A requiem for the WTO

Despite its benefits to global prosperity, the WTO may be on its last legs, unless something changes dramatically

The creation of the World Trade Organization (WTO) on January 1, 1995, marked the biggest international trade reform since the end of World War-II, as it extended the General Agreement on Tariffs and Trade (GATT) remit on goods to also cover trade in services and intellectual property. The birth of the WTO also created new procedures for the settlement of disputes. Three issues have arisen. First, the continuing designation of China as a “developing economy”. Second, China’s use of state-owned enterprises with special subsidies giving it an unfair advantage has slowed its progress to be a “market” economy. Third, the charge that the WTO appellate body has over-reached and some countries misuse its dispute-settlement system to gain unfair advantage.
 

Despite lack of consensus on the Doha Round, global trade volumes more than doubled and global tariffs fell until the global financial crisis (GFC) in 2008. Since then, regional trade agreements like the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) have gone forward. But there are obvious signs that the US and China are now engaged in creating parallel and competing trade spheres while continuing to trade with one another. With manufacturing hollowing out in the richer countries and premature de-industrialisation in many developing countries, including India, the political landscape for freer trade has changed.
 

Richard Baldwin speaks of the next phase of globalisation driven by trade in services as Globalisation 4.0. But a revival of trade since 2020, especially in services and cross-border financial flows, suggests that globalisation may continue but more slowly — “slowbalisation” — than in the period before the GFC, and that more “regionalisation” may occur for geoeconomic reasons. Artificial intelligence (AI) may spring an unpleasant surprise for growth in services trade, but its impact so far remains unclear. The current global trading system is now in flux, with rising protectionism, and with Covid and Ukraine war shocks to supply chains and renewed efforts to onshore and friend-shore production, especially in key strategic sectors like semiconductor chips. Nevertheless, trade in commodities continues to grow despite sanctions, as the failure to embargo Russian oil shows.
 

The WTO introduced more formal mechanisms for dispute settlement, including an appellate body of experts to adjudicate disputes, but that system is now in disarray. It also allowed a self-designated status of “developing” country which provided various exemptions from WTO agreements for specified periods. Despite a lack of agreement on the Doha Round, the WTO system worked reasonably well. But problems have arisen lately. The continuing self-attestation of some countries like China — now the world’s largest trader and second-largest economy — as a “developing economy” with huge trade surpluses seems unfair. The use of state-owned enterprises with special subsidies is also an issue, especially with China, as that gives it an unfair advantage. The US has held up appointment of new appellate body members, gutting its functioning. A group of 26 countries, including China and the EU, have set up an alternative mechanism called the Multi-Party Interim Appeal Arbitration Agreement (MPIA), but their decisions are not binding on non-parties to the agreement. It has also unilaterally increased tariffs in recent years and others have retaliated, which has damaged the WTO system considerably.
 

Frustration with lack of progress on multilateral agreements, which require consensus, has created the demand for allowing more such plurilateral agreements at the WTO and calls for a change from consensus to other voting arrangements. But India and many developing countries oppose these approaches. Many issues related to tariffs on e-commerce, investment protection, and environmental and labour standards also remain unresolved so far. The agreements reached at the 12th Ministerial Conference on a limited number of issues, such as fisheries subsidies, pandemic response, food insecurity and e-commerce, were important because they were multilateral and gave hope to address the more difficult issues. But the hopes were dashed by lack of progress at the unlucky 13th Ministerial Conference. Trade in services grew rapidly and is expected to grow further, as a 25-year moratorium on tariffs on e-commerce was extended at the 13th Ministerial Conference for another two years until 2026. There is hope that this will continue and, in any case, tariffs on e-commerce may be more difficult to monitor and control.
 

India was seen as a spoiler in global trade agreements in the past, while it saw itself, rightfully, as a protector of its interests and those of the developing world against an unfair system where the decks were stacked in favour of the richer countries. Despite slowing global trade, India’s rise is predicated on its ability to continue to increase its share of world exports, which rose from 0.5 per cent in 1990 to 2.5 per cent in 2022, and is expected to be about 4 per cent in 2030 — at about $2 trillion. Of this, about half will be in fast-rising services exports. Despite a growing protectionist lobby in India, the country’s interests clearly lie in a more open world trading system, not one that spirals further into protectionism.
 

But the WTO may no longer be the answer to that more open trade world. India will have to rely on more free-trade agreements — with the UK, EU and eventually the US. Joining the RCEP is another option, but that exposes its markets to a flood of imports from China. With even greater protectionism on the horizon amid the EU’s Carbon Border Adjustment Mechanism and even higher US tariffs, and with China continuing to rely on a heavily subsidy-driven export model, the chances of a global consensus on trading rules are slim. Aggressive industrial policy is the flavour of the day and may spiral out of control if not checked soon.
 

Despite its huge benefits to global prosperity, the WTO has become the whipping boy for major trading powers and appears to be on its last legs, unless something changes dramatically.

The writer is distinguished visiting scholar, Institute for International Economic Policy, George Washington University, and non-resident senior fellow, The Atlantic Council