Dhaka Courier

The woes of the World Trading Organization: Can reforms revitalize it?

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The World Trade Organization (WTO) is headed for a crisis of gargantuan proportions. The COVID 19 crisis has dealt a huge blow to global commerce, which has plummeted. Countries have resorted to protection and self-reliance. Globalization and Multilateralism no longer appear to enthuse States. The United States had earlier given these ‘values’ leadership as part of its own perceived self-interest. President Donald Trump is now anxious to extricate the US from this web of complex understandings and arrangements. He feels these tend to constrain his country’s external choices and options. All these factors have combined to cause a frustrated head of WTO, Director General Roberto Azevedo, to resign with effect from31 August, cutting his tenure short by a year. The woes of WTO are multiplying rapidly.

Before delving further as to what can be done to revitalize it and if the efforts are worth their while, a brief examination of what the WTO is about should be useful. It was created in 1994, replacing the earlier General Agreement on Trade and Tariff (GATT), a part of the Bretton Woods arrangements following World War 11.  The new creation was different from its forerunner in three main ways. First, in their mandates; GATT dealt only with trading in goods, while the WTO covers the newer areas of services and intellectual property. Second, GATT was smaller with 128 member states drawn from the global capitalist camp, while the WTO is nearly universal, with its membership of 164 States, including socialist China which used to hold GATT in contempt. Third, while GATT ignored ‘development’, WTO embraced it, indeed linking ‘trade’ with ‘development’ in the belief that the two go hand in hand, a largely welcome concept.

The WTO rests upon a tripod. One of its legs is the multilateral Agreement on Trade in Goods (including GATT and associated agreements); the second is the General Agreement of Trade in Services (GATS); and the third is the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS). The Ministerial Council, the apex decision making forum, which meets biannually is sustained by three structures. First is the General Council of Ambassadors, akin to the central legislature, which also meets as two other manifestations, one being the Dispute Settlement Body (DSB), and the other being the Trade Policy Review Body (checking WTO-consistency of trade policies of member states, which the author has been privileged to Chair). The second is a set of committees, each focused on a major WTO function. The third is the Secretariat, headed by the Director General (DG). It is important to note that the DG is not just an international bureaucrat; he is elected by all the Member State, and holds a globally significant political office of immense importance.

The WTO system is based on certain principles, of which the following are key. First, is that protection can be provided to domestic production against foreign competition only by tariffs and not by any quantitative restrictions. Second, these tariffs should be reduced in due course and non-tariff barriers (NTBs) eliminated. Third, all members must accord one another ‘Most Favored Nation’(MFN) status, or equal treatment. Fourth, ‘national treatment’ is to be accorded to all, meaning no distinction is to be made between imported and domestic products. Fifth, services transactions were to occur in four modes, including the free movement of ‘natural persons’ (mode 4). And sixth, Intellectual property rights are to be protected complementing the agreements developed by the World Intellectual Property Organization (WIPO).

The multilateral legal instruments which constitute the WTO system, are treated as a ‘single undertaking’. This implies that, in one stroke, it makes all members subject to the Agreements to be implemented, albeit with varied responsibilities, as some are eligible for ‘Special and Differential Treatment (STD). This is particularly true of developing countries, because of their low level of development. This exception has become an apple of discord between Member States. This is because ‘developing countries’ in the WTO are ‘self-declared’ ( though not the ‘Least Developed Countries’ or LDCs  , with more privileges who needed to satisfy certain criteria to be classified as such), and includes China and South Korea, much to the chagrin of President Trump and some other developed country leaders.

The WTO aspirations found fruition through various rounds of global negotiations. The latest, called the Doha Development Round, came a cropper for several reasons. These included differences on a variety of issues such as agriculture, industrial tariffs, non-tariff barriers (NTBs), services and trade remedies. The most significant differences were between developed countries led by the US, the European Union (EU), and Japan , and the developing countries led by China , Brazil, India and South Africa, Also of major relevance was the gap between the US and the EU, predating Trump, but exacerbating during his period in office. This included the question of subsidies that the EU provided its agriculture sector. However, the evolving ‘mother of battles’ that has now become an existential threat to the WTO is the burgeoning trade war between the US and China, and Trump’s current threat of ‘de-coupling’ Washington from Beijing.

Regional Trade Agreements (RTAs) have for existed alongside the WTO for sometime. Actually, the WTO allows for such derogations from its principles through GATT Article XXIX and GATS Article V, though the language has been kept deliberately vague. The impasse at the Doha Round gave the phenomenon a fillip. Free marketeers like Jagdish Bhagwati had always been critical of this tendency, terming it the ‘spaghetti bowl problem’ (or ‘noodle-bowl’ for Asia), because of the intertwined agreements. In Asia where the RTAs were spurred on initially by the Financial Crisis of 1997, gathered momentum as the US turned inwards deepening the perception of neglect of East and South East Asia. The latest example of the ‘noodle-bowl’ is the China-led Regional Comprehensive Economic Partnership (RCEP). It is noteworthy that India pulled out of the negotiations for RCEP, due to small industries’ worries about being overwhelmed by cheaper Chinese manufactures, and farmers’ wariness about being flooded with dairy products from Australia and New Zealand.

Few global bodies have generated the kind of passions as the WTO has. Meetings of the Ministerial Council, each normally has a different venue, have been almost invariably accompanied by huge protests in the host cities. It is mainly because detractors see it, a tad unfairly perhaps, as having altered little from GATT which was widely see, in this case possibly fairly, as a “rich men’s club”. But now with powerful State actors striking out on their own, or creating RTAs providing them advantage, the poorer countries see benefits in the rule-based global order, or rule of law, in trade that the WTO stands for. Most wealthy countries still see its benefits as well. So, there is a broad consensus that the organization can yet yield positive results provided there are reforms. But they are not agreed on what, where and how.

A worthwhile reform effort would need to include: all three of the WTO’s key functions: One, administering multilateral trade rules; two, serving as forum for some negotiations; and three, offering a mechanism to settle disputes. Many, particularly developed countries, are unhappy with the decision-making process by consensus, which gives the least significant member of the organization an effective veto power. The organization stands threatened by the raising of tariffs in the name of security as the US has warned, and the blocking of appointments to the WTO Appellate body, rendering it non-functional. The US wants a return to the non-binding dispute settlement of the GATT era .The US has stated these , and more steps would be taken , unless guidelines are formulated to prevent high economic growth countries , like China, from taking benefits of SDT by self-declaring themselves as ‘developing countries’.

China is said to support the reform process also, viewing this as an opportunity to play a lead role in it, rather than have the initiative hijacked by others. It wants to link it up to China’s domestic policy of ‘reform and opening up in the new era’. It sees prudence in addressing ‘early harvest’ first, seeking common ground where possible, and shelving differences (an oft-stated Chinese negotiating strategy). China has identified Appellate body reforms as a priority area, as evidenced in its position paper on WTO Reforms, and later, on Reform proposals issued on 23 November 2018, and 13May2019 respectively. Some notable ‘early harvest’ subjects are fisheries subsidies, e-commerce, small and medium sized enterprises, and investment facilitation. China has shown empathy with the Canada-led 13 party consultation forum, and as a part of Plan B favours RTAs, in which its own role is key such as with regard RCEP, and other bilateral and plurilateral arrangements including its “Belt and Road Initiative’.

In the long run prevalence of a global trading order that is WTO’ principal aim should benefit all. One hopes, therefore, even the individual self-interest would drive all to some kind of an agreed arrangement. It would stand to logic to initially address ‘low-hanging fruits’ like fixing the Appellate Body Crisis and the dispute settlement mechanism. Whether the US is led by Donald Trump or Joseph Biden in the years ahead , it should realize that a lack of interest on the part of America, or an attempt to weaken the WTO which is now favoured by most countries, would  only lead to greater Chinese clout in shaping global trade rules, a scenario that should not be Washington’s choice outcome. Azevedo’s departure would be a blow, but it is also an opportunity for fresh blood in the person of the new head of WTO to act more effectively on the reform process by knocking some heads together.

 As has been said, speaking metaphorically of the WTO, giving it a ‘reform shake’ could make some fruits, including the low-hanging ones, to fall. But as Azevedo had wisely warned that shaking a tree too hard could also kill it. Since a dead WTO would almost certainly lead to more trade barriers, as well as less predictable and enforceable global trading, there is no good alternative to keeping WTO alive. One hopes it will be possible. There is a passage between the rock and a hard place that the WTO reform process entails. The challenge for the world leaders would be to find it. Failure to do so, and the resultant chaos in the trading world, is not an option.

Dr Iftekhar Ahmed Chowdhury is Principal Research Fellow at the Institute of South Asia Studies, National University of Singapore. He is a former Foreign Advisor (Foreign Minister) of Bangladesh and President of Cosmos Foundation Bangladesh. The views addressed in the article are his own. He can be reached at: isasiac @nus.edu.sg

  • General Agreement on Trade and Tariff (GATT)
  • World Trade Organization (WTO)
  • Covid-19

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