WTO’s Existential Crisis- Will the Rules Based Trading System Survive?

By Satyajit Mohanan

The World Trade Organization had recently ruled that the US tariffs imposed on Chinese goods starting in 2018 had violated international trade rules.  President Donald Trump had imposed tariffs on more than $350 billion worth of Chinese imports. The ruling termed the US tariffs as “discriminatory” and “excessive”.  It is not surprising that the US- China trade war had violated global trade rules. However, China gains little from the verdict and the US is expected to continue with the tariffs. Apart from China’s gain of the moral high ground, the ruling has no impact on America’s future actions. This is because the US has blocked the appointment of new judges to the WTO’s Appellate Body. If Washington decides to appeal against the verdict, the case will be stuck in legal limbo owing to the appellate body’s defunct state. The absence of an appeals systems would bring about no concrete resolution and America could continue to apply further tariffs on Chinese goods. This WTO ruling has brought back the focus on the threat posed towards the WTO’s very existence and the future of the rules based trading system.

How did we get here?

In brief, the WTO regulates nearly 98% of global trade flows among its 164 member countries. Established in 1995, the WTO has ensured collective benefits for its members through trade liberalization enforced by its rules and by negotiating multilateral trade agreements. Its primary aims include ensuring equality among its members through its principles of non-discrimination and reciprocity and settling of disputes through its dispute settlement system.

Over the years, the world has witnessed a rising wave of protectionism. Right-wing and populist parties in countries such as the United States of America, India and Europe have successfully argued a case for protectionism and have disseminated narratives about the discontents of free trade and globalization. The pandemic has further fuelled the rise of protectionism. Countries have erected trade barriers and have opted for anti-import policies in order to tackle their economic woes. For instance, India has adopted a host of anti-import policies in the defence sector and increased tariffs on items such as kitchenware, fans, electrical appliances, medical devices etc.  While most of these actions are defensible under the “national security” clause of the WTO rules, they pose a danger to trade liberalisation. The national security clause of the WTO specifies that it shall not prevent a government from taking measures to defend its national security even if they such measures were protectionist in nature.

 In 2008, countries around the word had imposed more than 2500 restrictions. Data suggests that between November 2013 and May 2014, the G20 countries undertook 112 protectionist measures while only opting for 98 liberalization measures. Many countries have also provided trade-distorting subsidies for its domestic businesses. The WTO has failed to keep a check on rising protectionism in countries and has made very little progress in developing a consensus on among its members for further trade liberalization.

Dimtry Grozoubinski in his article, “The World Trade Organization: An Optimistic Pre-Mortem In Hopes Of Resurrection” argues that the WTO is facing challenges across its three pillars: Compliance, Negotiation and the Dispute Settlement System.  This is certainly true as the major short-comings of the WTO is in its potential to enforce compliance of trade rules and negotiate new rules. The failure to uphold its legislative functions has in-turn affected its adjudicative functions which has now lead to the death of the dispute settlement system.

Compliance:

The WTO has increasingly found it difficult to enforce compliance of its trade rules. Countries are obliged to notify the organisation on their domestic policies or regulations and attend committee meetings which focus on general compliance. However, The WTO cannot directly enforce such compliances and highly relies on international peer pressure for its enforcement. Moreover, any formal concern must only be raised by countries or a group of countries against a country charged with non-compliance which then would be addressed by the dispute settlement system. This then becomes an addressal of breaches that harm certain member countries and not the institution as a whole.

Negotiations:

Negotiations on various issues have been stuck in the WTO. The organisation has shown very little progress in multilateral trade negotiations. The consensus-based organisation has failed to create new rules for trade liberalisation. In 2001, negotiators in the Doha Round focused on three areas: agriculture, tariffs on non-agricultural goods and services and development. In 2015, after yielding few results, the US declared that the Doha round had collapsed following no progress in the agriculture area. Agriculture is the most protected sector in trade. Data from OECD suggest that its members spent more than $238 billion on agricultural support or subsidies. There has been no progress on special sessions of the WTO’s Committee on Agriculture which was created with an aim to negotiate new rules on agricultural subsidies and tariffs. Moreover, the Agreement on Agriculture (AoA)  was negotiated by the US and the EU with an aim to ensure the continuity of their existing agricultural support schemes. The reform of the AoA remains stalled and progress has been elusive.

WTO’s ‘Crown Jewel’ Now A Defunct System:

In 2016, Former WTO Director General Pascal Lamy called the dispute settlement system (DSS) as  the “Jewel in the WTO’s Crown” and hailed it as the bedrock of the multilateral system. The DSS transformed the organisation from an advisory body to an adjudicatory mechanism. It consists of a Panel and an Appellate Body (AB). A Panel of 3-5 independent experts provide an initial order on the case after an investigation. The AB which is composed of seven judges reviews the appeal of the panel’s order and issues a final order. The DSS has been highly successful in the past. It has solved various disputes and has also provided a platform for Least Developed Countries (LDCs) to voice its disputes against developed countries. For instance, in the famous banana dispute, Ecuador pursued an aggressive case against the EU’s discriminatory trade practices which ended with Ecuador imposing retaliatory tariffs against the EU.

 In 2019,  a crisis hit the DSS which affected its functioning. The seven judges on the AB would serve fixed terms approved by consensus, the US refused consensus on all nominees. On 10th December 2019, the AB stopped functioning as the number of jurists fell bellow three persons. The US has had serious differences with the judicial body and alleged that the body largely ruled against the US while turning a blind eye against countries such as China. The US has also complained of the dispute settlement process as being time consuming. The AB’s annual report of 2018 showed that the a trade dispute on an average spent 859 days at the panel stage , 395 days on appeal and in total took 1,267 days to receive a final order. America’s spat with the AB did not start with President Trump. President Obamas administration blocked the reappointment of Seung Wha Chang of South Korea and Jennifer Hillman of America accusing them of being against America’s interests. In other words, the US views the AB’s rulings against US measures meant to protect itself from “unfair foreign competition” as against its interests. The ‘unfair foreign competition’  here often refers to the subsidies provided by countries such as China and India to its domestic exporters. The US, EU and Japan had in the past issued a joint statement against China’s high powered subsidies and had urged the WTO to hold the dragon accountable for its actions. However, the WTO could not do much owing to its weak negotiating structures and poor enforcement mechanisms.

International Trade Structure at the Crossroads:

The WTO is partially stalled and multilateral negotiations have failed. Protectionism is on the rise and countries are embroiled in trade wars. Member countries over the years have entered into bilateral, regional and plurilateral trade agreements. The Regional Comprehensive Economic Partnership (RCEP), EU-Mercosur agreement, the African Continental Free Trade Area (AfCFTA) and Transatlantic Trade and Investment Partnership (TTIP) are some examples. While the benefits from these trade pacts are plenty, they threaten a centralised rules based system of the WTO.

What does this mean for the future of a rules based trading system? The global trade structure without the WTO could witness the emergence of unilateralism and jeopardise the international trading system. Tit-for-tat trade retaliation would increase, trade flows will decrease with more trade restrictions, discriminatory tariffs would rise and a state of anarchy would prevail in the system. WTO reform is the only solution to solve this existential crisis and save the rules based trading system. Ministerial meetings and technocratic fixes from Geneva alone will not suffice, a consensus based reform of the WTO is essential for its very existence. The United States has held the organisations budget for 2019 and is poised to do the same in 2020. Hence, it is imperative that the US must be central to any future reform. A reformed WTO is the ultimate recipe for the survival  of the rules-based trading system.

The views expressed in this article are the author’s own and may not reflect the opinions of The St Andrews Economist.

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