DEPUTY DIRECTOR-GENERAL ALAN WM. WOLFF
The banner headline across the top of the current issue of Foreign Affairs reads “How a Global Trading System Dies”. There is no shortage of reasons for concern over the current challenges facing the multilateral trading system, but it is not near death and it is not about to die. The countries and peoples of the world need it, and all 164 Member governments acknowledge that this is so. Words of course must be matched by deeds.
In fact, the level of activity at the WTO is higher than it has been in over a decade.
- Negotiations on important new topics such as electronic commerce are advancing, as are negotiations on investment facilitation and domestic regulation of services.
- Progress is being made in the regular committees of the WTO such as those relating to product standards and sanitary and phyto-sanitary standards. This work is vitally important because while a tariff can slow trade, not meeting a standard is an absolute barrier.
- Assistance to the poorest countries, for example, for improving the yield from cotton, the mainstay of a number of least-developed economies, is marshaled by the WTO and partner international institutions.
- A similar role is played by the WTO in assisting developing countries in meeting product standards.
- Strong support exists among a large number of Members for exploring how to make the trading system more beneficial for women and for small businesses.
- And not least, there are intensive efforts being made to curtail the use of fisheries subsidies granted by some that undermine the economies of others.
Under the impetus given by both recent G-20 and G-7 meetings, the need to modernize and improve the functioning of the WTO's institutions must be a top priority.
The conversation is no longer about whether, but how to make the needed improvements. In the joint initiatives, and in much of the work of the regular committees there is a spirit of pragmatism enlisted to find ways forward. There is an emerging consensus that the dispute settlement system needs some changes made, particularly at the appellate level.
The most eloquent testimony in favor of the current health and value of the WTO is the fact that twenty-two countries seek to join the organization. Accessions are at the cutting edge of reform. For the acceding country, it is a negotiation with those who are already WTO Members. The latter are negotiating on the basis of current concerns, not some distant base period in the mid 1990s when the GATT was transformed into the WTO.
Despite all this intense activity, a dominant theme in the current public narrative is that the WTO is failing. Why?
- It cannot be denied that the WTO cannot stop trade wars,
- Its current dispute settlement system as matters now stand will be cease to exist as currently constituted in two months’ time,
- It has not been able to conclude new agreements in recent years,
- Members’ obligations seem to be too casually disregarded, and
- Not least, even remaining a Member is from time to time very publicly questioned by the leader of the country that led the founding of the current trading system.
Once an article of faith, the strategic and global economic importance of the multilateral trading system has been forgotten by countries who were present at its creation. Now, due to current challenges, they are rediscovering its importance, despite but to some extent because of, the rise of populism.
Why did the WTO seem to be irrelevant to current challenges?
- For some, it was unrealistic expectations, hoping an international agreement could halt a trade war, when no treaty of any kind ever prevented a war by a party intent on having one.
- Business was dealing with the world as it found it.
- Many governments turned to bilateral and regional agreements as an easier path forward.
In not too distant, less-challenging times, governments no longer acted as if they considered support for the multilateral trading system as being a priority, as an important part of their national interest. In short, the WTO was taken for granted.
Well the quieter times are over.
Understanding the centrality of the multilateral trading system
All bilateral and regional agreements rest upon a foundation of the multilateral system. (1) These sub-multilateral agreements make little sense without it. Single markets and nations rely on the WTO rights and rules for their external relations. Most of world trade, some 98% (trade war tariffs excluded), continues to move across borders based on the rules of the WTO’s rules.
Some observers have thought that the world will divide into two spheres of influence, into two trading blocs. That is not possible. The world cannot be split into two camps, each led by one of the two largest national economies. Whatever happens, there are still other economic power centers, in the form, for example, of the European Union and India. Most countries would not accept dominance by a major trading nation. For the developing countries, they are not seeking a new colonialism.
The multilateral trading system will endure because it is in the fundamental economic interests of all countries. Why?
FIRST, the costs of being outside the system, even for the largest economies, would be enormous. In medieval terms, it is like being outside the castle walls during a time of unrest. (For those who have watched episodes of Game of Thrones, you understand the risks of being outside the wall). An economy outside the system could not assure itself through bilateral or regional agreements against depredations. To be outside the multilateral trading system is to have an unacceptably low level of security. A country’s goods, services and ideas will be at risk, wherever the current system is not replicated through another agreement. No number of self-defense measures (also known as retaliatory trade measures) could save an economy of any size from discrimination against its trade in instances large and small. No country's missile defense system is a 100% guarantee against very serious damage from an adversary. This proposition has been tested.
SECOND, the economic harm of departing from the multilateral trading system, and for a large country, to the world economy would be intolerable.
When the costs estimated by the UK Treasury of BREXIT, going from a single market to trading at WTO levels are extrapolated to the world, not being a global single market would cost the world economy by the year 2035 over $90 trillion. (For purposes of comparison, the total GDP of Africa is about $3 trillion). There is not a single country that aspires to having a global single market. There is widespread recognition that all need the WTO to underpin their economic well-being. Were the 72-year old multilateral trading system to collapse, the costs would be almost beyond calculation. Think of it as a nuclear winter for trade and economic growth. It could turn into an experiment to recreate the Great Depression. That is not going to happen. Apocalyptic visions are unwarranted.
On the contrary, the chances of the Members of the WTO being on the verge of improving the system are good. (The British might say the chances are “not negligible”.)
Addressing current challenges to the system
a. The problems with rule by consensus.
When it comes to Members' ability to affect the course of events at the WTO, there are two extremes: the positive consensus needed to make rules and the negative consensus rule applied for the approval of dispute settlement reports. The results are diametrically opposite. One Member can block an agenda item and therefore prevent the conclusion of a multilateral negotiation. That one Member in effect is exercising the sovereignty of all 164 Members, and self-restraint on the part of each Member is required to avoid freezing all movement on any issue, even the adoption of an agenda. At the opposite pole is negative consensus, the rule for adoption of dispute settlement reports. Negative consensus means that the report is automatically adopted unless 100% of the members oppose its adoption. Rejection of a dispute settlement report will never occur as a party prevailing in a case would have to join in a unanimous decision to prevent its approval. In effect, in the Dispute Settlement Body, no Member has any control over outcomes.
To date this has resulted in Members not being able to seek to correct a dispute settlement outcome that it considers erroneous unless all Members agree through rulemaking, which is a practical impossibility. It has become a system of governance in which there is no legislature to re-state or revise the rules. The absence of checks and balances in any system of governance poses high risks. A major motivation for the French Revolution was government by judges.(2) The cure applied then resulted in much violence but the offenses being addresses were more severe.
b. Saving the WTO dispute settlement system
A prime distinguishing feature of the WTO is that its rules are enforceable. While it is expected that Members will live up to their obligations, and in the main, they do, when they do not it is best to have some agreed means to determine what the rules are, how they apply to the current facts, and the level of retaliation or trade compensation that is warranted should a party have a decision handed down against it.
Panels inquire into the facts of a case and provide legal analysis. It makes sense to have a functioning appellate system to correct egregious errors, should they occur, and to have a degree of consistency among decisions.
As you all know the U.S. has blocked appointments to the Appellate Body (AB). Two out of three remaining AB members' terms expire on December 10. As it takes three AB Members to render a decision, there will be no review of panel decisions available after that date under the existing WTO dispute settlement rules. The impasse has occurred over a disagreement as to the role of the Appellate Body. The U.S. believes the Appellate Body has created rights and obligations and that this constitutes impermissible overreach. The EU generally views the Appellate Body as a court and does not agree with the United States that the Appellate Body is filling gaps in the rules, creating new rights and obligations.
The impasse is being worked on. Ambassador David Walker of New Zealand is engaged in a process of building a consensus to address the concerns most clearly understood and shared by the WTO Members which engage regularly in WTO dispute settlement.
What happens after December 10 when no future appeals are possible? There is a range of possibilities. A Member losing a case before a panel could test the proposition that filing an appeal blocks adoption of a panel report, even though no appeal can be heard. If all did this, gaming the system, and the necessity of hearing appeals remained the requirement of the system when in reality the original appellate mechanism no longer existed, the result could be retaliation and counter-retaliation. In short, Armageddon.(3)
The alternative is pragmatism. Members have choices. Some options include: (1) Two parties to a dispute could agree not to appeal. Vietnam and Indonesia have already agreed to do so in a pending case. (2) The parties could agree to some form of arbitration under the current rules, on a case-by-case basis. (3) They could agree bilaterally or plurilaterally with an alternative approach for all appeals in advance. The EU and Canada have concluded an agreement to as closely as possible recreate the current WTO system, seeking to have the same binding effect, again under the arbitration rules of the WTO Dispute Settlement Understanding.
My estimate is that there will be an outbreak of pragmatism rather than a reversion to a plague of retaliation and counter-retaliation.
Can the impasse over making appointments to the Appellate Body be resolved? Of course, it can. The system was constructed in a negotiation and it can be saved through further negotiation. All profess that they want an agreement, and that dispute settlement is a vital element of the WTO. I shrink from calling it the “jewel in the crown” as what is the most important thing to be saved is the crown itself, which is the multilateral trading system embodied in the WTO. Concentrating on the so-called jewel in isolation, misses the need for broader systemic reform.
A possible solution to the impasse lies in the WTO Members coming to a common understanding as to the nature of the problem and that it should not recur. If this accommodation is reached, there would be no need to re-litigate old cases nor for a struggle to make structural reforms.
In the interim, WTO Members are still filing cases presumably in the justified belief that the WTO will deliver results that help resolve their differences. When any trade restrictions are imposed, they can be and are challenged under dispute settlement provisions, which I believe will continue to deliver decisions.
c. Reviving the WTO’s negotiating function.
The negotiating function of the WTO has been given new life through the open plurilaterals, also called the joint initiatives, and the work in the regular committees. The formation of joint initiatives is not a direction welcomed by all Members, but a large numbers of Members, developed and developing, has joined them, and those who have joined represent at least three-quarters of global GDP and trade. The rigidity of consensus (which came to mean unanimity) for either rulemaking or dispute settlement was obviously causing these two primary instruments of the multilateral trading system to break down. Like examining a dam that appears to be about to give way, it became clear to the Membership that there had to be change. That is what gave rise to the instruction by the G7 and the G20 to reform the WTO.
d. A series of unfortunate events — trade wars, agreement terminations, unilateral trade restrictive measures, retaining unnecessary policy space.
Does the WTO have answers to the list of current challenges that characterize the world we live in?
The WTO does not prevent trade wars, but it can be part of the solution. There are Members who see the WTO as a possible way forward to deal with the current major conflict and have said that they will table proposals that could either be a path to solutions or reflect solutions reached bilaterally. Many of the issues, a trilateral group, formed by the United States, the European Union, and Japan, have agreed to address in proposals, the first of which has been tabled, regarding transparency through notifications. Also expected are proposals dealing with industrial subsidies, overcapacity, state-owned enterprises, and forced technology transfer.
All Members appear to agree that at least some other Members have too much policy space. For example, two leading developing country Members have introduced a proposal to limit the policy space of the two largest trading economies. (This concerned flexibilities to subsidize agricultural commodities). Ultimately the range of challenges laid at the doorstep of the WTO will be resolved through negotiations. That is what trade negotiations have been about since trade agreements began to be negotiated centuries ago if not millennia.
I am fundamentally optimistic about the future of the multilateral trading system. Part of this is because pessimism never created anything positive. But my expectations are also shaped by realism. There are and will be difficult issues to face and times of stress. Having a multilateral trading system is in the fundamental interests of all countries and it will not only endure but be improved.
My optimism in large part stems from my daily experience in the WTO Secretariat. The Secretariat consists of a corps of highly dedicated, knowledgeable professionals who serve the WTO Members. Ultimately WTO reform will address how to make the best use of this resource. In sister international organizations, there is a deeper and more extensive role in providing analyses, as well as in monitoring and crafting initiatives. Being wedded to the status quo is not an option. Adaptation is unavoidable — to the needs of Members, to rapid technological change, to shifting extremes of climate and natural disasters, and to foster economic integration especially among developing countries.
Lastly my optimism is based on my being involved in the process of accessions to the WTO. As noted, the accession process is a source of leading-edge reforms for the organization as a whole. Domestic economic reforms are a primary benefit of countries seeking entry into the organization. Many countries seeking to join the WTO are conflict-affected or fragile. In the process of accession, they seek stability through integration into the world economy, to raise the standard of living of their people and to improve the chances of obtaining a sustainable peace.
The representatives of Sudan, South Sudan, and the first leader of East Timor all say the same thing — where there is trade there is peace. The two — trade and peace — are interdependent, and while the presence of either is not a guarantee of the other, it is clear that they are mutually supportive. Trade does not guarantee peace but the two are closely interrelated.
The relationship of trade to peace is a forgotten part of the narrative of the multilateral trading system. It was very much present at the founding of the system. Seeking to secure peace through equal trading opportunities was the driving concern of Woodrow Wilson in his failed attempt to find a solution to prevent another world war at the end of the First World War. The cause was picked up and became a central objective of Franklin Roosevelt and Winston Churchill in their plans for sustaining a hard-won peace after World War II.
The correlation between openness of trade and peace has now been studied and calculated. (4) That correlation is strong, particularly among conflict-affected countries.(5) See the Global Peace Index created by the Institute for Economics and Peace.(6) Of the 163 countries ranked in order of peacefulness, the Republic of Ireland is ranked #12. In effect, preserving that ranking has become the central element in the UK and the EU finding a solution regarding Brexit.
In an age of widespread populist pressures, it is vitally important that the value of the multilateral trading system in terms of its impact on the daily lives of people be better understood. This is not done by arguments tied to macroeconomics or the teachings of David Riccardo. For the individual worker, farmer or company, it must be understood that the WTO is about fairness.
It would be foolhardy to be declare that we have reached the low point in the multilateral trading system. There may well be more difficult times ahead.
One thing I am very sure of, is that the multilateral trading system will ultimately survive and be improved.