The World Trade Organisation: From Dithering to Withering?

February 8, 2018
The World Trade Organisation: From Dithering to Withering?
Richard Woodward
Richard Woodward Non-Resident Fellow - International Economics

The 1st of January 2018 marked the 70th anniversary of the entry into force of the General Agreement of Tariffs and Trade (GATT). Back in 1948 the GATT had just 23 signatories and was focussed mainly on reducing tariff barriers to trade in goods. In the intervening period the GATT and its successor, the World Trade Organisation (WTO), became the pivot around which an increasingly elaborate regime for the governance of global trade revolved. Today’s WTO has 164 members, a full-fledged dispute settlement mechanism, and an agenda encompassing a range of non-tariff barriers applying not just to goods but also services and intellectual property. Few doubt that this regime has contributed significantly to the flourishing of global trade and curbed the protectionist instincts of states in times of economic turbulence, most recently the aftermath of the 2008 financial crisis. These successes notwithstanding, long-standing shortcomings in the organisation’s institutional design combined with a US administration deeply suspicious of multilateralism have left the WTO, and the post-war trading regime, facing an existential crisis.

Ebbing support for the WTO reflects its failure to effectively discharge its primary function as a venue for negotiating deals to liberalise trade. The termination of the Doha Round in 2015 means that the organisation is yet to successfully complete a comprehensive multilateral round of trade talks. The WTO’s reliance on decision making by consensus means progress, if it is made at all, is painstaking. The latest WTO Ministerial Conference held in Buenos Aires in December 2017 typified the problem with members unable to reach an agreement on any of the agenda’s substantive items. Indeed as Robert Azevedo, Director General of the WTO, acknowledged in his closing remarks “we could not even agree on more detailed programmes in many areas”. This inertia is hindering the WTO’s ability to evolve rules for new trade issues such as e-commerce. By 2025 it is forecast that cross-border data flows could be worth $20 trillion, exceeding the present value of trade in goods. E-commerce has featured at almost every ministerial conference since 1998, yet no binding agreement on this matter is in sight.

In the past, leadership from the WTO’s strongest players, most notably the United States, has helped to resolve such impasses. During the last decade, however, US leadership of the global trading regime has withered. President Trump’s disdain for multilateralism and his appointment of advisors espousing the case for economic nationalism is entrenching this problem. On the campaign trail Trump aimed regular broadsides against global trade rules, promising to renegotiate or withdraw from trade deals and organisations, including the WTO, which he regarded as detrimental to US interests. Since taking office the President has been as good as his word, ending US participation in the Trans-Pacific Partnership (TPP), launching a renegotiation of the North American Free Trade Agreement (NATFA), and signing an Executive Order to review all US trade agreements, including those subject to WTO rules. Pressure from the United States also led to the dropping of the customary pledge to “resist all forms of protectionism” from the communiques issued by the International Monetary Fund and the Group of 20.  The country that was once the principal guarantor of the rules based multilateral trading regime is now spearheading the assault against it.

From the US perspective the charges against the WTO are that it is simultaneously too weak and too strong: too weak in confronting what the US believes to be the unfair trade practices of others, most notably China, and too strong when it compels the US to abide by the rules.

For the US, the WTO’s impotence is epitomised by its approach to China.

China’s accession to the WTO in 2001 was supposed to usher the country towards a market based economy and the adoption of established international trading norms. Instead the WTO has been complicit in allowing China to perpetuate a mercantilist strategy of subsidising its exports whilst maintaining barriers to restrict foreign competition in its domestic markets.

According to many of the Trump administration’s senior figures this helps to explain the United States massive trade deficit with China and the “rusted-out factories” to which the President referred in his inauguration speech. In its annual report on China’s behaviour as a WTO member published in January 2018 the Office of the United States Trade Representative (USTR) went further still.  The report explains: “the United states erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market oriented regime” going on to claim “it is now clear that the WTO rules are not sufficient to constraint China’s market-distorting behaviour”.

Conversely when the WTO seeks to uphold the rules, it is regarded as overbearing. Echoing earlier complaints expressed by the Obama administration the current USTR, Robert Lighthizer, has accused the WTO Appellate Body, a seven member panel which adjudicates appeals against rulings made in disputes brought by WTO members, of judicial overreach claiming it was making rather than interpreting the law. As he argued in a September 2017 speech to the Centre for Strategic and International Studies “the United States see numerous examples where the dispute settlement process over the years has really diminished what we bargained for or imposed obligations that we do not believe we agreed to”. Meanwhile, in an interview with the Fox Business Channel in October 2017, the President grumbled that “the World Trade Organization was set up for the benefit of everybody but us …. they have taken advantage of this country like you wouldn’t believe”. His evidence for this prejudice was that “we lose …. almost all of the lawsuits in the WTO”.  The reality is somewhat different. Between 1995 and 2016 the United States did lose 89% of the 129 WTO dispute settlement cases where it was a respondent. This figure is nonetheless consistent with proportion of cases lost by other complainants. Moreover, the United States has won in 91% of the 114 WTO dispute settlement cases where it has been the complainant.

Undeterred by this, the United States appears determined to cripple the WTO’s dispute settlement system by blocking appointments to the Appellate Body.  Under WTO procedures, the Dispute Settlement Body, comprised of all 162 WTO member states, appoints members to the Appellate Body by consensus.  Any one member state can block appointments.  Owing to US intransigence three of the seven posts are now unoccupied and a fourth vacancy will open at the end of September 2018. With three members required to hear each appeal the Appellate Body will be stretched, adding to the backlog of cases. Furthermore, by convention none of the panel members hails from the same country as the plaintiff to any dispute. The three remaining members of the Appellate Body from September 2018 will be from the United States, China and India, countries that have been party to almost 50% of all WTO disputes during the last two years. If it is unable to referee disputes between its major members the Appellate Body will be obsolete. As Cecilia Malmstrom, the European Commissioner for Trade, has warned this is tantamount to “killing the WTO from the inside”.

Hopes that other countries might salvage the WTO by assuming the United States’ leadership mantle are, as in other arenas of global governance, misplaced. The optimists point towards the ongoing commitment of the WTO’s other major protagonists to the organisation noting, for the moment, that even the United States continues to pursue some of its trade battles through the dispute settlement mechanism. Furthermore their complaints about the WTO often chime with those of their American counterparts. The European Union (EU), for instance, shares the concerns of the US and its corporations about China’s weak record of protecting intellectual property and forced technology transfer. The buccaneering post-Brexit vision of a ‘global Britain’ spurring global trade liberalisation has rejuvenated the United Kingdom’s interest in collaborating at the WTO to protect the rules based order. The problem is that the major players share only a partial diagnosis of the illness facing the WTO’s rules based trading order and advocate very different prescriptions. For the EU dealing with China requires a strengthened WTO framework that is anathema to a US administration which fears judicial activism may be encroaching on its sovereignty. The UK’s free trading vision clashes with the Trump administration’s inveterate attachment to economic nationalism. President Xi Jinping’s keynote address in Davos in January 2017 ostensibly signalled China’s readiness to pilot the free trade agenda but this is not translated into concrete policy action.  In short, on their own none of these actors are capable of substituting for US leadership but the prospect for collective action is inhibited by their competing interests and visions.

Discerning the United States’ true intentions towards the WTO is made difficult by the inconsistencies and contradictions that plague Trump’s ‘America First’ foreign policy. Likewise, even if there is a grand strategy the administration’s penchant for rhetorical bluster and brinkmanship could lead to unintended consequences. Although it is much less active than its predecessors, the United States continues to use the WTO submitting cases to the dispute settlement process and using meetings to exert pressure on allies and enemies alike. On the side-lines of the Buenos Aires meeting for example, the US issued a joint statement with the EU and Japan complaining about the market distorting practices that have fuelled excess capacity in the steel industry. Although the statement did not mention it by name, this was a clear sideswipe at China and the subsidies, state-owned enterprises, and local content rules that are key features of its economic system. Equally by paralysing the Appellate Body and threatening to ignore the WTO’s rulings the United States appears determined to ensure that future trade disputes are resolved by recourse to power rather than the rules. As anxious students of global economic history are acutely aware, it is precisely this kind of aggressive unilateralism that made the GATT so necessary in the first place.