This talk is based on my experiences. Of this approach Somerset Maugham wrote:
Fact is a poor story-teller. It starts a story at haphazard, generally long before the beginning, rambles on inconsequently and tails off, leaving loose ends hanging about, without a conclusion. It works up to an interesting situation, and then it leaves it in the air to follow an issue that has nothing to do with the point; it has no sense of climax, and whittles away its dramatic effects in irrelevance.
I will try to avoid some of these pitfalls to the extent possible in my narrative.
I will start by stating my conclusion: I am optimistic about the future of the WTO and the multilateral trading system that it seeks to manage. The fundamental interests of all WTO members require a positive outcome.
My view is grounded in the WTO’s 11th Ministerial Conference held in Buenos Aires this last December. Most came away disappointed. I had the opposite reaction. Several important things happened at Buenos Aires. For one thing, the United States, reputed to have turned its back on the trading system, attended and contributed. This was not a foregone conclusion given pronouncements from the new U.S. Administration about its preference for bilateral agreements. And importantly, the U.S. Trade Representative told his fellow trade ministers that the United States was committed to the WTO while also specifying needed reforms that in several respects were concerns that were shared by other members.
The second positive element was that groups of members accounting for over three-quarters of the world economy announced that they would move forward to consider how best to expand the scope of the WTO to address new subjects of importance, for example E-commerce, investment, and domestic regulation of services. Similarly, groups of Members also said that they would work on making the trading system more inclusive, regardless of the size of any entity engaged in international trade, no matter how small, and that will allow more women to participate in trade to reap its benefits.
In Buenos Aires, Japan, the European Union and the United States announced that they were joining together to propose ways to deepen the substantive rules of the trading system to address under-regulated measures that affect trade, such as industrial subsidies, the problem of excess capacity, the role of state-owned enterprises and concerns over transfers of technology.
While not all WTO members see a need for change of the kind foreseen in the various joint initiatives, others see these efforts as being initiated none too soon. This is a time of testing for the world trading system that is different in degree and kind from any other in the post-World War II era. International trade relations are in more turmoil than they have been since the creation of the multilateral trading system seventy years ago.
Reading the current headlines here in London, I am struck by the parallels between the current crises affecting the WTO and Brexit. Both occurred through the ballot box — Brexit occurred through a targeted referendum; the election of Donald Trump through a presidential election. Neither vote was just about trade, but both profoundly affect their national trade policies. Both resulted in formal government actions to cancel a major trade agreement – the single market, in the case of the UK and the Trans Pacific Partnership in the case of the U.S. Both votes were sold in part on the basis of a call for new bilateral agreements. The votes were expressions of nationalism, with more than a tinge of populism. In the aftermath of the votes, it became clear that there was widespread public concern that the existing economic system was not providing hoped-for benefits for all.
I leave it to this audience to determine the odds on how Brexit turns out. I will confine myself to looking at the future of the WTO.
It will take some effort on the part of a considerable number of WTO Members to deliver as bright a future as I believe possible for the WTO and the multilateral trading system. One major challenge is that the role of the United States at the WTO changed: It no longer views itself as being the primary steward of the world trading system. It expects more of the burden to be taken up by other major trading partners, including the European Union. Success will also require that Japan, China and the pro-trade middle countries join in. All have a stake in a successful outcome.
While this adjustment to new circumstances is beginning to take shape, global trade news is dominated by stories of increased tariffs, generally headlined as trade wars – increased U.S. tariffs on steel and on aluminum, the retaliatory tariffs on U.S. exports in response; increases in U.S. tariffs on a range of Chinese imports into the United States, and the retaliation in kind imposed on U.S. exports to China. No WTO member with trade affected by increased tariffs sees the measures as being legitimate. With respect to the latest round of U.S.-China tariff increases, there is, as far as I am aware, no attempt by either country even to justify the measures under any WTO rule.
And there may be more trade restrictions to come: Further rounds of tariffs on the part of both China and the United States are threatened. In addition, the U.S. is investigating whether automobiles — a very substantial portion of Canadian, Mexican, Japanese and European trade with the United States — are a threat to U.S. national security.
Add to this litany of pressures on the system one more: The WTO’s dispute settlement system is under siege. The U.S. will not allow vacancies to be filled in the Appellate Body. Absent a solution, the WTO’s dispute settlement system, in its present form, will cease to exist. Were litigants, frustrated by the lack of an enforceable response after winning an adjudication to turn to self-help as a remedy, every case could end up with exchanges of retaliatory trade measures. The result would not be dispute settlement but numerous outbreaks of fresh trade hostilities.
A casual critic of the WTO might readily conclude that the organization was either ill-designed or that it was being overwhelmed by current events, or both, and that it was headed toward assuming a vegetative state, albeit one in which there was still a lot of talk taking place in countless meetings with no major outcomes.
The reality is far different. Most of world trade is still conducted within the rules. The current trade measures, while substantial, are exceptions to a functioning world trading system. The work in the regular WTO committees continues — it is actually thriving. For example, assuring that trade is not strangled by the imposition of discriminatory and burdensome standards – a far more effective means to prevent trade from crossing borders than are tariffs – is essential work. Moreover, upon examination, one would also find that all bilateral and regional agreements rely for their foundation on the WTO rules.
Chinese and Indian mythology places the entire world on the back of a giant turtle. Not what we at the WTO might have chosen as an image for the organization, but in some ways it suits. Slow moving perhaps, but stable, supporting the international trading system, and up to the task of bearing great weight. Since we are all concerned with the health of the turtle, we need to take a closer look at its prognosis.
It is increasingly and perhaps glaringly clear that the system needs updating, and it needs stronger support from its Members and from the chief beneficiaries of the system, those engaged in commerce.
Three broad outcomes of the current turmoil are possible – (1) the system becomes ineffective, (2) muddling through, or (3) change for the better. Muddling is likely to be no more than a variant of the first outcome but that may not be immediately apparent; a turtle in slowly declining health. I am surprised when I hear that we can get along with a system in which both the rule-making and dispute settlement machinery have seized up, with no additional means to improve compliance with the current rules. When ancient Rome collapsed there were outposts of civilization where inhabitants thought life might continue unchanged indefinitely. That was an illusion. This is not the time to hide WTO agreements away in the hands of monks on remote islands off the coast of Ireland, to be recovered after a period of years of if not darkness the twilight of open international trade. It is a time to act aggressively to improve the trading system.
The risks need to be listed, evaluated and managed; the opportunities weighed and taken advantage taken of.
First, the risks:
- Risk # 1. Escalation –Further increases in U.S. and China bilateral tariffs would further slow world economic growth, and further reconfigure global supply chains. U.S. national security action on automobiles would fracture the alliance for reform.
- Risk # 2. Emulation – There is no evidence of other countries emulating the current combatants. Since 2008, following the global financial crisis there has been a growing and substantial number of trade measures that observers say are restrictive.
- Risk # 3. Rolling back global supply chains – This is currently occurring. There will be varying effects on the trade of third countries – ranging from often negative, to large positives for a few countries.
- Risk # 4. Inadequate collective responses – As noted, WTO members are becoming more pro-active in dealing with current realities.
- Risk # 5. A sharp decline in investor and consumer confidence. Last Thursday, the headline in the Financial Times was that quarter on quarter the German economy, central to European growth, had shrunk, and attributed this in part to the U.S.-China reciprocal increases in tariffs.
- Risk # 6. Decline in growth in global GDP. Forecasts have been revised downward repeatedly in recent months. The estimated range given by economists is a negative effect on global GDP of from under 0.5% to about 2.0%. The actual effect is now much less for a variety of reasons: Businesses to the extent possible re-route purchasing to other sources to escape the tariffs, exchange rates adjust in part due to trade restrictions, macroeconomic factors including national growth rates swamp trade effects, and exemptions from tariffs are granted, among other factors.
- There has not been as much interest in improving the multilateral trading system in a generation, not since the mid 1990s when the WTO was created.
- There is a recognition in governments, business and civil society, that maintaining and improving the multilateral trading system is vitally important.
- The interest lies in making positive changes in all three aspects of improving the global trade regime
- the executive functions (monitoring and implementing the agreements),
- rulemaking (the legislative function), e.g. first in requirements to enforce obligations for transparency; and
- dispute settlement.
The systemic challenges are creating substantial opportunities, and there is a good chance the outcomes can be very positive. As my father used to say about the process of growing old, the alternative is not good.
Robert Kagan in his recent book The Jungle Grows Back presents his view that the last seventy years during which there has been a liberal world order — characterized by the absence of global wars, an open world economy, and the improvement in the economic well-being overall of the world’s inhabitants — is an aberration. He posits that the norm is tribalism, nationalism, international hostilities, and nations carving up and restricting international trade. His message is not one of despair. He simply holds that active efforts at maintenance of the system are essential, both with respect to geopolitical and economic challenges; that the garden we inhabit must be vigorously and unceasingly tended or the jungle will grow back. And he cites evidence that this is beginning to happen now.
Governments have increased their interventions in trade. Simon Evenett’s Global Trade Alert cites nearly 12,000 government trade measures (interventions) over the last twelve months that are harmful to foreign commercial interests. These include subsidies (excluding export subsidies), export-related measures (including subsidies), tariffs, contingent trade-protective measures, and government procurement restrictions. Ten years ago, the number of measures was under 1400, and that was during the global financial crisis, when world economic growth was a negative 1.7%. However one measures trade restrictions on an annual basis, they are up markedly.
At the same time forces have been mobilized to seek more open trade. Besides the reform efforts at the WTO, NAFTA is be replaced by USMCA, which once ratified keeps North American economic integration mostly on course; more exemptions from current restrictions on trade in aluminum and steel may be granted; and the U.S. Administration’s intention to enter into a series of negotiations has been notified to the Congress to achieve broad bilateral trade-liberalizing agreements between the U.S. and, respectively, Japan, the UK and the EU. At the G-7 Summit, the U.S. President called for the seven to go to zero tariffs on all their trade. Trade agreement initiatives not involving the United States are also moving forward on a regional basis in Asia, Africa – in the case of Africa, for the first time continent wide, and Latin America, among others, and at least some in the UK government hope that the UK will emerge from Brexit as the world’s most active seeker of bilateral free trade and similar arrangements.
There are three specific areas that deserve particular attention where changes in WTO rules can provide solutions
- a. The WTO and U.S.-China détente
In the exchange of measures and threats between the U.S. and China, we do not know the End Game. There is a hardline position in various parts of the Washington policy community that call for a “decoupling” of the two economies — having virtually no bilateral U.S.-China economic relationship.
What could exist is a Middle Game. A form of détente. Even during the Cold War between the United States and the Soviet Union, there were agreements that could be reached on some subjects, and there could be a lessening of tensions. An interim understanding could prevent an escalation of mutual economic restrictions. A crucial part of a package might be proposals regarding some of the issues that were announced by the U.S.-Japan-EU trilateral WTO reform effort. Any reforms in the WTO are very likely to need the support of at least these four countries – including China — before gaining sufficient support for adoption by a consensus formed of the WTO’s Members.
The possibilities for achieving an interim solution may be evanescent, opportunities may be perishable. Alacrity is not part of the DNA of WTO negotiations. A decade or more is a more usual timeframe for major WTO initiatives to be formulated, ruminated, digested and end up as a final agreed product. We have available a small fraction of that amount of time.
- b. WTO dispute settlement
Members may disagree on the degree of danger to world trade inherent in the loss of the WTO’s Appellate function. We do not know whether trade rules would lose their force gradually or quickly were there no effective WTO dispute settlement. Doing nothing would constitute taking an unnecessary increase in level of risk. Without the rule of law, in domestic society or international relations, the end result can easily be chaos.
Progress toward a solution is uncertain. The U.S. has listed at considerable length the problems that it sees with the AB's conduct, decisions and processes, but it has not stipulated what would be an acceptable outcome.
If attempts to find a solution are to have a chance of success, the first step is to recognize the nature of the underlying problem. U.S. complaints are not new, having been stated over several administrations, Democratic and Republican. The U.S. asserts that the Appellate Body has overreached, acted beyond its authority, and in so doing has destroyed the bargain upon which binding WTO dispute settlement was in its view based: acceptance of binding dispute settlement in return for an iron-clad commitment that dispute settlement would neither add to nor subtract from the rights and obligations of the parties, particularly with respect to trade remedies. The U.S. considers that Appellate Body interpretations narrow the scope for use of trade remedies and that this has progressively eviscerated that bargain.
Most WTO Members, while having some of their own criticisms of the operation of the Appellate Body, do not agree with the United States. They appear to be content with the resulting decisions and call for the appointment of members to fill current vacancies.
The impasse stems from deeply divided views about the appropriate mandate of the Appellate Body and the nature of the WTO dispute settlement system: is the system one similar to "a court or tribunal of judges" or is the goal of the WTO dispute settlement system more narrowly to settle disagreements and disputes, where third party adjudication is one of several means to reconcile parties' differences. While a greater mutual understanding of respective legal interpretations might have aided a resolution at an earlier time, there now appears to be an unbridgeable gulf among WTO Members on this point now.
With the benefit of hindsight, perhaps there was insufficient reflection at the end of the Round when it came to the design of the dispute settlement system’s Appellate Body – with its commuting judges, tight time frames for decision, and a somewhat functionally unclear relationship to a Dispute Settlement Body made up of all Members. None of the negotiators drafting the Uruguay Round that resulted in the WTO’s dispute settlement system imagined they were creating a kritarchy – rule by judges, with no effective role of the WTO Members in making rules or in determining what they mean.
Dispute settlement was and is an integral part of an effective world trading system. There must be enforcement of rules and an agreed means to achieve that end. An agreement was reached once, and it can again. Pragmatism and creativity characterized the establishment of the WTO in the first place, including the dispute settlement system. Technical fixes aimed at increasing the clarity and efficiency of Appellate Body procedures are useful, but in the end a political resolution will be required to reach a successful resolution of the current impasse.
- c. WTO reform more generally
As noted, at the Buenos Aires at the WTO Ministerial last December, the American trade minister, Robert Lighthizer, called for reform. In May, at the OECD Trade Ministerial, French President Emmanuel Macron picked up the theme of reform. Reform found support with the European Union which tabled a paper that to discuss reform and is actively seeking co-sponsors for this initiative. Honduras has made a specific suggestion for reform in the area of dispute settlement.
The first outcome of the Japan, U.S., EU trilateral effort was tabled two weeks ago at the WTO, calling for administrative sanctions on countries failing to comply with their obligations to file notifications. Examples of notification requirements include those relating to domestic subsidies to industry and domestic support for agricultural commodities.
There is now clearly momentum for reform of the WTO. While reforms almost certainly will be adopted piecemeal and not in large interrelated packages, time as noted is not on the side of waiting for extensive period for reflection on any of the topics under current consideration. The Appellate Body ceases to exist in reality not later than December 2019. The threat to the continuation of the current WTO dispute settlement system, its appellate function, is real but progress in consideration of solutions is not sufficiently well-advanced.
- d. Back to the future
When I joined the U.S. government, now decades ago, when the multilateral trading system was just a generation old, many of my speeches began with a description of the prolonged and difficult progress of moving up from the protectionist tariffs of Smoot Hawley in 1930 to create a more liberal trading system. Progress was slow and hard won. The Congress refused to formally recognize the existence of the GATT until 1974, if recollection serves.
I have never questioned the proposition that international cooperation to continually improve the international trading system was the natural objective of interaction among its members. The visionaries who founded the multilateral trading system assumed that a common purpose among nations was to avoid a repetition of past disastrous trade policies and to lay an economic foundation for peace and prosperity. Now it is our turn. Complacency would be both dangerous and unwarranted.
No small part of the hope that I see for the future of the system is to be found in the number and nature of countries who have recently acceded to the WTO and those who are at the door seeking entry. The last two countries to join were Afghanistan and Liberia in 2015. Among those in the present queue for entry are Somalia, Sudan, South Sudan and East Timor, all poor, all conflict-affected. They have a shared aspiration and vision, that integration of their countries into the world economy through joining the WTO will improve the well-being of their peoples and provide a better chance at stability and peace.
Each of us has some part of a shared responsibility to fulfill the promise that an improved multilateral trading system can deliver. I did not accept Director General Azevedo’s offer of the job of WTO Deputy Director General to play a second violin in the orchestra on the boat deck of the HMS Titanic as it settles into the icy deep, as noble as that role might be. Each and every WTO member needs to make a net positive contribution to keep the multilateral trading system, the WTO, relevant and effective. For the poorest, the domestic reforms required to join the organization may be its primary contribution, a benefit not only for themselves but for the international order. They can also contribute innovative ideas to improve the benefits of the system. For the largest, the obligation is much greater. For all, the reward is having a system that not only serves specific national economic interests, but more generally, benefits them through its continued existence.
Ultimately, we sit in judgement on ourselves as well as being judged by posterity. The one true test is: Did we leave the world in better condition than the way we received it?
I strongly believe that we can do so. I do not see the creation of a liberal international economic order as an aberration but as the foundation for future progress.