The WTO and the Future of the Global Trading System

Alan Wm. Wolff, Deputy Director General, World Trade Organization (WTO) at the Council on Foreign Relations, Washington D.C., October 15, 2018

There is reason for optimism about the future of the multilateral trading system.  This does not mean to quote Dr. Pangloss from Voltaire’s novel Candide that this is now or ever has been “the best of all possible worlds”.  The world of trade could always be better.  However, the daily committee work of the WTO continues, dispute settlement is still functioning, the new Joint Initiatives are meeting, proposals are being tabled in the regular committees, and by far most of world trade flows within the WTO’s rules.  Importantly, various groups are actively considering WTO reform. 

The post-World War II effort to organize the world economy has been a grand and highly successful endeavor.  It has within it the potential to make progress toward fewer trade distortions, fewer trade restrictions, in short, greater openness, inclusiveness and, generally — fairness. 

It is true that world trade could slip backward toward a very much worse place.  There are enormous stresses on the system at present and the challenges posed should not be minimized.   However, while seasoned negotiators recommend it, I do not assume the worst with respect to any given Member’s intentions.  It is true that ultimate objectives of key Members on what they are willing to contribute and what they are willing to live with are unknown.  It is both unwise and unnecessary to reach dire conclusions about the future of the system based solely on conjecture. 

At the top of the list of current challenges are that:

• The two largest trading nations are imposing reciprocal rounds of tariffs on each other’s trade with threats of more of the same —with neither justifying their actions under the trading systems rules. 
• The earlier measures and countermeasures resulting from steel and aluminum tariffs imposed by the United States may spread to automobiles. 
• The United States has blocked the appointment of new Appellate Body members.  Exactly one year ago today the European Union’s chief trade spokesperson famously accused the United States’ position risking “killing the WTO from inside”.⁽¹⁾ The natural consequence of dispute settlement becoming inoperative is to return trade relations, where no agreed solution is found by the parties, to a state of nature — combat without rules. 
• And last, but not least, the United States, the guarantor and lead sponsor of the multilateral trading system, has not given explicit assurance that it intends to continue in that role.   Its words and actions are seen as being inconsistent with it wearing that mantle.   

Robert Kagan in his newest book, “The Jungle Grows Back” warns that the international geopolitical and global liberal economic order that we currently have requires active maintenance.  He points out that the last 70 years of global economic growth and general peace were based on a liberal international order built by the United States and its allies that included open trade. He concludes that these conditions are not the norm in human experience but an historical aberration.  The fact that from where I sit in Geneva, I see a lot of positive signs — including that 22 countries seek to join the WTO, to integrate into the world economy to help gain better lives for their peoples and to support peace, and that no current WTO Member has formally declared its departure, does not justify complacency.  To ignore current challenges would be to invite severe peril to global economic well-being.  It is not just that the multilateral system is being tested by measures of enormous magnitude that are not even claimed to be justified by the rules and by other measures that are accompanied by justifications that are greeted in major instances with skepticism.  It is also the fact that the last few years the WTO has been characterized by a loss of momentum.  It has been over two decades since the WTO members committed to a program of general trade liberalization.  The concern goes deeper, in that the system may become eroded by exceptions, by discriminatory trading arrangements, and by exploitation of trade measures and distortions not yet covered by rules. 

What we cannot foretell is whether, if solutions to current challenges are not found, the effectiveness of the current system will decline, nor at what rate.  That is not a risk worth taking.  In short, there is an urgent need for prompt and vigorous efforts to find broadly agreed paths forward.  

Seismic events

A storm is not a crisis.  Failing to deal effectively with a storm foments a crisis.  That said, three major historic changes have come together to create the current sense of impending if not actual crisis:  the rise of a major new economic actor, China; the policies of the new U.S. administration; and increasing populist pressures in many parts of the globe. 

Addressing each of these in turn:

Dramatic shifts in trade patterns.

A sweeping change in trading patterns causes disruptions.  In geologic terms, the interface of a major new economy and the pre-existing ones is very much like tectonic plates colliding and moving with great friction against one another.  Pressures build up and find an outlet, often in the form of earthquakes.

During the last half of the 19th Century, a Great Depression in British Agriculture occurred.  Britain had opened its market to American grain and meat.  The size and efficiency of American productive capacity in these commodities was enormous.  The British countryside was depopulated.  The pressure was moderated by the industrial revolution.  Britain adjusted by its agricultural workers moving into manufacturing.  This is not to say that free trade was a mistake, it was not.  Britain would have been far worse off it had it remained a rural economy raising much of its own food. 

In more recent history, in the last four decades of the 20th century, the economic rise of Japan likewise disrupted the economies of its trading partners.  Competition from Japan, for example, eliminated much of the production of consumer electronics in the United States and depressed American production of autos and steel.  There were a series of seismic events — in 1971 a global U.S. import surcharge that had as a significant element the management of U.S.- Japan trade relations; in 1987 the first imposition of trade retaliation against Japan since the 1930s (this was over market closure and the dumping of semiconductors); and throughout this period, threats from the U.S. Congress to impose a broad range of import restrictions.  Pressures were alleviated by Japan agreeing to a number of major voluntary export restraint agreements and they ultimately dissipated by Japan’s evolution toward an economy more open to being shaped by market forces.

The latest experience has been and is with China, principally over the last two decades.  There are some parallels between the rise of China and the rise of Japan. Both economies differed in important respects from those of other major trading partners.  A comparison with the rise of Japan only goes so far, however: China’s economy is much larger, the effects have been felt more broadly across industrial (and some non-industrial) sectors, and these effects occurred simultaneously with even larger global disruptions of production due to automation and other forms of technological change.   In the case of China compared with Japan, the role of the state and the use of subsidies is more pronounced than was the case with respect to Japan, and there are other measures of concern to the China’s trading partners — such as forced technology transfer, alleged to exist by a number of China’s trading partners and whose existence is denied by China.  Another difference: VRAs have not been a tool of choice by either China or its trading partner to slow changes in trading patterns (with the possible exception of calls for reduction of steel-making capacity).  Adjustment has largely taken the form of economic dislocations in importing countries, attributed by importing countries to competition from China, and again, not a view shared by China.  The situation became unstable and solutions are now being sought.

The U.S. election of 2016

No one would argue that the trade policies of the Trump Administration do not differ from those of its predecessors.  The election was largely about making dramatic changes from prior policies, and there has been a consistent effort to implement that campaign pledge with respect to trade.  Pre-existing trade agreements were labeled as at best flawed.  Upon the new Administration taking office, the U.S. withdrew from the 12-nation Trans Pacific Partnership.  Bilateral agreements were heralded as being superior to multilateral trading arrangements.  The new Administration, following in the footsteps of its predecessors but more insistently, leveled an extensive list of criticisms at the WTO’s dispute settlement system, with particular reference to the role and findings of the WTO Appellate Body.  Given even greater press attention is the current U.S. approach to China, and China’s responses in kind, consisting of the imposition of successive rounds of increased tariffs.  This pointed bilateral exchange of salvos has no precedent.    

All of America’s pronouncements and actions taken together indicate an American view that insofar as it is within its control, international trading rules and relationships will change.  The extent to which it wishes to do so is not yet clear.  The United States is a highly active participant in the regular work of the WTO and has tabled proposals that are not radical, they are contributions to institution building⁽²⁾.  In negotiations that have been concluded outside the WTO and with respect to the Appellate Body, there have been stark differences in the American approach.  In regional and bilateral agreements, accommodations have been reached by the United States with Korea, Mexico and Canada.   In each of these cases, where prior agreements existed, actions have taken the form of adjustments in those existing agreements rather than their being scrapped.  Negotiations are just beginning with the EU and Japan, against the backdrop of the recent U.S. bilaterals, the renounced TPP, the stalled TTIP, the G7 meeting, and the Trump-Juncker meeting.

The impact of technological change

Just as the industrial revolution had an immense impact on workforces across much of the world, the information technology revolution, bringing with it automation has caused profound changes, both in terms of creating major new opportunities for entrepreneurial activity and in terms of dislocations of employment.  Further transformations are now occurring in a variety of fields driven by the arrival of artificial intelligence, big data, biological and manufacturing breakthroughs, and other technological inventions and applications, the impact of which cannot be clearly foreseen.

Add disruption due to technology to the stresses caused by the movement of peoples and the sum of all fears has resulted in a rise in populism (e.g. Brexit) and a rejection of the status quo by substantial parts of the populations of many countries around the world. These forces of discontinuity increase pressures for adjustments in the rules of the global trading system.

Standing on the threshold of further change in the multilateral trading system

In several important respects, the world of international trade policy is starkly different than it was a year ago:

• The U.S. and China were on the verge of a trade war, not in one. 
• The complement of Appellate Body members was at five (of seven), not three. 
• A period of stasis in broad international negotiations persisted following the failure to conclude the Doha Development Agenda, and the end of the harvest of low hanging trade negotiating fruit (consisting of a ban on agricultural export subsidies, the expansion of the coverage of the Information Technology Agreement and the conclusion of the Trade Facilitation Agreement).   

The present attempts at finding solutions

The situation changed at the Buenos Aires WTO Ministerial last December.  Members who wanted to discuss new issues, addressing E Commerce, investment, domestic regulation of services, the participation of micro, small and medium enterprises in trade, and gender in trade, found a way to do so.  These joint initiatives are open to all, but all have not welcomed them.  Also, at Buenos Aires, the U.S. Trade Representative called for three substantial reforms of the WTO — differentiation among those labeling themselves as developing countries, compliance with existing rules particularly with respect to transparency and a complaint that litigation had replaced negotiation in WTO rulemaking.  The room full of trade ministers applauded.  There were no audible jeers. 

At Buenos Aires, on the side of the Ministerial meeting, the EU, Japan and the United States announced that they were going to engage in a cooperative effort with respect to several issues: 

We shared the view that severe excess capacity in key sectors exacerbated by government-financed and supported capacity expansion, unfair competitive conditions caused by large market-distorting subsidies and state-owned enterprises, forced technology transfer, and local content requirements and preferences are serious concerns for the proper functioning of international trade, the creation of innovative technologies and the sustainable growth of the global economy.

The call for WTO reform was taken up by French President Emmanuel Macron in March.  In recent weeks the European Union circulated a detailed paper on reforms it would suggest be considered.  The Canadian trade minister called a meeting of the trade ministers of twelve WTO members interested in reform who will meet in Ottawa next week.  The invitees are Australia, Brazil, Chile, the European Union, Japan, Kenya, Mexico, New Zealand, Norway, Singapore, South Korea and Switzerland. The meeting does not include the United States or China.  A very useful analytical background paper has been prepared in advance of the meeting.  Last week the EU held its first bilateral meeting with China to discuss WTO reforms. 

Past crises have led to systemic reforms.  The devastation of World War II led in 1947 to the creation of a new international order, including the GATT.  The imposition by the United States of a 10% import surcharge in 1971 led ultimately to the creation of the floating exchange rate system and the first broad GATT negotiation, the Tokyo Round, to address nontariff barriers.  In the mid 1980s, U.S. unilateralism (use of section 301) in the view of the then GATT Director General, Arthur Dunkel, provided the needed motivation to create the WTO.  In short, past crises have led to improvements in the world trading system.  Whether the shock and awe of Trump Administration trade policy can be channeled into making the trading system better is an open question.  But WTO members are actively contemplating what systemic improvements they might consider.

Where solutions may be sought

a. China

On October 4, U.S. Vice President Pence condemned a series of what he took to be unacceptable forms of trade competition practiced by China.  China rejected the allegations.  The press considered the Pence statement to be official U.S. recognition that a state of trade war existed between the two countries.  While the end of the strategic competition is not foreseeable, it suggests that there will be no near-term solution, one based on some additional purchases by China of U.S. goods and statements by the two sides about working matters out later.

It that is indeed how matters stand, working now for a concluding an end game, a complete solution, may not be feasible.  For those who care about preserving a liberal (a term which conservatives should support in this context) international order, leading to a form of détente between China and the United States, this suggests that there is a need to focus on the middle game — that which is within the realm of the achievable.  I assume that this is a subject that is under current active consideration in a number of capitals, including Beijing, Brussels and Tokyo, and perhaps among some in Washington policy-making positions.

The middle game consists of trying to get more of the trade relationship within international rules.  Whether obtaining some rollback of trade restrictions is possible is an unknown.  An interim solution would at a minimum include a standstill committing to avoid succeeding rounds of retaliation and counter-retaliation.  The Cold War with the Soviet Union provided scope for arms limitations and reductions, so finding some solutions on major issues even in a serious geopolitical competition is possible.  Given current circumstances, the scope of an understanding might well have to include both trade and investment issues as well as cybersecurity.  Of course, if the end game in either Beijing or Washington is decoupling of the two economies — known as non-intercourse in the 19th century⁽³⁾, there may not be enough trust to work on a middle game.  It is nevertheless worth the effort.  A total severing of economic relations is in the interest of neither country, nor of the world. 

Solving the Appellate Body impasse

The first step is to recognize the problem.  Then it is worth thinking about the best path to a solution.  Hostage-taking is not unusual in negotiations, whether in the Senate on approving nominations, or in trade negotiations in Geneva, although this is seen by most WTO members as an extreme case.  While this issue is politically charged, it is logically possible to seek to resolve differences without acknowledging validity of any position.  The situation is unusual in that there has been no meaningful engagement to my knowledge between the United State and other WTO members on working out a solution. Rather, the U.S. has listed problems that it believes to exist — with the conduct of the Appellate Body, its decisions and its processes.  But it has not stated what the solution is that it could accept. 

As with the U.S.-China trade conflict, the end game is unknown.  It is clear that there is a mismatch of expectations as to what the Appellate Body should have been.  Neither side is likely to convince the other that its concept of the Appellate Body was and is the correct one, based on legal reasoning, through interpretation of the Dispute Settlement Understanding or citing informal recollections of negotiating history.  Some would just suggest working around the United States with an alternative structure.  Tabling this alternative prematurely can endanger coming to a better solution.  An appellate function is very important to preserve, for consistency of decisions and to correct panel errors, but also to avoid risking a situation in which every trade dispute devolves into small and not so small trade wars, consisting of retaliation and counter-retaliation.   

The problem at this point is not primarily technical, it is political. Whether the U.S. view of what it was getting at the end of the Uruguay Round with binding dispute settlement, that there would be some latitude for national decision-makers to interpret compliance with international obligations with respect to its trade remedies, or the EU view is correct that only the Appellate Body could decide the scope of the obligations and rights, is not likely to play a role in finding a solution.  The question is whether a balance can be struck that those on each side of the argument can live with.  Pragmatism, creativity and agility, if applied to this issue, can provide WTO dispute settlement with an appellate function having a legitimacy that will find general support.  

Income inequality, inclusiveness and the world trading system

It is easy to say that this is a matter for national authorities alone to deal with.  This may be largely true, but it is not the whole picture.  International trade rules matter.  Where protection becomes widespread, national incomes drop in the protected economy, creating inequality between it and more open economies.  Conversely, protection for a particular sector will improve profitability for the beneficiary industry at the expense of downstream users and consumers.   

Subsidized and other unfair foreign competition deprives workers in competing sectors of their incomes.  This is true whether the market is at home or abroad, whether the measures involved apply to exports or imports.

The liberal international trading order was designed not only to lift global and national GDP for participants on the whole, but also at the level of an individual, a small business, or a large concern, to create opportunities to enhance income through access to world markets.  Today the goods and services that support the internet and E commerce have opened up literally a world of opportunities.  Governments can work to enhance these opportunities, providing capacity, infrastructure and education, among other supporting policies, or they can stifle participation in the world economy. 

Nelson Mandela at the 50th anniversary of the GATT came to the WTO and called for engagement to assure that national policy initiatives for shared growth had support from the multilateral trading system. 

A basis for optimism. 

I have the happy assignment within the WTO of overseeing the work of the Accessions Division.  At the WTO Public Forum held the week before last, I moderated a program which featured speakers from Somalia, South Sudan, Afghanistan and East Timor.  The subject was bringing fragile, conflict-affected economies into the WTO.  None of the speakers take WTO membership for granted.  Not Afghanistan which was the last to join the WTO two years ago, and not those countries starting or those more deeply involved in the domestic reform process that is required of applicants.   They want their countries to become integrated into the world economy, to provide an economic basis for a greater assurance that it is possible to maintain peace.  I asked our keynote speaker, the first President of East Timor, Xanana Guzmao, to make some closing remarks.  He spoke slowly and carefully, asking the packed room for indulgence for this halting English, which he said was learned in prison dating from the struggle for the birth of his new country.  He spoke with an eloquence, an elegance, that none of us could have equaled, about the need for his country to engage in world commerce, which was why the WTO was so important to his country’s future.

The WTO emerged from the GATT almost a quarter century ago.  It has to a large extent fulfilled its promise.  It grew in size, bringing in an additional 36 countries.  Its rules withstood the global financial crisis of a decade ago, and it made substantive progress through conclusion of a Trade Facilitation Agreement.

Perhaps to some extent because of its accomplishments, the WTO came to be largely taken for granted by most heads of state, corporate leaders, and much of civil society.  A short two years, had you asked any of them what their top ten priorities were, support for the WTO or enhancing it would be highly unlikely to make their lists.  In February, I was in Paris and among others met with a senior French economic official, and she asked, provocatively, what value the WTO had — as if it were a wine that had been stored past its peak.  Yes, she said, it had had an era of great accomplishments, but the newest thing was bilateral agreements — Paris was regularly briefed by Brussels on the 96 bilateral trade agreements it had or were under negotiation, and the news from the WTO was that the Buenos Aires WTO meeting of trade ministers just over a month earlier had failed to even agree on a joint declaration.  The dispute settlement system was hobbled, was it not, by the U.S. blocking appointment of new Appellate Body Members and last but not least, no new trade negotiations of great promise were underway.  True, the official was not directly engaged in trade policy or negotiations, multilateral trade was not at the center of her policy universe. But clearly for her, the WTO did not hold much promise.  Her well-intentioned taunt: “Make the WTO Great Again”. 

Times have changed.  Last month, Philippe Etienne, diplomatic advisor to French President Macron, spoke at Chatham House, of France’s interests.  National security was of course first.  Second was the preservation of a rules-based international order.⁽⁴⁾  There is probably not a government official, legislator, or company executive who is not reading avidly about efforts to maintain and improve the trading system. 

What comes next? 

We will see what comes out of the Ottawa meeting next week on WTO reform.  In addition, soon the United States, together with at least the EU and Japan, will table a proposal to increase obligations to provide transparency under the WTO agreements.  We will also see further reactions to the extensive list of EU reform proposals.  Going forward, I believe that there will be substantial attempts to enhance the WTO’s dispute settlement system

The responsibility for the liberal world order, the multilateral trading system included, cannot be shirked without causing great harm to the world as we know it.  The United States has been the indispensable country for 70 years.  We do not know the extent to which it will continue to carry this burden as completely as it has done.  And we do not know whether its allies in this endeavor will be willing and able make up for any shortfall. 

The outlook is far from dismal.  In my job, I get to speak with graduate students around the world.  Last June in Bern, last month in Almaty, Kazakhstan, and two weeks ago in Cape Town.  The students are strongly motivated to make the world a better place.  They are focused on possibilities not limitations.  I believe that they will leave the world of international trade better than how they found it. They intend to make a difference.  The open question is, I suppose, will we?  I believe that we can, that we should, that we must, and most likely that we will.