DEPUTY DIRECTOR-GENERAL ALAN WM. WOLFF
My sincere thanks to Professor Mark Wu and to Harvard Law School for organizing this event.
My purpose today is address the challenges faced by the world trading system and its ability to measure up to these challenges.
It is increasingly common to read that the end of the liberal international order is very likely close at hand. By liberal international order, what is being referred to is the post-war geopolitical order, dominated by peaceful relations among like-minded countries and bonded together by a liberal multilateral economic system. This global structure, 80 years old, still largely shapes international relations although its future has been called into question.
The global geopolitical order and the global economic regime, the two components of the liberal international order, were for decades considered by Western leaders to be indivisible, two halves of a whole.
This belief that became doctrine can be traced back to the vision of U.S. President Woodrow Wilson encompassed in his Fourteen Points. Wilson sought an enduring peace following the First World War in part through
The removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance.(1)
This concept was embraced by all major nations and, at that time, implemented by none.
The ideal did not, however, die with the League of Nations nor the outbreak of the Second World War. This linkage was central to the belief and policy of Franklin Roosevelt's Secretary of State, Cordell Hull:
“When the war came in 1914, . . . . I saw that you could not separate the idea of commerce from the idea of war and peace. I reasoned that, if we could get a freer flow of trade ‐ freer in the sense of fewer discriminations and obstructions ‐ we might have a reasonable chance for lasting peace.”(2)
This concept was incorporated by Franklin Roosevelt and Winston Churchill as a central tenet of their Atlantic Charter issued at Argentia Bay, Newfoundland on August 14, 1941.(3) A few months later, on January 1-2, 1942, this joint declaration was subscribed to by 26 countries, a group that President Roosevelt, with the support of Prime Minister Churchill, dubbed the United Nations.
This essential policy thread - consisting of intertwined strands of economics and geopolitics, open trade and peace - was made operational through the creation of the Bretton Woods economic institutions: the World Bank, the International Monetary Fund, and the International Trade Organization, the last of which, while it did not come into being, gave rise to the General Agreement on Tariffs and Trade (GATT) succeeded a half century later by the World Trade Organization (WTO). Trade for peace was a core element of U.S. foreign policy until relatively recently, although the link began to be cited less and less often. Then it disappeared altogether from official statements of U.S. policy(4) The link of trade to the cause of peace was also famously contained in India’s creed of Pancheel, (5) which was given pride of place in the 1954 trade agreement linking India and the Tibet region. This statement of principles was unanimously adopted on 11 December 1957 by the United Nations General Assembly.
The memory of why peace and trade were seen as mutually supportive faded with the passing of the WWII generation. Global peace is no longer a generally recognized basis for maintaining the multilateral trading system. Absent the conviction that the two are inseparable, and in the face of a series of seismic economic events, the survival of the liberal international order, the multilateral trading system (MTS), is being increasingly questioned.
The evidence adduced for the proposition that the existing geopolitical order is disintegrating includes the rise of populism, the movement in a considerable number of countries toward greater authoritarianism, the large number of local armed conflicts and uneasy borders, the challenges from nonstate actors, and not least, changes in the relative positions of competing power centers and potential cracks within longstanding alliances.
With respect to the supposed decline of the other core element of the liberal world economic order - market oriented domestic economies and open trade - the bill of particulars is lengthy. It is alleged that the multilateral system is being
- eroded by an incompatibility of economic systems of major trading nations,
- eroded by an upsurge in unilateral trade measures,
- eroded by differences over what is needed to promote economic development (including whether the majority of trading nations should seek acknowledgement of the need to receive preferential treatment before negotiations even begin),
- eroded by an upsurge in populism, nationalism, income inequality, and the absence of political will to liberalize trade further through new trade agreements,
- eroded by a lessening of trust,
- eroded by increasing concern that existing trading arrangements are not mutually beneficial, and
- eroded by the absence of a consensus on the part of all WTO members on the way forward, an overriding sense that the period when it was possible to reach multilateral agreement is over(6) - with one result being a continuing proliferation of bilateral and regional arrangements.
The multilateral trading system depends heavily on a recognition that WTO obligations are enforceable. Adherence to the WTO rules is predominantly through voluntary compliance. But, when consultations fail to resolve an issue, it is vitally important that dispute settlement be available. It can provide a basis for resolving differences over whether a Member’s actions are consistent with its obligations. This fundamental strength of the WTO is now destined to cease to function with respect to consideration of any new cases by year end. After that, there is a strong likelihood of the WTO dispute settlement system in its current form will suffer cardiac arrest.
It cannot be denied that there are serious strains currently in the post-World War II order, or that a surfeit of crises is near at hand. These challenges require intelligence and prudence if the WTO system is to continue to provide stability, prosperity, and peaceful international relations.
The resilience of the world trading system
I am fully convinced that the multilateral trading system will endure, that it will be improved and that it will in fact thrive. This conviction does not justify complacency. The tasks at hand are enormous, but so are the opportunities for positive change. The system is being tested as never before in its 80-year history, but there are sound reasons for optimism. I will list eight of them:
1. Most of world trade by far continues to be conducted in accordance with the WTO commitments its members have made. The restrictive trade measures taken are aberrations and unlikely to be permanent.
- Counterpoint: Much depends on an absence of escalation of trade measures, and an absence of contagion, of emulation. In addition, cancelling international agreements with ease poses systemic risks. The ease of leaving agreements increases each time it takes place.
2. World trade is growing, not shrinking. The multilateral trading system survived a much more serious threat, the economic downturn of 2008 during the global financial crisis.
- Counterpoint: The WTO anticipated merchandise trade volume growth of 4.4% in 2018, as measured by the average of exports and imports, roughly matching the 4.7% increase recorded for 2017. Growth was at that time expected to moderate to 4.0% in 2019, below the average rate of 4.8% since 1990 but still firmly above the post-crisis average of 3.0%. However, there were signs that escalating trade tensions were already negatively affecting business confidence and investment decisions. (7)
- The WTO downgraded its trade forecast last September amid escalating trade disputes and tighter credit market conditions. Trade growth is currently forecast to slow to 3.7% in 2019 from an expected 3.9% in 2018, but these estimates could be revised downward if trade conditions continue to deteriorate. Nevertheless, greater certainty and improvement in the policy environment could bring about a swift rebound in trade growth.(8)
3. Not one of the 164 Member countries has opted to leave the WTO. On the contrary, twenty-two countries are in the queue seeking to join it. The trend represented by the many countries in the active process of acceding to the WTO is without exception for the steady adoption of market-based reforms.
- Counterpoint: It would be a mistake to ignore the statement of the President of the country that was the primary moving force behind creation of the world trading system who said last year "If they don't shape up, I would withdraw from the WTO". (9) The United States has tabled at the WTO numerous critiques of some aspects of the system, and specific proposals for change, but is nevertheless one of the most active members in the work that makes the WTO valuable.
- The U.S. Trade Representative stated at the WTO Ministerial Meeting in December 2017: “If in the opinion of a vast majority of Members playing by current WTO rules makes it harder to achieve economic growth, then clearly serious reflection is needed.”
4. The solid daily work of the Committees of the WTO continues to accelerate, serving a myriad of important functions heavily relied upon by its members.
- Counterpoint: The WTO is far from perfect. It depends not only on voluntary compliance, but knowledge that other Members are by and large complying as well. In too many instances full transparency does not exist due to a failure of a number of Members to provide full and current information, for example with respect to domestic subsidies.
5. The dominant theme among the WTO Members is to make it stronger not weaker, to reform the WTO to make it more responsive to longstanding as well as new issues generated by technologies driving a rapidly evolving world trading system. WTO reform has been called for by the U.S. Trade Representative, by French President Macron, by the G20 Trade Ministers, and there are reform activities being conducted in various groupings of Members - including the U.S, the EU and Japan, the Ottawa group of 13 members convened by the Government of Canada, proposals from individual members including Honduras, an EU-China collaboration. And there is a goal of agreeing to some deliverables by the June 2019 Osaka G20 leaders meeting.
Examples of current reform endeavors include:
- The pledge of all members to agree to curtail fisheries subsidies by the end of 2019, subsidies that give rise to plundering of the world’s oceans, depriving the fishermen of developing and less developed countries of their livelihoods, and leading in the case of Somalia’s dispossessed fishermen to piracy.
- Joint Initiatives joined in by Members accounting for more than three quarters of the world’s economy,
- to create new rules for Electronic Commerce,
- to create greater benefits of trade for micro, small and medium enterprises and for women;
- to address the facilitation of investment and;
- to reduce the adverse impact on trade from domestic regulation of services.
- Proposals for reforms aimed at providing greater benefits for developing countries, and
- A proposal for increasing transparency with respect to measures that affect trade.
- Counterpoint: Despite all of the foregoing, the outcomes at this time are far from certain.
6. While the functioning of the WTO’s dispute settlement system is headed for an impasse, no Member has said that it wishes the system to end, and intensive work has begun to find workable solutions to issues that have been raised as to its opposition.
- Counterpoint: There is still a substantial gap between what the U.S. and the EU together with a number of other members believe as to how the Appellate Body should conduct itself.
7. Perhaps the most compelling reason for optimism is that conflict-affected countries see in the WTO what the founders of the multilateral trading system saw in its creation in 1947. They see a path toward economic growth, leading to greater domestic stability, and a better chance to attain and sustain peace.
- Counterpoint: It is uncertain whether this view of the centrality of the multilateral trading system to their core interests will extend from the newly acceded and acceding countries to the membership more broadly, including the largest trading countries.
8. Countries have interests that are best served by membership in the WTO. They require trade rules to provide sufficient certainty to allow international commerce to flourish. This is about economic well-being. It is not based on theory but on practicality. Sufficient trust must exist to support an expectation that rules will be adhered to, that understandings will be implemented. Voluntary adherence to rules, rather than compulsion through enforcement as a result of dispute settlement proceedings is the basis for the functioning of the multilateral trading system.
- Counterpoint: Members do not always recognize the need to conform their conduct to their longer-term interest in the maintenance of the global trading system. The system is not based on an underlying moral imperative. If at one time the morality of nations was considered the prime motivating force for making the system function, that is no longer the case. That is an anthropomorphic projection of social obligations felt by individuals to society mistakenly attributed to the contractual arrangements governing world trade.
The Trade Imperative
Underlying the multilateral system is a basic human need which prevails over all else – an imperative to trade. Trade preceded written human history and five millennia ago in ancient Sumer (part of Mesopotamia and present-day Iraq) may have even given rise to writing.
The motivations for trade, including bringing variety to life, are not going to decline. One scholar traced eight basic ancient trade routes: most famously, the silk road and the spice route; as well as a route for incense, amber beads, tea, salt, trans-Sahara for gold, slaves, salt and cloth, and, as noted, tin.(10) Standing in Samarkand, as I was three weeks ago, there is no doubt that trade was ingrained in the peoples of the world for millennia.
Trade has been needed and is needed for national security since the time when tin was required to make bronze out of copper.
Trade has been needed and is needed to feed one’s people, and that need is only going to grow with climate change making some lands more capable of cultivation and others barren.
Trade has been needed and is needed for the sake of efficiency, without which a lower standard of living would prevail everywhere. Autarky is not the wave of the future. It is a demonstrably poor policy choice. Global value chains always existed, but now they are more sophisticated due to a world that shrank due to revolutionary improvements in transportation including super cargo carriers and enhanced communications. The world will only become more interconnected. The continuing advance of technology is an irresistible force.
The desire to trade has its own gravitational force, which cannot long be resisted.
Trade cannot flourish absent generally accepted rules
Rudimentary trade rules were first recorded in the Code of the Babylonian King Hammurabi around 1780 BC, or at least these were the first set of rules that we have that have survived to the present day. (11)
Today, the WTO agreements set out an extensive panoply(12) of rules and procedures for the conduct of international trade. Among these are the following key elements:
- living up to contractually bound tariff commitments on imports of goods,
- not discriminating against imports of goods or the provision of services based on country of origin except in circumstances where doing so is explicitly permitted,
- not imposing quantitative limitations on imports,
- providing national treatment in applying domestic regulations,
- not employing subsidies tied to promoting exports or to import substitution,
- notifying proposed standards and taking into account comments received from other Members,
- providing transparency with respect to subsidies and trade measures, and
- implementing adverse findings of dispute settlement panels.
And this is far from a complete list.
Under these rules, since the WTO was founded in 1995, world merchandise exports have increased in value terms from $5.6 trillion in 1995 to $17.7 trillion in 2017 (by 3.4 times) and in volume terms, merchandise trade rose by a multiple of 2.6 times. When the Trade Facilitation Agreement, which entered into force two years ago, is fully implemented, it is estimated that it could cut trade costs by an average of 14.3 percent. As of early March 2019, 141 Members of the WTO have ratified the Agreement.
Into any discussion of progress in international trade and the rule of law, the fate of the WTO Appellate Body must be considered. To decide a case, a three-member “division” of the seven-member body must sit on a case. At present there are only three members, and as of December 11, there will be only one. Therefore, no new appeals will be possible. When and if this occurs, a panel finding, under the WTO’s Dispute Settlement Understanding will not be final if a party appeals, even though the appeal cannot be heard. This runs the strong risk of a resort by those who would otherwise litigate to self-help - namely retaliation followed by counter-retaliation - replacing a quasi-judicially aided settlement of every dispute. For this reason, attempts are being made to meet U.S. concerns and obtain its unblocking of the appointment procedure. Absent resolution before December 12, 2019, which cannot be predicted at this time, alternative arrangements may be entered into by some of the Members. There is no guarantee that all will agree to one approach, or that the U.S. will agree to any “Plan B” substitute. A dispute settlement system that is ad hoc will add a degree of uncertainty and potential instability to the multilateral regime of trading rules.
This need not be calamitous, but it poses a very high risk, especially where the largest trading partners are involved. The risk is not necessarily systemic, and certainly not existential for the WTO, but the situation is highly dangerous absent at a timely and positive solution and careful management of trade relations.
A unique positive attribute of the WTO is the enforceability of its rules. The rule of law is a unique achievement of civilization. Extreme care is needed to preserve this feature.
A senior White House official is reported to have stated last week that the greatest threat to the WTO is an inability to adapt to current conditions of world trade. Adaptation to change is a natural law that applies to all living organisms and it applies to the WTO as well. The WTO must be able to formulate new rules as needed and as well as to enforce all of its rules,
Once the Uruguay Round was concluded in 1993 and the WTO came into being in 1995, there followed a period of implementation of the new agreements. Since then, there have been some noteworthy achievements – an agreement was reached to ban agricultural export subsidies, the coverage of the Information Technology Agreement was expanded, and the Trade Facilitation Agreement – promising to smooth the process of getting goods across borders, was entered into. But following the failure to conclude the Doha Development Agenda negotiations in 2008, businesses and governments appeared to a significant degree to turn their attention elsewhere - businesses to making their own arrangements to work within existing rules and governments negotiating bilateral and regional trade deals.
There was momentum within the WTO, but it was no longer enough to carry it to new heights within the work of regular WTO committees. The global news was about income inequality and the rise of populism. Notably the United States began to take matters into its own hands, in its relations with China, in the use of national security measures, in its blocking appointments to the Appellate Body and in its call for reforms of the WTO. These actions eventually stimulated a reaction among WTO members. Now there is serious discussion of potential reforms including of the Appellate Body. With a further impetus from the G20, the Government of Canada and others, there is analysis taking place among members of improvements in many areas of the WTO. A spirited discussion is taking place on differentiation among “developing country” members in terms of their relative contributions. As noted, a proposal has also been tabled by a number of Members to improve compliance with transparency and notification obligations.
In addition, stasis was no longer acceptable to Members accounting for three quarters of the global economy. They intend to extend the scope of the WTO. Discussions were started after the Buenos Aires Ministerial Meeting in the context of four Joint Initiatives, with a negotiating phase being entered into on rules for the conduct of E-commerce.
In short, at the WTO there is a new sense of possibility in the air. Nothing will be easy, but a process of attempted renewal and potential reform has begun.
Less noticed perhaps but a major element of reform has been the rededication by a number of smaller economies to joining the WTO due to what they understand is an essential link between their participation in the liberal trading system and their chance for economic growth, stability and peace. The last two entrants in 2015 into the 164-member WTO were Liberia, which survived the twin plagues of civil war and Ebola, and Afghanistan, whose challenges need not be detailed. Their trade ministers and ambassadors became evangelists for the multilateral trading system, just as several of the major trading countries were taking that system for granted.
A line has formed at the door to join the WTO. In many cases, older attempts at WTO accession were reactivated with enthusiasm. Led by Afghanistan and Liberia, the Trade Ministers from eight countries officially inaugurated the g7+ WTO Accessions Group on 10 December 2017, on the margins of the 11th WTO Ministerial Conference (MC11) in Buenos Aires, Argentina. Of the twenty members of the g7+, twelve are original WTO Members (Burundi, Central African Republic, Chad Cote d'Ivoire, Democratic Republic of Congo, Guinea, Guinea-Bissau, Haiti, Papua New Guinea, Sierra Leone, Solomon Islands and Togo), three are Article XII(13) WTO Members (Afghanistan, Liberia, and Yemen), four are WTO acceding governments (Comoros, Sao Tome and Principe, Somalia and Timor-Leste) and one is a non-observer currently considering an application for WTO accession (South Sudan). The main objective of the g7+ WTO Accessions Group is to facilitate the integration of post-conflict and fragile economies into the multilateral trading system through WTO accession-related reforms, including the establishment of credible economic and trade policy frameworks and institutions, and the promotion of transparency and good governance, based on international best practices. Also, in the list of countries expressing renewed interest in becoming members of the WTO are Belarus, Ethiopia and Iraq.
It was impossible not to be moved to hear the first President of Timor Leste, Xanana Gusmão, make the case at the WTO last October for the link between trade and peace, a conclusion he reached during his seven years in prison and made reality after an armed struggle followed by a period of reconciliation. Equally unforgettable was to hear the Ambassador of Sudan sitting next to the Ambassador of South Sudan say simply at a meeting in Djibouti in January of this year that “where there is trade, there is peace”.
It is remarkable that the thread of trade and peace envisaged by Cordell Hull in the aftermath of the devastation of World War I has been found once again by nations seeking economic growth, stability and a basis for peace.
The enthusiasm of Bosnia and Herzegovina and Belarus for accession, to aid in their domestic reform processes, is also heartening. And most recently the decision by the leadership of Uzbekistan to leave isolation behind and press to join the WTO is strong witness to the value of the multilateral trading system.
With reforms and with new energy from acceding countries, the future of the WTO has the prospect to be nothing short of brilliant.
- Point III of the Fourteen Points. http://avalon.law.yale.edu/20th_century/wilson14.asp. back to text
- Quoted from: Trade Liberalization: Cordell Hull and the Case for Optimism, Douglas A. Irwin, July 31, 2008 back to text
- Their joint statement pledged they would . . . endeavor, with due respect for their existing obligations, to further the enjoyment by all states, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity back to text
- It is nevertheless still imbedded in U.S: statute. See: The author’s address at American University, Washington, DC., February 5, 2018, to be found at https://www.wto.org/english/news_e/news18_e/ddgra_09feb18_e.htm. back to text
5 Panchsheel, or the Five Principles of Peaceful Co-existence, were first formally enunciated in the Agreement on Trade and Intercourse between the Tibet region of China and India signed on April 29,
1954, which stated, in its preamble, that the two Governments “have resolved to enter into the present
Agreement based on the following principles: -
i. Mutual respect for each other’s territorial integrity and sovereignty,
ii. Mutual non-aggression,
iii. Mutual non-interference,
iv. Equality and mutual benefit, and
v. Peaceful co-existence.” back to text
- No major new multilateral trade agreements equal to those negotiated at the founding of the WTO in 1995 have been concluded since that time. back to text
- https://www.wto.org/english/news_e/pres18_e/pr820_e.htm back to text
- https://www.wto.org/english/news_e/news19_e/wtoi_19feb19_e.htm back to text
- https://www.bbc.com/news/world-us-canada-45364150 back to text
- Claire Cock-Starkey in 2016 article found at http://mentalfloss.com/article/86338/8-trade-routes-shaped-world-history. back to text
- It is now in the Louvre. It includes, for example, the following: 103. If, while on the journey, an enemy take away from him anything that he had, the broker shall swear by God and be free of obligation. http://www.thenagain.info/Classes/Sources/Hammurabi-Trade.html. back to text
- Interestingly, the Merriam Webster dictionary gives us the derivation of Panoply as coming from the Greek word panoplia, which referred to the full suit of armor worn by "hoplites," heavily armed infantry soldiers of ancient Greece. This talk is really about how complete that suit of armor is. back to text
- Countries acceding to the WTO who were not GATT members when the WTO came into being. back to text