increases
participants’ consumption levels and income in the long run. There may exist unequal gain
among countries but total welfare will supposedly increase from trade. Governments
therefore should let the “invisible hand” dictate the trading environment. As one of outputs ofsuch economic philosophy, the WTO endeavors to lift trade barriers and discourage
government intervention to clear the road for a free world market.
The second point of view stimulates deeper thoughts. The competitive perspective argues thatthe motive for participating in the WTO may not simply to be benefit from it, but indeed to
avoid marginalization. As higher tariffs are borne by outsiders of the free trading system,
higher production cost will weaken outsiders’ relative competitiveness and lead tocatastrophic chain effects. This is especially true for export-oriented economies, where loss ofexports results in domestic economic depression, domestic industry shrinkage, foreign
investment withdrawal, and eventual exclusion from the world economy. In fact, having thecommon feature of lowering the internal members’ transaction cost, any type of reciprocal
trading arrangement, including the WTO and FTAs, widens the competitiveness gap between
their members and outsiders. By applying the CGE model, Kawai and Wignaraja analyze
potential income effects on Asian countries under the CEPEA and EAFTA scenarios (cf.
figure 1). Their findings conclude that Hong Kong and Taiwan will suffer from being
excluded from the regional trade integration in both scenarios. Whereas Hong Kong’s losses
will be relatively small due to its trade connection with China, Taiwan’s manufacture-basedindustrial structure will be significantly affected by the increasing costs and shrinking export
markets. To sum up, the reason for participating in trade integration is twofold: either to gainfrom the free trade or to avoid being marginalized in trade competition.
Figure 1. Income effects of alternative scenarios compared to 2017 baseline (% change in GDP)
12
EAFTA

CEPEA

9
6
3
0
‐3

Notes: ASEAN = Association of Southeast Asian Nations; CEPEA, comprehensive economic partnership for
East Asia; EAFTA, East Asia free trade area; GDP, gross domestic product.
Source: Kawai and Wignaraja (2011) based on the CGE model used in Francois and Wignaraja (2008).
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Chen, Kung ChenGraSPP MPP / IP 2nd year

Case Study: International Political Economy
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3.2.2. Actor: the outsider gameThe aforementioned reasoning can be modeled through game theory. In competitive
international trade, players in a zero-sum game maximize their interests by forming astrategic triangle. A player benefits through cooperation with another player but suffers if it
fails to form alliances. Meanwhile, a player benefits when conflict arises between the othertwo players but suffers when the other two players cooperate. By adopting the concept ofstrategic triangle, the outsider game is derived to demonstrate the outsider’s decision making.
Hypotheses include:
1. Engagement or containment are two options available to players. Engagement will be
indicated by a “+” sign; containment will be indicated by a “–” sign. Players only act
pursuant to rational choice. There is no particular preference toward either option.
2. Free trade will only be established when both players choose engagement, and thederiving gains are indicated by 1. If either one chooses containment, than the cooperation
will fail, and the resulting losses are indicated by -1.
3. Free trade between A and B have been established, whereas C is the outsider.
4. All players have equal influence upon each other.
5. This is a simultaneous-move game.
When free trade is established between A and B (as the symbol of the WTO in the real world),
relations between A, B and C can be categorized into the following strategic triangles (cf.
table 1). We can calculate the payoff of each player.
Table 1. The Payoff in the Strategic Triangle
A
Figure

1

A
1

1

A
1

1

A
-1

1

-1

A-B relation

B
1
C
free trade establishedB-1
C
free trade establishedB
1
C
free trade establishedB-1
C
free trade establishedA-C relation

free trade establishedfree trade establishedcooperation failed

cooperation failed

B-C relation

free trade establishedcooperation failed

free trade establishedcooperation failed

A’s Payoff

1+1-1=1

1+1-(-1)=3

1+(-1)-1=-1

1+(-1)-(-1)=1

B’s Payoff

1+1-1=1

1+(-1)-1=-1

1+1-(-1)=3

1+(-1)-(-1) =1

C’s Payoff

1+1-1=1

1+(-1)-1=-1

1+(-1)-1=-1(-1)+ (-1)-1=-3

We can then insert the payoffs of specific relationships between individual players into Table
2. For instance, a2 represents: A contains C, B engages C, and C engages both A and B
simultaneously. The three players thus form a romantic triangle; free trade is establishedbetween A and B, and between B and C but A-C cooperation fails. In this triangle, A’s payoff= -1, B’s payoff = 3, C’s payoff = -1, and therefore a2 = (-1, 3, -1) (cf. table 2). By inserting
payoffs in each cell, we can deduce a complete game.

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Chen, Kung ChenGraSPP MPP / IP 2nd year

Case Study: International Political Economy
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Table 2. The Outsider Gamea

Figure 2.

b

c

d

e

f

C

1
2

A

+C
-C

+A，+B
B
+C
-C
(1,1,1) (3,-1,-1)(-1,3,-1) (1,1,-3)

g

h

A

C
+A，-B
B
+C
-C
(3,-1,-1) (3,-1,-1)(1,1,-3) (1,1,-3)

-A，+B
B
+C
-C
(-1,3,-1) (1,1,-3)(-1,3,-1) (1,1,-3)

-A，-B
B
+C
(1,1,-3)(1,1,-3)-C(1,1,-3)(1,1,-3)+ + + ++B

The following demonstrates each player’s decision making: For A:
(1) Under the condition C and A engages, regardless of B’s attitude towards C,
engaging C is more beneficial for A. (a1>a2、b1>b2、c1>c2、d1>d2)(2) Under the condition that C contains A, disregarding B’s attitude towards C, it isindifferent whether A engages C or contains C. (e1=e2、f1=f2、g1=g2、h1=h2)(3) When three players make a decision at the same time and when A is unaware of
C’s motive based on rational decision A will engage with C.
For B:(1) Under the circumstance that C engages B, disregarding A’s attitude towards C
engaging C is more beneficial for B. (a1>b1、a2>b2 、e1>f1、 e2>f2)(2) Under the condition that C contains B, regardless of A’s attitude towards C, it isindifferent whether C engages or contains B. (c1=d1、c1=d2、g1=h1、g2=h2)(3) When three parties make a decision at the same time and B is unaware of C’s
intentions out of rational decision making engages C.

For C:(1) Under the condition that A engages C, if C engages B. Regardless of B’s attitude
towards C, engaging A is more beneficial for C. (a1>e1、b1>f1)(2) Under the condition that A engages C, and under the hypothesis that C contains B,
disregarding B’s attitude towards C, engaging A is more beneficial for C. (c1>g1、
d1>h1)(3) Under the condition that A contains C. If C engages B, disregarding B’s attitude
towards C, it is indifferent whether C engages A or contains A. (a2=e2、b2=f2)(4) Under the condition that A contains C, if C contains B. Regardless of B’s attitude
towards C, it is indifferent whether C engages A or contains A. (c2=g2、d2=h2)(5) Thus, regardless of the relation between B and C, if A engages C then engaging A
is strategically beneficial for C. If A contains C, then it is indifferent whether C
engages or contains A. Since all three parties simultaneously make decisions, when
C is unaware of A’s motive, based on rational decision C will engage A; similarly
C will engage B.

In sum, equilibrium is at al: under the condition that A-B FTA has been established, A
engages C, B engages C, and C will engage with A and B to retain its interests (cf. figure 2).
This result can be generalized to explain competition among actors in the real world. Given
that competitors (A and B) have allied as trading partners by joining the WTO, the impact tothe outsider (C) is in two aspects. First, it implies that free trade may bring a certain degree of
profit for the outsider’s competitors. Second, this scenario may further relatively jeopardize
the outsider’s position in trade competition by enhancing its competitors’ competitiveness.

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Considering the negative impact, it is likely that any rational actor will participate in the
WTO in an integrated global economy as illustrated by the game. Stated differently, somecountries actively participate in the WTO to gain interests through free trade while others join
apprehensively to preserve their advantages by reducing impact brought by their trading
competitors. Regardless of their different motives, actors all realize the urgency to participate
in the global trading system.
3.3. After joining the WTO
In a perfect world as illustrated, the Doha Round would never be dominated by chaos. The
current deadlock evidences that conflicts of interest exist among WTO members and cause
free trade obstruction. How does the conflict emerge both in theory and in the real world?
What is its influence on actors’ decision making? The following analysis explores the hidden
rationales which are less discussed by extant studies.
3.3.1. Structure: the perspective of structuralism
Wallerstein depicts the power structure in international trade and analyzes actors’ restrictionsin the World System Theory. Anarchy leads to the rapid expansion of capitalism, which hasformed an efficient system to allocate resources and created production specialization.
Developed countries, serving as core actors, determine the power distribution in this system,
pushing developing countries to the system’s periphery. It is therefore not surprising that thesystem operates with undue benefit to its designers at the expense of the developing
counterparties.
Structuralists consider trade competition as a zero-sum game. Developed countries importraw materials and export high value-added goods. The trade between iPads and apples
conspicuously leads to wealth accumulation in the core instead of the periphery, so therelationship between core and periphery states in fact is not as reciprocal as it in the liberals’argument. In the periphery, the standard of living does not increase proportionately with trade
income. With reference to data from the 1970s to 1980s, Hirst and Thompson (1999, pp. 7576) indicates that the invisible hand did not render trade benefits to developing countries;
instead, the poverty gap between the core and the periphery expanded. Structuralists rebut
liberals by arguing that under the structure set by developed countries, redistributing trade
wealth is futile and therefore unequal development and conflicts of interest inevitably exist.
3.3.2. The structural problem of fair competition
The argument of structuralists is visualized in today’s free trade practice. WTO principles andrules establishing the free trading system include non-discrimination, reciprocity, binding andenforceable commitments, transparency and safety valves. These seemingly fair and harmlessvalues instead exposed actors, especially developing countries, to a formally equal but
essentially unfair trading environment as evidenced through their imports and exports.
As importers, developing countries experience homogenous product competition between
foreign and domestic producers. Advanced technology and substantial capital haveconsolidated developed countries’ advantageous position in the trading system. As this makes
developing countries inherently vulnerable in trade competition, they tend to protect theirlocal industries by setting higher tariffs, imposing import quotas and setting stricter quality
standards on import products. Although these protections can be effective, they are currently
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prohibited or difficult to implement due to the WTO regulation. As a result, developing anddeveloped countries with great resource disparities are placed on equal footing. Given that
gaps in comparative advantage still exist, the structure of free trading system in fact promotes
unequal trading development.
On the other spectrum, developing countries, as exporters of labor and raw materials, are still
disadvantaged by unequal trading relations. Free trade opens up a huge world market fordeveloped countries to acquire resources with lower costs than ever, while globalization
incentivizes multinational companies to reduce production costs and increase profit margins
by outsourcing and dividing production. Developing countries, however, often face stringent
trade conditions with weak bargaining power against the developed countries or those profitthirsty multinational companies; eventually, they are often forced to be price takers.
To be more specific, the free trading system takes both labor and raw materials from thedomestic market into the world market; as more competitors and homogeneous goods emerge,
wages and raw material prices decrease accordingly, thereby reducing the percentage gains ofdeveloping countries. With minimal profits from trade, developing countries barely
accumulate capital to elevate their industries into more skill-intensive and value added level,
not to mention improve generally work conditions and labor exploitation. Thanks to iPads,
Apple Inc. is heralded as the avant-garde of global information technology. This
corporation’s stock valuation is over five billion US dollars, which exceeds most counties’
GDPs and is equal to the 18th biggest economy in the world. The New York Times found thatwhile raw materials represent the largest portion of total production cost for each iPad, thelabor cost only accounts for 2%, meaning that, Apple maximizes profit by squeezing margins
of its upstream manufacturers in developing countries. To sum up, as long as the developedversus-developing structure exists, developing countries difficultly benefit from the free
trading system; in the meanwhile, they still face challenges form the aggressive expansion ofdeveloped countries’ export sectors.
3.3.3. Actor: the compensatory outsider game
Governments of developing countries would face public pressure if unequal trading relations
under the WTO framework compromise their domestic industries’ interests or even cause
unemployment and dumping. Protests at the WTO conferences in Seattle (1999) and Hong
Kong (2005) are examples. Stated differently, the governments have to balance among trade
benefit, domestic interest groups and the unsatisfied and ireful public.
In such case, considerations for non-trade factors might skew the decision making of trade
policies. Wan argues that political leaders often tend to weight short run, non-economic gains
more than trade liberalization. This is especially obvious during elections as the politicalleaders may overlook free trade principles to satisfy voters and lobby groups. To reflect suchsituation, rational actors now react through a new model that incorporates non-trade factors.
We revise the outsider game by taking “el” for example. C receives two points of utility(-1→1) if it engages A. For non-trade factors to influence C to contain A, their utility must be≧2. C must benefit at least 2 points from non-trade factors to compensate for its international
trade losses. Due to trade competition between A and C, C’s 2 point gain in non-trade factors
will be A’s losses, so the 2 points should be deducted from A’s payoff, resulting in e1 =(-1,3,-1) → (-1-2,3,-1+2) → (-3,3,1). We remodel the new payoff distribution as Table 3 byusing the same method to calculate the payoff in each chart.
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Table 3. The Compensatory Outsider GameijkFigure 3.
l

m

n

C

1
2

A

+C
-C

+A，+B
B
+C
-C
(1,1,1)(3,1,-3)(1,3,-3) (3,3,-7)

o

p

A

C
+A，-B
B
+C
-C
(3,-3,1) (3,-1,-1)(3,-1,-3) (3,1,-5)

-A，+B
B
+C
-C
(-3,3,1) (-1,3,-3)(-1,3,-1) (1,3,-5)

-A，-B
B
+C
(-1,-1,1)(1,-1,-1)-C(-1,1,-1)(1,1,-3)+ + - BThe following demonstrates each player’s decision making: For A:
(1) Under the condition that C engages with A, regardless of B’s attitude towards C’s,
it is indifferent whether A engages or contains C. (i1=i2、j1=j2、k1=k2、l1=l2)(2) Under the condition that C contains A, regardless of B’s attitude towards C,
containing C is more beneficial for A. (m2>m1、n2>n1、o2>o1、p2>p1)(3) When three parties make a decision at the same time, under the condition that A is
unaware of C’s intentions, based on rational decision A will contain C.
For B:(1) Under the condition that C engages B, regardless of A’s attitude towards C, it isindifferent whether C engages or contains B. (i1=j1、i2=j2 、m1=n2、 m1=n2)(2) Under the condition that C contains B, regardless of A’s attitude towards C,
containing C is more beneficial for B. (l1>k1、l2>k2、p1>o1、p2>o2)(3) When three parties make a decision at the same time, when B is unaware of C’s
intentions based on rational decision making B will contain C.

For C:(1) Under the condition that A engages C, if C engages B, regardless of B’s attitude
towards C, engaging or containing A makes no difference for C. (i1=m1、j1=n1)(2) Under the condition that A engages C, if C contains B, regardless of B’s attitude
towards C, engaging or containing A makes no difference towards C. (k1=o1、
l1=p1)(3) Under the condition that A contains C, if C engages B. Regardless of B’s attitude
towards C, containing A is more beneficial for C. (m2＞i2、n2＞j2)(4) Under the condition that A contains C, if C contains B. Regardless of B’s attitude
towards C, containing A is more beneficial for C. (o2＞k2、p2＞l2)(5) Thus, regardless of the relation between B and C, if A engages C, it makes nodifference whether C engages or contains A. If A contains C, then containing A is
strategically more beneficial for C. Since three parties simultaneously makedecisions, under the condition that C is unaware of A’s intentions and based onrational decision, it will contain A. Under similar conditions C will choose tocontain B.
(6)
In sum, equilibrium will be at p2: under the condition that A-B FTA has been established, A
contains C, B contains C, and C will contain both A and B at the same time. (cf. figure 3)
While C becomes the isolated party, this result implies that even if its competitors ally in the
WTO, the outsider will still contain them and disrupt free trade in consideration the greater
non-trade interests.

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3.4 The big picture
It is therefore not surprising to find deadlock in the WTO. The outsider game suggests that in
an integrated global economy, a rational strategy for any outsider is to cooperate with otheractors. A WTO outsider strives for membership not only because of gains brought by free
trade, but also to avoid being marginalized from the global market. In theory all actors will
eventually participate in the WTO and therefore if any conflicts of interest emerge all actors
will suffer.
Unfortunately, there is an inherent fracture in the structure of the WTO. Although actors may
believe that free trade promotes growth, the assumption is only valid for certain members due
to dynamic comparative advantages in the developed-versus-developing structure. Developed
countries dominate most of the production process by having advanced technology andabundant capital. The lack of dominant industries in developing countries suggests a lack ofcomparative advantage which is a prerequisite to benefit from the trading network. During
the mid-1970s, the percentage of primary agricultural production for export was relatively
high for developing countries; some of them even reached 90 percent (Strayer, 1973). After
two decades, this situation has not improved because even if developing countries havecomparative advantage for low labor costs or abundant raw materials, they are unable tobargain for good prices against their wealthy trading partners. Since the value of goods
produced in developing countries is relatively low and limits wealth accumulation, theperiphery remains habitually poor.
The WTO design ignores this inherent inequality but places developed and developing
countries at the same starting line. It consolidates the core-periphery structure and deprives
developing countries of their opportunity to elevate themselves. While the biased
international redistribution effect has aggravated poverty, the WTO would be incapable toeffectively address this issue as long as it advocates free trade. Free trade therefore merely
brings income for developed countries, but increases poverty with the asymmetricalaccumulation of wealth. As a result, conflicts of interest inevitably emerge between thedeveloping and developed worlds.
Findings from the compensatory outsider game illustrate developing countries’ reactions
under this kind of conflict. Once actors’ interests are no longer satisfied by the WTO or theirrelative losses are greater than gains within the system, the compensatory outsider game
identifies that disrupting free trade among other actors would be a rational strategy. The
implications here are two-fold. On one hand, under the current rule of most-favored-nation
treatment and national treatment, abdicating WTO membership would lose these rights andsignificantly increase the cost of export products, while competitive reduction would further
increase risks of marginalization. Hence, rational actors may prefer to remain in the WTO
after weighing the costs and benefits, except they would insist to modify the current
arrangement and protect their stripped interests, causing trade negotiations to deadlock. On
the other, rational actors may refocus on alternative bilateral or multilateral trade cooperation.
This explains the increasing bilateral or multilateral free trade agreements (FTAs) establishedin the recent decade. To sum up, as long as actors are rational and interest-seeking, conflictsof interest will continually challenge the trading system and possibly collapse the WTO.
Any rectification is doomed for failure due to structural conflicts embedded in the nature offair competition within the WTO. Especially for multilateral initiatives, the prerequisite forPage | 12 of 16

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their initiation is in settling the participants’ interests, which, however, just forms the core of
Doha’s deadlock. In this regard, Schwab and Mattoo are either too optimistic or too naïve.
While the current structure results from several past trade negotiations, every country’s
interests have been intertwined together and expected to be increasingly closer. Attempted
modification would redistribute vested interests under current arrangements, causing
reluctance to accept structural changes. This logic not only applies to the WTO reform but
also to any multilateral initiative that redistribute participants’ extant benefits. The absence offirm support from developed countries equates to a death knell of multilateral cooperation,
not to mention that any developing countries’ attempt to protect their interests might risk
sanctions and be criticized as protectionism in consideration of the principle of faircompetition. Realistically, north-south cooperation is undesirable and such effectiveness toreform the WTO is also questionable. This explains why multilateral cooperation is an
infeasible solution to a structural problem.
4. The way to a better world
Doha’s goal is to alleviate the unbalanced development status among actors. The way,nevertheless, is not necessary restructuring the WTO architecture especially when thoseextant obstacles seem to persist. In the view of this paper, the real concern is how to
maximize the positive effect of free trade, whereas the WTO per se is merely a means to theends. As the WTO is fraught with problems to fulfill its mission of promoting free trade, tworelated issues emerge: first, how could state actors pursue trade liberalization without the
WTO framework; second, in consideration of Doha’s uncertain future, how could state actors
address the global unbalanced development which is the original mission of the Doha Round.
4.1. New possibility for free trade
While this paper highlights structural obstacles in the WTO and argues that Doha’s progress
seems forlorn, should we bid farewell to free trade, which liberals consider as the mostsignificant achievement in post-war international economics. Opponents might point to thenightmare of protectionism that caused WWII and claim that free trade brings growth incertain developing countries. In the 1980s, the four tigers including Hong Kong, Singapore,
South Korea, and Taiwan developed rapidly and successfully created the East-Asian
economic miracle by utilizing export-led strategies. (Stiglitz, 1996, pp. 151-177) By the year
2001, the term “BRICs” referred to the four new emerging markets of Brazil, Russia, India
and China, for which Goldman Sachs predicted would contribute 40% to global growth by
the year 2025. Apparently, countries pursuing wealth will not ignore free trade.
Indeed, free trade not only contributes to the post-war recovery and the growth of four tigers
and BRICs, but is also growing with an unprecedented speed and scale in Asia
(Feridhanusetyawan, 2005; Fiorentino, Crawford & Toqueboeuf, 2009). Despite the impeded
global trade regime, Asian economies actively promote trade via FTAs. Information provided
by the Asia Regional Integration Center (ARIC) FTA Database identifies this rapid growthtrend in the same period of the Doha stalemate. The number of concluded FTAs in Asia as agroup multiplies from only 3 to 61 during the period of 2000 to 2010. Among these, 47 FTAs
are currently in effect, while another 79 are either under negotiation or proposed. In themeantime, almost every Asian country shifts its focus from the world trade to its FTA
partners (Kawai and Wignaraja, 2011). Figure 4 shows the share of an economy’s bilateral
trade with its FTA partners in its total trade with the world for 2000 and 2008.

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As Asian practices demonstrate, FTAs is a better approach than a global trade regime for two
reasons. First, free trade can spur overall economic growth only when each participant has acomparative advantage to acquire mutual benefit. However, under open market and nondiscrimination principles, developing countries must open themselves to all WTO members
regardless of whether such trade is beneficial. This results in greater losses than gains forthem when participating in the trading network. In this regard, developing countries in fact
suffer more from the seemingly fair but indeed biased global trade regime.
Figure 4. Share of an economy’s trade with its FTA partners. Relative to the economy’s tradewith the world: 2000 and 2008 (% of total trade).

Note: Only covers concluded FTAs for that year. Japan and Hong Kong, China had no FTA partners in
2000.Sources: ADB staff estimates based on Direction of Trade Statistics, International Monetary Fund (data asof November 2009) and ADB ARIC FTA database (www.aric.adb.org); data as of April 2010.

Second, even though the WTO provides equal status to both litigant parties via the disputes
settlement mechanism, its democratic nature impedes further reforms aiming to correct thestructural inequality of this system. The problem of “a fair trial before an unjust law system”
exists in the WTO architecture. Developing countries can only repeatedly appeal to thedispute settlement body case by case, but are incapable to address the fundamental inequality
existing in the developing versus developed structure.
One might argue that the Generalized System of preferences (GSP) and the Safeguardmechanism are designed to institutionally correct the structural inequality. Whereas this point
is well taken, it is also difficult to deny that the conditionality of applying these WTO articles
in practice is at the developed countries’ discretion. It is the IMF who determines whether acountry encounters difficulties in its balance of payments; also the US negated China’s claim
as a developing country for a long period. It can be seen that developed countries still
dominate over these mechanisms that aim to alleviate the gap between the north and south.
In contrast, bilateral/multilateral FTAs are exceptions to the principle of non-discrimination.
With the bottom-up nature, FTAs allow countries trading with each other based on theirneeds and advantages without constraint from comprehensive liability under the WTO
framework. It creates more flexibilities and alternatives for policy making. By removing thePage | 14 of 16

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developed-versus-developing structure and allowing certain special rules, FTAs empower
actors to design a trade regime which best suits each participant’s needs and interests.
On the other hand, the FTAs demonstrate higher efficiency when adjusting themself to therapidly changing global business environment. As the Doha Round has shown, once an
initiative is related to members’ vested interests, it is difficult to reach any consensus orprogress. In fact, the diversity of East-Asian FTA projects implies that different interests andconcerns among state actors are competitive but also compatible. This dynamic co-opetitionin trade benefit can be embodied by the FTA architecture, whereas it would scarcely happen
in a world trade regime. In conclusion, the approach of FTA is more pragmatic and feasible
for governments to promote free trade compared with the stalled WTO negotiation.
4.2. Solution to the global unbalanced development
In order to alleviate the global unbalanced development, a new fair trade regime should beestablished to protect developing countries’ interests in international trade. Mr. Lamy,
Director-General of the WTO, argued that a global trade arrangement is ideal for most
medium and small open economies as FTAs cannot provide a fair institution except the WTO.
His point reveals the blind spot and paradox of the WTO. The emphasis on “institutional
equality” makes the goal of “real equality in trade” unreachable and aggravates the unfair
trade relation resulted from competitive differences among actors.
Instead of institutional equality, the fair trade prototype is a conceptual trading partnershipthat seeks greater equality in international trade. It contributes to sustainable development byoffering better trade conditions that ensure rights of marginalized producers and workers indeveloping countries. Although the Doha Round has showed that the current free trading
structure is difficult to modify, actors could be more instrumental in promoting a fair trading
environment by changing their practices. The key to improving practice should not beestablishing new international organizations or multinational institutions, but simply
introducing market power to correct failures of the free trading system, endeavoring tochange actors’ trading behaviors rather than reforming the rigid competitive structure itself.
In this regard, consumers should utilize purchasing power as leverage against foreign
producers to promote production justice. Instead of only focusing on material costs andprofits, the social cost of production factors should also be considered. If consumers prefergoods and services with fair trade certifications, the market and its producers would respondto such demand and form a fair trade regime based on interest-seeking incentives. Progress
would come from the market itself rather than trade negotiations. Meanwhile, since it iseasier to legalize fair trade domestically, governments could regulate the certification ofqualified trading partners, such as legally prohibiting domestic firms from cooperating with
suppliers that hire child labor or violate basic human rights. By significantly increasing thecost unlawful activities, domestic markets would send a clear signal to the world market for
fair trade. For example, Apple Inc. has required its suppliers and component manufacturers to
improve working conditions after pressure from public and governmental sectors.
5. Conclusions
Doha’s deadlock has exposed conflicting interests in the structure of the WTO. As member
governments are rational actors, the emergence of the deadlock is inevitable under thedeveloped-versus-developing structure. This paper demonstrates that by providing a logicalPage | 15 of 16

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analysis with theoretical bases and real life examples. The Doha Round aimed to amend
WTO rules to bring the system closer to its ultimate mission of promoting global growth andelevating the standard of living. Any structural reform, however, is futile, whereas free tradeis more attainable by promoting FTAs and establishing a fair trade regime driven by market
power. The courage of each generation determines the direction that our civilization will take.
In order to realize the free trade’s ultimate goal, we need great courage to foster thesealternatives. Only in this way can we open trade for the benefit of all, tide over the deadlock
under the north-south structure, and move forward to a better world.

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