The WTO has never been more relevant – or more at risk of collapse

Europe's World

Asia, Africa & Emerging Economies

Picture of Maurice Fermont
Maurice Fermont

Advisor on international trade and investment at BusinessEurope

Photo of This article is part of Friends of Europe’s upcoming discussion paper on global governance reform.
This article is part of Friends of Europe’s upcoming discussion paper on global governance reform.

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Show more information on This article is part of Friends of Europe’s upcoming discussion paper on global governance reform.

Since the founding of the ultimately ill-fated League of Nations in 1920, global governance has been dominated by a succession of supranational bodies, culminating in the foundation of the United Nations and the diverse Bretton Woods institutions at the end of the Second World War. These organisations have largely worked to ensure peace between the Western powers in the security sphere but also in finance and trade.  In a changing world, however, with the rise of new powers, it is imperative that the voices and needs of emerging nations are also adequately reflected. Given that 21st century global concerns focus far more than ever before on hybrid threats, human rights and the environment, is it time to draw a line under the past 99 years of global governance and look to re-evaluate and reform our established systems?

This article is part of Friends of Europe’s upcoming discussion paper on global governance reform, in which we ask the ‘unusual suspects’ to share their views on what reforms are necessary to make the rules-based order work for us all.

The World Trade Organization (WTO) is our global home, a place that allows us to trade freely with one another while serving as a bastion against protectionism. And much like a real home, if you do not check and repair the roof for almost 25 years, few people would be surprised to hear it is riddled with holes. They would also agree that taking a sledgehammer to the walls would in no way fix the roof and might end up leaving you homeless instead.

This analogy represents two sides of the debate on the future of the WTO: those who want to reform it and repair the roof and those who are putting it at risk of collapse without a clear alternative.

The WTO was created in 1995 to further liberalise global trade in an inclusive, reciprocal, rules-based manner. Its inclusive membership is comprised of 164 countries and counting, developed and developing alike, some of whom receive special and differential treatment on account of their development status. It is reciprocal because all members have agreed to liberalise their economies through successive rounds of negotiation. And they have done so in a rules-based manner, drawing up common rules for all member countries while resolving their differences through dispute settlement.

But after 25 years there is an urgent need for change. While national economies and business environments have seen radical change, the rulebook governing them has remained largely the same. When the WTO was launched, for example, only 0.4% of the world, or 16mn people, were connected to the internet. Today this figure stands at 58% or 4.5bn people. The iconic Nokia 3310 mobile phone was launched in 2000 offering basic functions, while today we use our smartphones to order products online and have them home-delivered from abroad within days. Trade in goods and services amounted to $6tn in 1995 and grew over fourfold to $25tn in 2018. The global trading environment has changed, and it is important that the WTO keeps up.

The WTO was created as a flexible institution that would evolve in parallel to the needs of the modern economy

A globalised economy needs clear rules and enforcement mechanisms. Discussions on the classification transfer and storage of data is a case in point. Without rules on data, countries may arbitrarily require data to be stored locally and require access to or the transfer of source codes for companies to obtain market access for software. With the advent of 5G and Industry 4.0 and the increased digital connectivity that this represents, companies trying to protect their intellectual property could face many risks.

The absence of new rules or improved enforcement of existing rules could therefore lead to market fragmentation and new forms of protectionism. Countries could exploit the lack of rules in different areas to undermine the global level playing field and gain unfair advantages, leading to a domino effect.

But rule-making has stagnated, and people could be forgiven for forgetting that the WTO and its predecessor, the GATT, were created as permanent bodies of negotiation through successive rounds. The WTO was created as a flexible institution that would evolve in parallel to the needs of the modern economy. The current Doha round was launched 18 years ago and progress to date has been limited. Initially, the deadlock was caused by disagreements along developing-developed country lines in the areas of agriculture, access to patented medicines and special and differential treatment. The non-market-oriented policies and practices that lie at the root of the US-China trade war, however, have induced a renewed sense of urgency for WTO reform.

Issues such as industrial subsidies, forced technology transfer, the non-market behaviour of state-owned enterprises, export credits, overcapacity and weak enforcement provisions for some existing rules have increased both the cost of stagnation and the need for a breakthrough. The growing share of global trade from 20% of the world GDP in 1995 to 30% in 2018 means the WTO is more important than ever as the guardian of multilateral trade. Yet the current paralysis on rulemaking and reform, the US-China trade war, and the coming paralysis of the Dispute Settlement Body are bringing the WTO to the brink of collapse.

One positive for the prospect of WTO reform is that talk of its replacement is limited, and no clear alternative ideas have emerged thus far

If the WTO cannot deliver on its mandate and regulate trade freely and fairly, why should countries continue to support it? And what are the alternatives? The continued paralysis within the WTO and the US-China trade war have exposed a painful schism in multilateral governance that besets institutions the world over. Can we still achieve meaningful compromise and upgrade the rules governing the global economy?

 

The pressure of paralysis may well lead to a breakthrough at some point. Plurilateral initiatives for reform are taking shape. But the increasingly visible power struggles may also push us further apart. While the US, the EU and other developed countries certainly need to take their responsibility, it is increasingly up to new players such as China, now the second-largest economy in the world, to decide whether they want to make a meaningful contribution to the multilateralism from which they have so heavily benefited.

One positive for the prospect of WTO reform is that talk of its replacement is limited, and no clear alternative ideas have emerged thus far. But it will not remain that way. New ideas will surface and may include a regionalisation of parts of the global economy. Hopeful observers may look forward to the end of the US-China trade war and a swift return to the days of Doha negotiations but the idea that we can go ‘back to the way it was’ is wishful thinking. History may resemble itself, but it does not move backwards. We would do well to prepare ideas on how multilateral trade governance, even if limited, could flourish in the future.

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