The future of the World Trade Organization: why should we care?

#CriticalThinking

Peace, Security & Defence

Picture of Jamie Shea
Jamie Shea

Senior Fellow for Peace, Security and Defence at Friends of Europe and former Deputy Assistant Secretary General for emerging security challenges at NATO

In the aftermath of World War Two, the architects of the new multilateral order made the liberalisation of global trade one of their priorities. They were guided by the experience of the Great Depression of the 1930s when the major economic powers reacted to the Wall Street Crash by putting up trade barriers, raising tariffs on imports, freezing credit and adopting ‘beggar-thy-neighbour’ protectionist policies. The resulting mass unemployment produced political as well as economic dislocation with the rise of fascism on the right and communism on the left.

After 1945, economic recovery required not only large injections of American capital into the global economy, exemplified by the Marshall Plan in Western Europe, but also a set of international trade rules that would make it harder for countries to close their markets to others or to impose unfair trade terms in the future. An open trading system that avoided preferential trade blocs would over time deliver more economic exchanges, more prosperity and the political stability that would come from growing interdependence.

Thus in 1947 was born the General Agreement on Tariffs and Trade (GATT) as part of the emerging United Nations system. In time it grew to 84 member states and launched a series of “rounds” of trade negotiations, the most significant being the Uruguay Round in the mid-1970s. Its rules on goods and services are still largely the ones that govern the international trading system today.

The end of the Cold War brought a further boost to world trade as the former communist bloc opened up to the international market and imported vast quantities of Western consumer goods to satiate the appetite of populations long impoverished by the command economy. China and other emerging economies, dubbed the BRICs by Jim O’Neil of Goldman Sachs, were also integrating into the global economy and anxious to take advantage of the cheap labour and large internal markets that they could offer to Western investors. So it was the right time to turn GATT into something more ambitious and the World Trade Organization (WTO) was born.

Both the EU and the US are using the WTO to push back against China

The new body would not only negotiate trade rounds, like the defunct GATT, but would have more teeth when it came to resolving trade disputes and monitoring its members’ compliance with its rules. Today the WTO has 164 member states, which is a good chunk of the overall UN membership standing at 193 member states. A further 23 countries are waiting to join. In a world where regional trade blocs are springing up on all continents, the latest being the African Union free trade zone or the Regional Comprehensive Economic Partnership in the Indo-Pacific, some may question why the WTO is still needed. The example of the European Union is edifying here. The EU has concluded 43 trade agreements with 74 partner countries. Yet two-thirds of its overall trade takes place under WTO rules. The EU has no trade agreements with China, the United States, India or Brazil. A trade agreement between the EU and Latin America – Mercosur – has been concluded but it has not yet been ratified.

Yet despite its wide membership and added value in complementing regional trade pacts, there is a sense that the WTO is experiencing something of a mid-life crisis. It has not concluded a major new trade round in its quarter-century of existence, although some smaller sectoral accords on agricultural subsidies and trade facilitation have been reached. It was also paralysed by the US during the Trump administration when Washington blocked the appointment of new judges to the WTO’s appellate panels. This stymied the WTO’s dispute resolution mechanism. President Biden has now allowed these appointments to go ahead but there is still a sense that the US has little interest in the WTO and that it does not occupy a high place in the Biden administration’s quest for a reinvigorated multilateralism. Washington speaks of a “worker-centred trade policy” and there is little enthusiasm in Congress for new trade deals. Congress has not approved new fast track trade promotion authority to enable Biden to convince America’s partners that it is truly committed to trade liberalisation. This said, when the US does have a clear objective, it deploys enormous energy and political clout in achieving it. The 15% minimal global tax on the tech giants, such as Google, Facebook/Meta, Amazon or Alphabet, was a case in point. In short order, Washington had this minimal tax rate adopted by the G7, G20 and the Organisation for Economic Co-operation and Development (OECD). Yet this type of US leadership is lacking on WTO reform.

Moreover, several of the more recent WTO members are now demanding ‘policy space’, a euphemism for disregarding WTO rules that they don’t like. They are encouraged in their rule bending: by China, which has dragged its feet on buying US soybeans or protecting foreign intellectual property; by India, which has rigidly opposed any attempts by the WTO to open its public procurement and agricultural markets; and by Saudi Arabia, which has resisted the introduction of environmental standards and green taxes in the international exchange of goods. Western diplomats in the WTO sometimes have the impression that although equitable trading rules for all have lifted millions out of poverty, only the OECD countries still take them seriously. In sum, when the three core tasks of the WTO are all contested at the same time, WTO reform becomes not an optional extra but a fundamental necessity. Yet the consensus rule so common in the UN system does not augur well for the advocates of change.

Still, and despite the gloom of old WTO hands, there may be a new momentum in the debate on WTO reform. In the first place, both the EU and the US are using the WTO to push back against China and its practices such as forced technology transfer, patent abuse, the dumping of underpriced steel on international markets and the use of forced labour, especially among the Uighur minority. The EU has stood in solidarity with its member state, Lithuania, in response to the trade restrictions that Beijing imposed on that country after it opened a Taiwan representation office in Vilnius. Although the WTO dispute resolution mechanism is still not fully up and running, the EU and 24 other WTO members have set up an ad hoc dispute resolution panel, including China, that can adjudicate the Lithuanian case. The US and the EU are both developing anti-coercion instruments to retaliate against the manipulation of trade for political ends and the WTO is a useful arena where they can make their case, not only against China but other manipulators as well, such as Russia over gas supplies or trumped-up health and sanitary regulations invoked to keep out EU meat and dairy imports.

The current dispute resolution mechanism extending over years does not encourage member states to settle

A second reason for hope is that the US and the EU are now working more closely together. They have launched a Trade and Technology Council with the aim to settle long-standing trade disputes between them and harmonise standards across the Atlantic in new areas such as e-commerce, data exchange, data privacy, foreign direct investment screening and supply chain security. Mutual recognition of standards, easing of export licences and foreign ownership rules, and greater access to public procurement can also boost the already considerable transatlantic trade flows.

Yet, more importantly for the WTO, if the US and the EU can harmonise their trade rules, especially in services and non-material assets such as data and artificial intelligence, they can set a global standard that could be reflected in future WTO agreements. The EU will also gain more leverage over Washington in encouraging it to develop a more active trade policy. The Office of the US Trade Representative is vocal in calling out China for its backsliding on WTO rules, but needs to set out its own positive vision for a new WTO negotiating round as well.

A third more positive element is the appointment of a new WTO Director-General, the first woman to occupy the role and the first from Africa. Dr Ngozi Okonjo-Iweala of Nigeria has already shown her commitment to modernising the WTO agenda. She has also raised the profile of the WTO on the international scene by taking part in the G20 summit in Rome last year and speaking out on COVID-19 vaccine distribution and related patent and intellectual property issues. She is putting the trade interests of the developing countries and their access to the markets of the developed countries higher up the WTO agenda. So although the WTO Director has few executive powers and the WTO members like to point out that the organisation is ‘member-driven’ – a euphemism for ‘member-controlled’, Dr Okonjo-Iweala is still an influential and respected voice, and an essential bridge builder for the US and EU to engage the activist developing countries in a WTO reform alliance.

So, what could a reform agenda look like?

In first place is the need to speed up the decision-making of the appellate panels in adjudicating trade disputes and imposing fines and penalties on the transgressors of WTO rules. The current dispute resolution mechanism extending over years does not encourage member states to settle quickly or to stop their abusive practices. A speedier dispute resolution process is also more likely to keep media focus on WTO issues and generate political pressure on member states to stick to the rules.

Another pandemic on the scale of COVID-19, or worse, is inevitable sooner or later

Next would be a broader agenda. When the GATT first came into existence, trade essentially meant the exchange of goods and raw materials. Today, it is a much more diverse concept involving financial services, insurance, data flows and services, and also norms and standards when it comes to environmental protection, fighting the illegal trade in raw materials and stolen cultural artefacts, the preservation of fish stocks caused by illegal and over-fishing, and the protection of workers’ rights or combatting child and forced labour. The piracy of consumer and luxury goods and the theft of data, industrial secrets and intellectual property through cybercrime also come into this framework. The WTO needs to be able to debate these issues and incorporate them into future trade negotiations. This may well be a difficult political battle but giving the WTO a broader mandate is essential if the organisation is to remain relevant to the bulk of its members.

Third, and associated with the recommendation above, the WTO needs to reach out to the private sector and civil society. As the WTO agenda broadens, their active engagement can be useful as a source of ideas and expertise to help governments generate political momentum. As we have seen at the recent COP26 meeting on climate change, securing breakthroughs often requires public-private partnerships between governments, NGOs, civil advocacy groups and private sector. The partnerships help to give negotiated agreements legitimacy and buy-in within societies, and public pressure from the grassroots level upwards can help hold governments’ feet to the fire when it comes to implementation. The WTO engaged with the private sector to a limited extent when it was first created but the practice of outreach has abated. So the WTO needs to develop an engagement strategy embracing not just the private sector but trade unions, trade associations and organised labour too. Some WTO members will say that the latter aspect should be handled separately in the International Labour Organization, but the US and EU need to push back.

Fourth is reform related to patent and intellectual property issues, known as TRIPS in WTO parlance. The issue of vaccine equity during the COVID-19 pandemic has put the spotlight on patent protection as a barrier to developing countries being able to produce their own generic vaccines more cheaply than by buying them off the shelf from the major pharmaceutical companies. Given that only 7% of the African population has received a first dose of COVID-19 vaccine, the African Union has been in the forefront in demanding patent waivers for the local production of vaccines such as Pfizer or Johnson & Johnson.

Yet, as in previous debates on patent protection, the manufacturers of medicines are pushing back, arguing that the issue is one of production technology and specialist skills rather than having access to the chemical formulae of pharmaceuticals. If patent protection breaks down, they will have less incentive to invest in new medical research and they argue that licensed production and joint ventures with local companies or research laboratories in the developing countries are better and fairer alternatives. Given that another pandemic on the scale of COVID-19, or worse, is inevitable sooner or later, the WHO has a key stake in working out the rules of the road now so that equitable vaccine or medical treatments distribution is not held up by protracted disputes over patent waivers or violations.

The WTO is clearly punching below its weight in the current global multilateral order

Finally, the consensus rule needs to be adapted so that smaller groups of interested WTO member states can negotiate new rules and standards without having to go at the speed of the slowest or more saboteur member states. Of course these smaller groups would need to be transparent, be open to future memberships as they validate their results, and pledge not to undermine the existing trade privileges of the WTO membership as a whole. Yet this kind of “variable geometry”, to use EU parlance, would certainly make the WTO more dynamic and innovative.

I recently heard an EU diplomat complain in a webinar that “the only place where WTO reform is not discussed is in the WTO itself”. The WTO ministerial meeting due to be held in Geneva last December has been postponed to this coming June because of the pandemic-related restrictions on travel and face-to-face gatherings. Yet this six-month postponement may prove a blessing in disguise, as it will give Dr Okonjo-Iweala and her team a breathing space to work with the reform camp among the WTO membership on an ambitious package of reform proposals.

The WTO is clearly punching below its weight in the current global multilateral order. It can and must do better. The starting point should be for the WTO secretariat to send to each of the 164 member state missions in Geneva a copy of Adam Smith’s classic 18th century work, “The Wealth of Nations”. Even in the 18th century, Smith argued that increasing trade and economic interactions, and giving countries the chance to participate and compete fairly in the global economy, were the route to greater prosperity and world peace. It is still true in the 21st century.

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