DEPUTY DIRECTOR-GENERAL ALAN WM. WOLFF

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Technology continues to reduce the physical challenges to moving goods as well as services and ideas across borders.  The port of Rotterdam bears strong witness to the solutions already found to complex logistical problems.  The success here is underwritten by a largely invisible multilateral trading system.   Were it not for the multilateral trading system, it is highly unlikely that the record of growth in trade and the global economy would be anything like the astoundingly positive numbers that have been achieved to date.  Tariffs would be a lot higher, import quotas would be common, discrimination would be rampant, product standards would be choking off trade, and every dispute might risk retaliation and counter-retaliation.  Without the multilateral trading system, bilateral and regional arrangements would have created both a palliative, reducing some tariffs between sets of trading partners, setting some rules, but also creating a miasma of regional content requirements that could make goods crossing a border a nightmare.  The economic activity witnessed here would be a fraction of what it is today.

Chastened by the abject failure to use economic means to underwrite a durable peace after the First World War, those who shaped the world of international relations following the Second World War created the Bretton Woods international financial institutions and committed themselves to the creation of a multilateral trading system.  It is easy to be unaware of what an extraordinary, now unremarked but remarkable, achievement this was.  It took nearly four millennia from the first surviving laws that regulated international trade, incised on a black basalt stele in the ancient kingdom of Babylon, to reach this stage in human economic evolution, characterized as it is by the creation of a single set of rules that governs 95% of world trade today, even with the new restrictions that make current headlines.

With a multilateral approach, world trade is to be regulated for all who commit themselves to the shared body of precepts, and all who sign are to benefit from doing so.  After failing a half century earlier in 1947 to put into place an international trade organization as an institution, in 1995 the WTO was formed to administer the system.  At present 164 countries have joined the WTO — and none have left.  Under the WTO’s auspices during these last twenty-four years, accompanied by advances in transportation and enabled by common standards, such as the steel shipping container, the value of global trade flows quadrupled and the global economy itself nearly tripled.   

The Multilateral Trading System at Risk

What has been created is of enormous value. Nevertheless, there is an increasingly negative feeling about trade in many quarters.   Few know how important the multilateral trading system is to them, and many who are aware of the WTO’s existence, now tend to focus on its deficiencies, not on its accomplishments.  That can be useful, to an extent, because complacency would be more of a danger to the world trading system than well-founded criticism.  But there is one major caution: progress is not likely to be born out of ennui or despair.  The times call for both increased leadership and strenuous cooperative efforts.

There were a series of danger signals that should have served as wake-up calls.  In 2017, the United States withdrew from the Trans Pacific Partnership Agreement before the pact entered into force.  At present the world’s two largest trading partners are exchanging tariff salvos across the Pacific Ocean.  America’s post-war alliance underpinning the international order that created came under additional stress with increased tariffs related to trade in steel and aluminum.  Moreover, after more than a decade of trying, the Atlantic has still not been bridged by a bilateral arrangement aimed at facilitating trade between the European Union and the United States.  On top of all of these concerns, it is still unclear what the width of the English Channel is going to be after Brexit, and, as troubling, the degree of openness of what is now largely an invisible Irish border is still unsettled. 

WTO reform

It is impossible to deny that the WTO itself is in crisis.  Now is a time of extraordinary stress.  That said it is even more a time of opportunity for the world trading system.  Recently, over the last year and a half, it has become plain to the governments of almost all trading countries that the system needed change, that it must be adapted to current circumstances.  This was articulated by the G20(1) leaders when they declared in Buenos Aires on December 1, 2018 —

We recognize the contribution that the multilateral trading system has made. The system is currently falling short of its objectives and there is room for improvement.  We therefore support the necessary reform of the WTO to improve its functioning. We will review progress at our next Summit.   

That next G20 Leaders' Summit is now just over a month away, with Japan as host.  With no further guidance at present from the G20 leaders as to the nature of the reforms needed, it is up to the WTO’s Members to plot a course forward.  The challenges posed can benefit from applying the approach articulated by Abraham Lincoln in his address to the Illinois Republican convention in June 16, 1858:

If we could first know where we are and whither we are tending, we could better judge what to do and how to do it. 

The impetus for reform of the WTO

While there were numerous problems to be addressed that predated the new U.S. Administration inaugurated on January 20, 2017, the current sense of crisis — that importantly also creates major opportunities for positive change — was triggered by actions of the new U.S. Administration elected in November 2016.  Diverging from the preceding 13 Administrations, it did not espouse multilateralism, announcing a preference for making bilateral arrangements.  It complained about WTO inaction on problems it had raised over the last decade and a half regarding dispute settlement and blocked appointments to the WTO dispute settlement system’s Appellate Body, which would lead, absent solutions, to its extinction.  It invoked the national security exception to the rules to apply tariffs on all imports of steel and aluminum from all sources, allies and “strategic competitors” alike.  It announced a policy of re-balancing trading relationships, mildly as it turned out with Korea, Mexico and Canada, and more radically with China.  The U.S. said that its actions were actually reactions to problems caused by others, and were in the circumstances, in its view, reasonable.  Other WTO Members disagreed both on tactics and substance.

There were already other indications that all was not going smoothly within the multilateral trading system.  After the failure to conclude the Doha Development Agenda in 2008, the energies of governments devoted to entering into bilateral trade arrangements dwarfed those employed for advancing a multilateral agenda.  Regional trade agreements, Members said, was a route chosen by default as multilateral progress had bogged down.  America came late to actually trying to implement a policy of bilateralism.  It is doing so now. 

There were other major factors at play.  Shares of world trade had changed dramatically since the creation of the WTO.  The political center had shifted.  The rise of populism and nationalism eliminated the appetite for trade liberalization.  The last attempt at liberalization of trade in goods, the ill-fated proposed Environmental Goods Agreement, foundered on the absence of sufficient mutual interest to close remaining gaps in perceptions of the balance of interests.  The same was true for agricultural products.  And the review of the coverage of the Information Technology Agreement which was to take place in 2018 (with a view to its expansion), did not take place.

Perhaps of greatest importance, a late entrant into the list of sources of causes of uncertainty in the trading system, the two-year moratorium on levying customs duties on electronic transmissions, may not be renewed.  In the modern world of e-commerce, the levying of customs duties on the content of cross border data flows could be catastrophic.  Policy space for national governments, means the absence coverage by international agreement, which while it can be healthy in many respects, can in certain instances be deadly for the world economy.

These, of course, are not all of the reasons multilateral progress appeared to falter.  Informed observers commented that the convoy system, the single undertaking by all 164 WTO Members going forward on a broad front, could not be sustained.  There was insufficient agreement on direction. 

There may also be a division among WTO Members as to the central purpose for participating in the WTO.  Is it increasing trade opportunities that lead to improvements in the economic conditions for all, including developing countries?  Or whether development is best spurred through greater differentiation in obligations and benefits between those who are recognized as being fully industrialized and those who determine for themselves that they are not?  This issue has begun to be addressed in open debate over the issue of which countries deserve “special and differential treatment”, meaning being treated better than others.  (There is no debate over whether the least developed deserve favorable treatment).  No early resolution of this policy debate is foreseen.

In addition, the WTO must be seen to keep up with technological developments affecting trade, must be responsive to a call for inclusiveness, providing opportunities regardless of the size of the entities involved in trade and understanding better whether the benefits of trade extend adequately to women.

A complicating factor:  Leadership is no longer concentrated in the hands of the United States, as it had been for 70 years as the primary champion of multilateralism. 

Where is reform headed (In Lincoln' words: Whither we are tending)

Many WTO Members when they gathered for the WTO 11th Ministerial Conference in Buenos Aires in December 2017 either called for reform or took clear steps forward on the path for reform at that meeting:

  • The US Trade Representative, while voicing support for the WTO, stated a number of criticisms: that litigation could not be allowed to substitute for negotiation, that not all who claimed to be developing countries could validly do so, and that countries had to live up to their obligations to notify their measures affecting trade if the system was to work. 
  • Members accounting for a large proportion of global trade established joint initiatives to explore what trade rules might be needed to govern E-commerce, investment for development and domestic regulation of services, and how to improve the participation in world trade of small and medium enterprises and women.
  • Three major trading Members – the EU, Japan and the US — declared that they would be tabling a series of specific proposals regarding transparency (enforcement of notification obligations), disciplines on industrial subsidies especially those leading to excess capacity, commercial competition from state-owned enterprises, forced technology transfer and local content requirements.

At present, proposals have been tabled, including on dispute settlement, transparency, differentiation among countries considering themselves to be developing, and in the Joint Initiatives (the open plurilaterals), with active negotiation taking place with respect to E-commerce and Investment.  Many Members are also engaged in seeking to resolve the Appellate Body impasse.  In short, reform has become mainstream at the WTO.

What to do and how to do it

The WTO is an international not a supra-national organization.  To accomplish its mission — to make trade more possible — it requires some basic capabilities.  The very word “organization” implies providing order.  Order requires governance, deciding who will do what.  There are three aspects of governance relevant to the WTO —   

  • A functioning executive – for the initiation of proposals, for monitoring, and in order to press for implementation of commitments;
  • The ability to make rules which is a legislative function; and
  • A means to settle disputes.

Proposals are needed under each of these headings to create a more effective WTO.  It could be argued that this can be achieved through gradual evolution.  But time is a luxury that world trade does not have.  If multilateralism does not provide answers, unilateral, bilateral and regional alternatives will be, and in fact are being, found.  Each of these paths is sub-optimal, and some may be directly harmful – involving exchanges of concessions that are more trade- diverting than trade creating and, in some instances, including provisions that have no hope of eventual multilateral adoption.   If the trade negotiating effort is too diffuse, too haphazard and too incomplete, the momentum created toward attaining a better structure for world trade will dissipate, and global trade will slow, and perhaps decline.  That is a high cost to pay for a reform effort that is deficient, that is both too shallow and insufficiently broad.

Reforms to enhance the WTO's executive functions

There is no provision in the WTO for executive functions.   Permanent representatives of WTO Members serve usually for a year or other relatively short period as chairs of standing committees and negotiating committees.   The manner in which they approach this assignment differs.  Some are clearly results-oriented and do their utmost to drive Members to positive conclusion.  Others may regard their position as more neutral, largely assuring that the Members have an opportunity to express views. There is no clear guidance as to the ambit of their authority.  At the top of the pyramid of committees is the General Council, where there is often no overt intervention in the proceedings by the chair, which position is held only for a year at a time.

Nor has the Secretariat more than a very limited mandate (e.g., to step in at various stages of dispute settlement to facilitate that process, as in suggesting panel Members, or offering good offices for conciliation).

As a formal matter, the Secretariat does not initiate proposals, it does not monitor compliance, and it never recommends to any WTO body that a Member’s noncompliance be rectified.  The Secretariat will provide technical and logistical support to committee chairs as a matter of course and on the request of any Member.  It is far more passive than similar staff in peer organizations — such as the World Bank, the Fund or the OECD.  Consideration is warranted as to what the appropriate role for the Secretariat should be for the future.

Reforming a dysfunctional rule-making process

The WTO legislative process has atrophied, at least insofar as notional 100% participation in the creation and adoption of broad sets of new rules is concerned. There have been some excellent exceptions – expansion of the coverage of the Information Technology Agreement (from which all benefit, but not undertake obligations), a ban on agricultural export subsidies and the Trade Facilitation Agreement (with its multi-speed implementation).  As for what is in the agreed pipeline, there is only one agreement that all are pledged to achieve and that is to limit subsidies to fisheries. There is a major effort underway to assure that an agreement will be reached by December of this year.  No new comprehensive round of trade negotiations covering a multitude of subjects is in prospect, and there are no indications that this broad form of activity will occur again. 

Nature — and a sizeable number of WTO Members — abhorring a vacuum, it is being filled to a significant extent by the Joint Initiatives announced at Buenos Aires in December 2017, open plurilateral discussions leading to negotiations.  Two of these are advanced, E-commerce and investment, and hold significant promise. 

Linkages that result in an absolute veto may be a thing of the past.  Little progress can be made in any organization under the banner of “resolve my issue before addressing your' s”.  All who wish to join the common effort are welcome.  How this plays out in terms of the most-favored-nation cornerstone of the WTO and GATT remains to be seen, the negotiations move closer to a conclusion.  

Reform of the WTO dispute settlement system

In order to assure consistency of outcomes and to correct serious errors, inclusion in WTO dispute settlement of an appellate function is very important.

With the appellate process heading for apparent oblivion, this is the most obvious crisis of the multilateral trading system.  Oblivion arrives in slow motion for a year or more from this December.  Why?  Because while the terms of two of the remaining three Members end on December 11 of this year, if current procedures are followed, existing Members may continue to work on cases they are seized with when their terms end.  However, no new appeals could be filed after December 11, 2019.

The United States has detailed most of the faults it finds with Appellate Body’s opinions at length in present proceedings and over the last decade and a half.  It has not tabled a proposed solution that would unblock appointments of new AB Members.  Importantly, it has stated that it wants a return to what was negotiated in its view as of 1995 when the Appellate Body came into being.  A substantial number of Members are now deeply engaged in seeking to find a solution, with the process is being facilitated by an experienced and skilled WTO negotiator, David Walker, the Ambassador of New Zealand, who not incidentally has recently become the Chair of the Dispute Settlement Body.

This is a process of seeking to close a gap between basic concepts of what the AB’s role should be — rule-making (as is the case in the European Court of Justice or the U.S. Supreme Court) or a Body that only makes findings that will assist in resolution of a dispute and forwards its judgment to the Members meeting as the Dispute Settlement Body (DSB) for disposition.  The latter formulation would seem to make the process to some degree political rather than solely judicial, though an admixture of the two.  This would be the case but for one factor: that is that the DSB acts by “negative consensus”.  This bit of jargon means that all must agree that the report of the AB will not be adopted — otherwise it is.  Since the winner at the panel stage and perhaps other Members are unlikely ever to go along with scuttling an AB report, the DSB stage consists of the automatic application by the DSB of a rubber stamp approving every AB decision.  While most members are wedded to keeping "negative consensus", there is the remaining challenge of making the DSB an effective instrument to act as a balance to a purely judicial process.   This is needed particularly if the legislative aspects of the WTO are unable to provide a counterweight. 

I believe that there are political and legal grounds for settlement of the issue and rescuing the WTO dispute settlement from early demise.  The alternatives, of which there will probably be several put into place next year, are inferior.  One possibility that has already been agreed by two parties to a dispute, is to agree in the terms of reference for a panel that if there is no appeal possible were there no AB, then the panel determination will be final.  (Indonesia and Vietnam in a recent case have done so).  There are other options that have been discussed by academics and the trade bar — variations of using an arbitral step after the panel decision that parties could agree to on an ad hoc basis, or in a more institutionalized form covering disputes among parties agreeing to a new regime.  But where there is no agreement, self-help, unilateral imposition of retaliation (which would be WTO-inconsistent) may be employed by some.  Gone would be certainty, consistency of interpretation, and a reasonable way to correct egregious panel errors, however rare these may be.

Reform and the impact of new technologies

The era of Big Data and the application of AI is in its early stages.  Commercial enterprises collect an astounding amount of information (as many as 30,000 pieces of data on each individual) for purposes often related to selling products in a targeted way.  There are also broader uses by governments and other data aggregators for political and other purposes, some yet to be conceived. 

The drafters of the WTO agreements knew that effective regulation of measures that affect trade depended on the availability of accurate information supplied through notifications and now increasingly through counter notifications, as well as tabling of specific trade concerns, and ultimately through dispute settlement if all else failed.  This system in some areas works reasonably well, for example with respect to the notification for comment of draft standards.  Data thus collected is made available on the web through e-Ping.  In addition, the Trade Facilitation Agreement provides for an impressive array of links to useful contacts within governments available online to any and all to provide information that will facilitate trade.  With new technologies, more information will exist, can be gathered and can be made available.

Much more can be automated.  There is no reason why a measure that has a substantial effect on trade (e.g. the raising of a tariff, or the grant of subsidy) should not instantly be notified to the WTO when it is promulgated.  Transparency should be more than an enforceable obligation.  It should become instantaneous.

Conclusion

The principle threat to the WTO at present may not in retrospect prove to be disruption but complacency.  Allowing the deterioration of international cooperation, failing to adapt the multilateral trading system to current realities and prepare it to meet future challenges, could cause a slow atrophy of the multilateral trading system, until the sinews of the system no longer hold.  That is over the longer term likely to be the greater danger.  It is also a fate that is entirely avoidable, with energy and will.

The WTO is imperfect, but it can and should be better.  It is not utopian.  There is no utopia for trade.  The G20 has said the system needs fixing.  That mandate can be approached in a desultory fashion, hitting a few high points, and failing to make needed improvements.  The opportunity is now.  It is time for a complete review of the effectiveness of the system and deficiencies attended to.

Reform need not and will not be accomplished in a new WTO Charter, in one package.  It is likely to be an ongoing process.  To succeed will require perseverance and leadership, not just from the largest trading countries but from all Members.  Serious pragmatic input from all knowledgeable sources, including past trade ministers and professionals, academics and not least from the corps of dedicated international civil servants serving now and previously in the WTO Secretariat is needed.

The youth of ancient Athens when turning 18 years of age took an oath, which included in part the words " I will not leave a diminished heritage but greater and better than when I received it."  The challenge facing all of us, as inheritors of the multilateral trading system, is to leave it in a condition which is better than it was when we received it.

Notes

  1. There are 20 members of the group: Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States. Back to text

 

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