Does the WTO have a Future?

 

The WTO is currently the only organization that oversees international trade. The organization’s primary purpose is to ensure that global free trade flows as smoothly, predictably, and freely as possible; it stands for non-discrimination, competitive and open trading, power balance, and environmental sustainability. (Wto.org, 2017).

The organization has expanded on its original role of providing a forum for governments to negotiate trade agreements. The WTO also serves as an arbitrator for disputes, an inspector of national trade policies that may conflict with global treaties, and a police for transparency in trade policies. As a rules-based, member-driven organization, the WTO mandates that all decisions are reached by consensus of its member states. (Wto.org, 2017)

The WTO was established in response to a push for global economic cooperation. It replaced the GATT, a multilateral trade agreement, when the GATT could no longer keep up with the economic impact of globalisation[1]. This paper argues that the WTO is facing the same situation as the GATT did. The WTO has evolved to be more than a negotiating platform centred around trade and economic policies; it is now greatly affected by political, social, and cultural issues. Recent events (including the threat of a trade war between China, Russia, and USA; Brexit and the UK’s subsequent role in trade negotiations) are creating situations which the WTO is unequipped to handle – simply because there are no precedents, and proposed solutions are little more than stop-gap, time-consuming measures. The impasse of negotiations[2] and the increase of bilateral and regional accords (with countries creating their own preferential trade agreements) point to the WTO’s diminishing relevance.

The paper proposes that the WTO does not have a future in its current state. It can no longer ensure smooth, predictable, and free-flowing global trade. To remain relevant, the WTO needs to restructure as an organization.

The WTO outlines ten specific outcomes for the organization. The table below highlights how well the WTO has reached its objectives. (Wto.org, 2017)

The WTO can

Recent Events not meeting Objectives

  1. Cut living costs and raise living standards
  1. Settle disputes and reduce trade tensions
  • Threat of Trade Wars – Penalty mechanisms are outdated and cannot be realistically applied.
  1. Stimulate economic growth and employment
  1. Cut the cost of doing business internationally
  1. Encourage good governance
  • Emergence of large FTA agreements outside of the WTO which set preferential agreements.
  1. Help countries develop
  • Power disparity between larger WTO countries and developing nations.
  1. Give the weak a stronger voice
  • As above
  1. Support the environment and health
  • Shrimp-Turtle case put trade before environment.
  • Protect pharma patents and ‘Right to Profit’. Developing countries not guaranteed to receive help.
  1. Contribute to peace and stability
  1. Be effective without hitting the headlines

As shown in the table above, the WTO is clearly not meeting all objectives which begs the question – does the WTO have a future? An organization that does not meet is objectives will find it difficult to sustain its relevance and international authority if it continues in this manner.

As mentioned previously, the WTO is failing to achieve some of its desired outcomes due to the current trade environment. The key failings are discussed in more detail below.

Labour Laws and Sustainability

The WTO does not incorporate labour and environmental standards in its agreements, despite these two facets being highly interlinked with economic decisions. Any discussion that does not reflect the effects of economic policies on labour or environment is incomplete[3]. (Wto.org, 2017)

Discussions around labour and sustainability have been stalled in the WTO for two key reasons: developing countries argue that set standards will be too high for their level of development, while developed countries argue that uneven working conditions would give an unfair trade advantage (e.g. lower wages lead to lower prices).

These issues particularly came under scrutiny when China joined the WTO in 2007 (Aaronson, 2010) as much of China’s trade power derives from cheap labour. Following WTO norms of transparency, China revised its labour laws to conform to acceptable (but not required) global standards. However, these reforms are rarely enforced.

Power Disparity

The WTO aims to support developing nations’ active participation in trade negotiations through favourable provisions and rights. However, the WTO’s consensus-based decision-making has led to power-based bargaining: developing countries that lack the resources and connections of developed nations invariably give way to those who hold more global economic power. (Walker, 2011)

New member countries are also at a disadvantage, as they are usually required to make greater concessions than existing members. (Hopewell and Margulis, 2016) Moreover, when disputes cannot be settled, past rules and regulations are recalled as precedent – long-time members (typically developed nations who have long met WTO requirements) will benefit from knowledge and experience.

The increase in member countries and shifts in global economic power has led to fragmented negotiations. One highlight is the Doha Development Round that has stalled for nearly 16 years as emerging nations challenge the power long-held by developed nations[4]. The stalled negotiations are hurting free trade, and there is a threat that closely allied countries will come to their own “informal agreements” and strong-arm other nations to accept.

Trade Wars and Large Disputes

If the newly elected American President Donald Trump stays true to his word, the world could potentially see a trade war between the US and China (Economist.com, 2017; Bermingham, 2017). If the US were to put restrictive tariffs on China, then it would breach the rules set out by the WTO and, if successfully disputed[5], would have to pay penalties in the order of hundreds of billions of dollars[6]. To date, the WTO has only authorised up to a maximum of US$4bn[7] in retaliatory trade sanctions. (Peterson Institute for International Economics, 2017) The penalties that the WTO would impose on the US are unrealistic and shows how the WTO is not equipped to handle these modern trade disputes.

Increased Preferential Trade Agreements

Due in part to the stalled negotiations, developed nations are turning to bilateral and regional accords. Countries are bypassing the WTO completely, and the WTO neither has the power to override these agreements nor to hasten a consensus in the Doha Development Round. (Wilson, 2017)

Preferential trade agreements[8], do not conform to any set of standards. Countries can include any concessions that are favourable to them, but not necessarily favourable to the other party. Sensitive trade issues are often excluded in PTAs and are often stop-gap measures rather than true facilitators of long-term free trade. PTAs between large economies may also allocate resources to inefficient industries (Council on Foreign Relations, 2008).

PTAs do not require that the same set of concessions be offered to all countries; developing countries run the risk of losing out on favourable trade agreements if they are excluded from PTAs. They completely undermine the multilateral trade agreements set by the WTO, creating the spaghetti bowl problem in global free trade.

Bureaucracy impeding progress

With the rise of technology and e-commerce, global traders are more connected than ever. Designing and enforcing trade rules to suit this new, hyper-connected economy require a more informed, updated and less bureaucratic organization. Technological advancements are rapid in developed economies, increasing their power in trade and negotiations. A more dynamic and involved organisation is needed to take global free trade further.

The future of the WTO?

International trade has proven its benefits, but international trade needs to be regulated by an independent body. Individual nations cannot (or will not) intensively self-regulate. Nations also have varying levels of knowledge and expertise on trade and trade policies; this inequality in knowledge can lead to power imbalance (Hankla, 2014). While it has been successful in overseeing the implementation of past agreements, the WTO in its current state is not set up for the future of global trade given recent changes.

The WTO’s power is contingent on the power of the nations that support it; currently, there is nothing the WTO can do to stop nations from making their own free trade agreements or retaliating without initiating formal disputes. The fear of penalties is losing potency for member nations, especially developed countries who will have less to lose and more to gain. In striving to be a platform for consensus-based decision-making for global trade, the WTO may be creating the problems it seeks to solve. The stalled round of negotiations is forcing countries to resort to PTAs, which may be doing more harm than multilateral agreements.

To resolve these problems, the WTO can continue to exist in its current state. However, this approach is not sustainable and will not address the issue of rapid globalization. The proposal for the WTO, then, is to completely restructure the organization and its objectives.

Restructure WTO procedures

A committee should be started to analyse the impact of recent events on trade (e.g. Brexit, threats of a trade war); clearly, the old process of handling trade disputes will not work (the highest retaliation penalty awarded in WTO history was US$4bn; the potential penalty to the US is US$220bn). A separate committee will focus on enriching the discussion around trade and global economics to include labour and sustainability standards, among others. Trade no longer stands in isolation of other factors.

Intervene in trade negotiations

The restructure should then give the WTO the power to meet its objectives[9], that is the WTO should be able to intervene in trade negotiations when the process takes too long and hurts global trade. Further analysis can also examine the impact of the WTO having jurisdiction over bilateral and regional accords.

Empower developing nations

The WTO should also consider redesigning its current negotiations processes. There are already several concessions that allows developing nations to participate in global trade; however, these do not allow developing nations to have a more active part in discussions. The restructure should include ways to let developing nations be on equal footing with developed nations in trade discussions[10]. Skills training in negotiations, for example, can be one way to empower developing nations. Special considerations for or greater weight given to developing nations in the negotiation process can also be another way[11].

The objective of the restructure is not to transform the WTO into a global tyrant, but rather to enable and empower the WTO to further global free trade.

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[1] Globalisation was driven in part by more efficient ways of communication, a breakdown of cultural and socio-political walls, and increased mobility between nations.

[2] The latest round of negotiations, the Doha Development Round, has been stalled since 2001.

[3] The GATT and WTO preamble expresses as much, that trade and employment policies should be linked.

[4] For instance, negotiations in 2008 broke down because of agricultural trade disagreements in general and the special safeguard mechanism in particular between the US, India, and China.

[5] This, of course, also raises the question if the WTO has the resources to handle a dispute of this magnitude, as well as other disputes that will follow.

[6] For example, if the WTO authorizes a 10% import tax, the US will lose an estimated US$220bn worth of exports. If the WTO authorizes a 10% export subsidy, US goods exports will be $150bn higher.

[7] The maximum retaliation fee awarded by the WTO is US$4bn, in the 2000 dispute US vs Foreign Sales Corporation.

[8] Examples include the Trans Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP).

[9] This necessitates the question of who should run the WTO, and if WTO associates can in fact remain impartial. The authors of this paper believe that it is possible to find individuals that will focus on advancing global trade over increasing the marginal benefits to any one country.

[10] Ideally, power-based bargaining will be completely removed from the consensus-based negotiations.

[11] The intent is to reduce the inherent power disparity among countries, not to give developing nations an unfair advantage.