Teaching Real-World Political Economy: Simulating a WTO Negotiation

"If free trade is a no-brainer, why isn't trade free?" Students often express such sentiments at the conclusion of a typical international trade course, during which they have learned that free trade is optimal, but that countries continue to restrict trade substantially. This article describes a simulation of a round of trade liberalization under the auspices of the World Trade Organization (WTO). The simulation differs from others in the literature in that it represents a substantial component of the course, but it is not the course's focal point. Because the simulation has proven beneficial to students, the article attempts to provide a blueprint that will enable other professors to implement the project with minimal start-up costs.

Keywords: Simulation; Negotiation; Free trade; Active learning

The top three teaching objectives instructors provide for using a simulation or game are to: (a) give students decision-making experience, (b) allow students to apply theory, and (c) introduce students to planning ([9]). [33]) summarize the value of simulations as experiential or active learning methodologies whereby learners are put in fairly realistic, yet psychologically safe learning environments where they can experiment with new behaviors with immediate, constructive feedback. Extensive business and non-business literature[1] documents the benefits of simulation and active learning, while [1] outline the importance of an international business education guided by theory, but bridled by practical relevance. [27] contend that, due to the geographic, cultural, and cross-disciplinary nature of international business, experiential learning might be more important for undergraduate international business students than for students in other business disciplines. This article provides a blueprint enabling other professors to implement the World Trade Organization (WTO) project in their course with minimal start-up costs.

The traditional and virtually universal approach to teaching international trade is to describe its evolution and theoretical optimality. Students learn during the first half of the course that free trade is a globally optimal solution. During the second half of the course, students learn that trade remains remarkably restricted in many important sectors, despite the half-century of trade liberalization conducted under the auspices of the WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT). Even when the instructor incorporates a political economy approach to explaining the current trading regime by highlighting the role that interest groups play in policy determination, students have difficulty understanding why countries have not achieved the long-run Pareto improvement of global free trade.

The authors posit that the chief reason for students' confusion is that they fail to internalize the incentives that generate the behavior of individual nations during negotiations and the extent to which those incentives vary across developed and developing, large and small, and poor and wealthy countries. Moreover, even those students that seem to internalize the impediments to globally optimal free trade largely fail to understand the broader lesson wherein self-interests and conflicting incentives prevent globally optimal solutions in myriad economic and political contexts.

The WTO is the organization under whose auspices the rules of international trade are currently determined and enforced. The GATT began in 1947 as a multilateral approach to international economic integration, particularly vis-à-vis trade in manufactured goods. Periodically, the GATT membership conducted "rounds" of negotiations designed to liberalize trade. In the Uruguay Round (1986–1994), the GATT expanded its role to address trade in both agriculture and services and to develop a global consensus on intellectual property rights, among other advances. Because the new scope of the GATT was so much broader than its original purview, the WTO was created in 1995 to replace GATT. Despite the failure of multiple post-Uruguay rounds, the WTO currently boasts 153 members and remains the primary mechanism for global trade cooperation. WTO rules cover more than 90% of global trade.[2]

When the WTO/GATT functions well, its negotiating rounds provide forums for multilateral discussions of key trade issues, with the goal of reducing or eliminating impediments to a free-functioning international marketplace. Existing problems are identified by member countries. Typically, groups of nations will form alliances formed around one or several of these points. For instance, during the Doha Round, developing nations formed an explicit bloc in an attempt to counterbalance the large influence that Europe and the United States had often exerted in prior rounds. Occasionally, individual nations will identify concerns that they insist be addressed in the negotiations. France took four such positions during the Doha Round. The simulation described in this article provides the instructor with the ability to model both of these behaviors.

The WTO framework is a distributed bargaining situation ([4]). The goals of the members are interdependent and attainment of respective goals is often in conflict, or perceived to be in conflict, with other member nations. Distributed bargaining situations become highly competitive when resources are more fixed and limited.

Simulations provide an effective teaching tool in the classroom and empirical evidence shows that students prefer experiential learning techniques that foster participation and active interaction instead of being passive spectators ([15]). This article describes a simulation that can become a useful tool for teaching International Trade. The literature includes two simulations of multilateral trade negotiations.[3][31] describe a well-designed, stand-alone Summit of the Americas[4] (hypothetical) regional trade bloc negotiation in which students are given country manuals that provide country-specific negotiating information. Strengths of the [31] simulation include the tying of negotiating outcomes to economic variables and the formal acknowledgment that nations must consider more than just trade policy when negotiating trade agreements. One drawback of this simulation is that students spend little time engaged in country-specific research, since the faculty-developed country manuals contain all information relevant to the negotiation. In addition to depriving students of the chance to learn about international data and information sources, this approach puts a substantial burden on the instructor to update and print manuals each term. A second criticism of the Summit of the Americas is that, in order to maximize their grades (equivalent to maximizing overall trade liberalization), students must find one of the few policy combinations that allow all countries to sign the final agreement during the single 3-hour session. While this framework retains aspects of the give-and-take nature of negotiation, it imposes an unrealistic amount of structure on the negotiations. Finally, the single session devoted to the simulation (with a short debriefing session during the following class period) has both positive and negative implications. On the one hand, it minimizes the amount of class time that instructors must forego in order to utilize the project. However, if one believes the active learning paradigm, then more time devoted to the project can further benefit students.

[18] adopts the latter attitude, outlining an entire course that is structured around a simulated GATT negotiation round. The course begins with lectures and readings on economic theory and GATT institutional characteristics and issues. She then requires students to conduct significant background research on their assigned countries and prepare policy statements and proposals for the negotiation. Thus, students choose the topics to be negotiated. Lowry then groups topics into committees and prepares packets for each committee. The negotiation takes place during an all-day session. Each committee must bring a single item back to the full conference for discussion and voting. A debriefing session follows. The strength of the Lowry method is that students are fully immersed in the project, becoming intimately familiar with GATT rules, procedures, and issues, in addition to knowing their own countries well through research. A drawback noted by Lowry is that the focus on GATT precludes coverage of some traditional trade topics.

The simulation described in this article lies between the [31] and [18] models. It requires both more class time and more student effort than the Summit of the Americas simulation. However, it is only one component in a more traditional, junior-level trade theory course. The authors, as well as several colleagues, have used the simulation in both a 6-week summer course that met 4 days per week for 100 minutes each session and a semester-long (15-week) course with two 75-minute meetings twice per week. In the course, instructors are still able to cover most of the tradition material—including mercantilism, the Ricardian and Heckscher-Ohlin models, the Leontief Paradox, tariff and non-tariff barriers, and new trade theories, in addition to devoting significant class time to the simulation.

The simulation has four learning objectives. First, students learn about the economic and political goals, including how they affect one another, for both the country they represent and the other nations. Second, students understand why trade isn't free, despite its theoretical superiority. Third, students develop an appreciation for the differences between the goals of developed and developing countries. Fourth, students get a feel for the complexity of international negotiations.

The simulation is integrated as a project that requires student involvement beginning about one-third of the way into a full-semester course, although only parts of two (75-minute) class periods are required to conduct the simulation. Table 1 summarizes the activities.

TABLE 1 Simulation Activities

Early in the semester, the instructor breaks with the traditional order of topics[5] and spends one class period discussing the evolution of the GATT/WTO. That lecture introduces students to the most-favored nation (MFN) principle, institutional aspects of the WTO, and current WTO issues. While students lack the analytical tools for understanding all of the information at this point in the course, exposing them to the concepts early allows instructors to refer back to them when covering analytical tools, helping to keep the simulation in the students' minds throughout the term. As [17] finds, it is important that students have confidence in their ability to succeed, that they understand the relevance of course-specific learning activities to their career goals, and that they can see how their effort will be rewarded.Students then form their own two-person teams. Afterwards, each team chooses one of the seven nations (Brazil, Chile, China, the European Union negotiating as a bloc—as in the real world, Japan, India, and the United States (the number of countries used will depend on course enrollment). This group of nations provides a balance of developed and developing nations, as well as geographic diversity. Students self-select into the region that most interests them, providing them with more motivation for conducting the research.[6] In a class with enrollment of approximately 36, two student groups select each nation. Then the instructor randomly divides the class into competing "worlds" of six nations each, generating two sets of negotiations within each section of the course.[7] In addition to keeping the size of each negotiation manageable, this framework allows for cross-world comparisons that introduce competition and facilitate grading.

At that point, all students in both worlds receive identical, detailed information about the upcoming negotiation. Table 2 provides the issues to be negotiated, along with point values and an explanation of those values from a global perspective.[8] Each issue has four possible outcomes and an associated point value. For example, a 10% tariff cut by developed countries is worth 1 point to the world, whereas a 40% tariff cut is worth 10 points. Assigning point values accomplishes three goals: providing students with a starting point for the negotiations, providing a concrete structure upon which the students can develop intuition about the relative importance of the issues from different perspectives, and facilitating grading. The following one-page handout, Table 2, to students also includes a brief explanation of how world point values were assigned for each issue.

TABLE 2 WTO Negotiation Project: Values of Possible Agreements for World

Although all students receive the same world table handout, each group also receives a second table with different point values derived from the political and economic impacts of each issue on the country it represents. That country-specific analog to Table 2 details the point distribution and offers an explanation for each issue.[9] Point values vary significantly by country, though the same values are used for each project replication. Students are told to keep point values confidential, since having their opponents know their detailed preferences would put them at a competitive disadvantage.[10] The country tables form the basis for the negotiating strategy papers. Students must research their countries and provide a more detailed explanation about why their nation's point values make sense.[11] Moreover, they can be expected to conduct detailed research into the political and economic rationale for other country's (unknown) point values. These rationales must be based upon the country's economic, political, and social characteristics.[12] While instructors should strongly discourage sharing of point values, sharing and discussing of the underlying economic and political issues is encouraged.[13]

Table 3 illustrates the diversity imposed through the use of country-specific point values. The issue addressed in this table is an across-the-board cut in both agricultural subsidies and import protections by all developed countries. For simplicity, liberalization is restricted to be at the same rate for both policy tools. Possible outcomes are 0% (i.e., no change in the status quo) and reductions of 5, 10, or 20%. From the world's viewpoint, the best outcome overall is a 20% cut, yielding 10 points. A 10% cut would give the world only 4 points; however, such a dramatic liberalization is extremely undesirable for the European Union and Japan, which would earn only 2 and 0 points, respectively. In Japan's case, any reduction in agricultural trade barriers is significant. However, the European Union can afford moderate cuts in its tariffs and subsidies.

TABLE 3 Point Assignments for Negotiated Agreements for Across the Board Subsidy and Import Protection Cuts for Agricultural Products in Developed Countries

Students are informed that their grades will be based on the total points their negotiating world scores and the score they receive for their country. Therefore, negotiating complexities arise not only from the differing country perspectives on each issue, but also tensions between maximizing points for the country and maximizing points for the world.

Each team's research paper should identify its negotiating goals and strategies. Students must understand that they cannot win the negotiation on every issue. They must determine, using point values as guides, which issues are most and least important to their country. In some cases, there is a dramatic change in the point value when a country gives just a small amount in the negotiation of an issue. In other instances, even a large shift in acceptable outcomes has little effect on a country's points. To illustrate, consider the world point values as shown in Table 2. An across-the-board tariff cut by developed countries of 30% yields the world only 6 points, while a 40% cut generates the maximum of 10 points. Complexities quickly arise when multiple issues are considered simultaneously. As an example, the world should be willing to accept a 5% (4 points) instead of 10% (6 points) opening of the Japanese food market in order to secure a shift from 30% (6 points) to 40% (10 points) in developed nation tariff reductions, because the world gains 2 net points.

For individual countries, this analysis, hence the negotiations, can be even more interesting, as some countries get no points from certain issues, regardless of the outcome. For example, China is not a supplier of rice, beef, and citrus for Japanese markets; hence, it does not care about opening of those markets. Consequently, China can use its vote on this issue as a bargaining chip. Teams must classify issues, determine which ones they must "win" and which they can afford to "lose," and identify useful bargaining chips. Moreover, the best papers examine the situations of other countries, in order to predict who will be an ally or opponent in each category. Teams' performance depends on the development of a successful strategy based on the interaction of the different points obtained in each issue at hand.

After returning the graded papers, the negotiating sessions begin. Before the first round, each world is required to group topics into two five-issue subcommittees. One person from each country sits on each subcommittee. The subcommittee structure simplifies the negotiation for the students, allowing each team member to concentrate on just five issues. Students may confer with their team members at any time, although they often lose sight of their larger 10-issue country goals in their enthusiasm to "win" their subcommittee negotiation. If they have not conferred with their team members by the 60-minute mark (in a 75-minute class session), it is useful to advise them to break up the subcommittees and do so. This allows teams to determine whether they are accomplishing their overall negotiating objectives. It also provides an opportunity to verify that no team member has given away too much. Subcommittees reconvene briefly before the end of the period to agree on the current status of its discussions. By the next class period, the subcommittees must have submitted their minutes, which the instructor posts on a project, world-specific website. Countries then use the minutes to write a brief progress report and identify any changes in their negotiating strategies.

The second round of the simulation focuses on finding agreements for the unresolved issues, although occasionally a group will revisit a Round 1 agreement. By this point, it is typically necessary for students to package two or three issues together to find enough compromise room to allow the negotiation to be completed. Once all issues have been agreed upon, each world informs the instructor of its outcomes and computes its country and world point scores. As with the WTO, the final agreement must have unanimous support. Failure to produce a final agreement represents a failed WTO round, yielding no points for any country in that world.[14] As a result, there is an incentive for countries to work out their differences and produce a final agreement.

It is useful to devote 10 minutes in the subsequent class period to a discussion of why international trade remains so restricted.

[11] argues and [17] finds that students must perceive that simulations and other experiential learning activities are pedagogically effective in order for them to be effective. Student perceptions influence students' level of effort and, ultimately, the depth of learning that follows. Moreover, [27] report that "learning and engagement play a significant role in explaining student perceptions of teaching performance and quality" (p.). As [6] found with various international business experiential learning activities, student evaluation results of the WTO simulation reflect extremely positive perceptions of its value and verify that the simulation accomplishes its learning goals. Both objective and subjective responses overwhelmingly indicate that the exercise enabled students to internalize the difficulty and complexity of trade negotiation far better than the lecture and reading alone. Upon completing the project, students understood that, although free trade is ultimately optimal, real-world pressures make it very difficult to achieve. Students consistently and strongly recommend that the simulation be used in future courses.[15] Reasons they would recommend the project include:

• • "Because it is a class about international trade, there is no better way to learn about the subject than actually to participate in exercises with it."
• • "The project puts the entire course into perspective and shows how complex moving to free trade can be."
• • "It helps in mastering the course and it teaches a lot about global trade and negotiations."
• • "It was hard and overwhelming at the beginning, but it was awesome."

The experiential component of the project enables students to internalize the basic notions underlying impediments to any negotiated agreement. First, by actually negotiating issues and having the grades dependent upon the outcomes of these negotiations, students learn first-hand the difficulty of the process. Students quickly recognize that simply understanding the issues and how they relate to their country and to the world is insufficient. The realization that their project grade is based on the outcome they achieve forces them into the painful process of negotiating an outcome that is beneficial to all parties. The points that are associated with each negotiated outcome for each country and the world provide students with something concrete. They can clearly see the trade-offs that are faced as they give on one issue to gain on another. Because each group involved in the simulation faces different internal and external constraints,[16] many students learn the broad applicability of the problems faced in this simple simulation. One student commented, "It is easy to sit and talk about how the world should move to free trade but when you actually get in there and see how self-interests affect negotiations, you can see why the process is an extremely slow one." Another student stated, "It provided worthy perspectives, but also creates a harsh competitive environment among students."

This article describes a simulated World Trade Organization negotiation designed to help undergraduate students understand the environment in which global trade rules are defined. If "practical know-how and evolved mindsets" are of central importance for international business education ([1]), the simulation described in this article provides benefits even beyond the original goals. Although the main focus of this project is to understand how various incentives have generated a sub-optimal trading environment, students also internalized several tangential, but important lessons, as evidenced by their project evaluations. Students learn that negotiation and compromise are necessary in politics, businesses, and myriad other situations. One student commented, "Negotiation takes patience and great effort to achieve ... goals." Another student learned "that when some participants are not willing to budge on negotiating issues, it is often necessary to create secret alliances to exert pressure on those holding out." Student response from the project has been overwhelmingly positive, despite the large workload associated with the simulation.

The framework of the WTO simulation extends easily to other situations in international economics. Examples include negotiations between developing nations and the International Monetary Fund (IMF) or the World Bank; international debt relief; the formation of new, expansion of existing, or merger of two existing regional trade agreements; and negotiations between oil producing and oil consuming nations. Domestic economics examples might include negotiations between government and "big oil," environmental and business concerns, or the passage of domestic economic legislation. In finance, negotiations on international capital mobility or between government and financial service firms engaged in mergers might be interesting. Management issues could encompass labor union negotiations or negotiating in a European works council (see [23] for an excellent approach).