After a quarter-century serving as the global arbiter of trade, the World Trade Organization faces an existential moment in an era of rising protectionism. The United States under President Donald Trump has called for a fundamental reset at the institution and sabotaged its ability to resolve disputes. A key U.S. goal at the WTO has been to challenge China’s state-led approach to trade and investment — a goal shared by Democratic presidential nominee Joe Biden. Some observers, recognizing that the WTO has failed to adapt to changes in the global trading system, see an opportunity for reform. What is unclear is whether the U.S. approach will lead to the WTO’s reinvention or obsolescence.
1. What is the WTO?
The Geneva-based WTO provides a forum for negotiating agreements, settling disputes and monitoring trade practices. It began operating in 1995, replacing the General Agreement on Tariffs and Trade, which was developed after World War II. While the GATT regulated trade in goods and reduced tariffs and other barriers, the WTO also covers services and intellectual property. A smoothly functioning WTO gives businesses the certainty they need to invest and operate abroad, and fosters growth and economic integration. Since its creation, the value of global trade has nearly quadrupled. However, in recent years, the WTO has lagged behind massive changes in the global economy, such as the proliferation of digital trade.
2. What are the rules?
The WTO's 164 members, which account for 98% of world trade, pledge not to discriminate among trading partners or between domestic and foreign goods and services. They also agree to reduce trade barriers; have predictable and transparent trade policies; and discourage unfair practices such as export subsidies. Some exceptions are allowed to protect the environment, health, and national security. Least-developed countries receive technical assistance, duty-free treatment, and quota-free access to foreign markets.
3. Why is the WTO dysfunctional?
The United States paralyzed the WTO’s appellate body by blocking appointments to the seven-person panel for more than two years. A global trade court, it has been unable to issue judgments on new cases since December 2019 because there are not enough active members. Although WTO nations can still receive an initial ruling on a dispute, a losing party can now appeal it in legal limbo. As a result, governments can impose measures without fear of WTO-sanctioned retaliation. Trump’s complaint is that the WTO has become a legal tool for nations to exert pressure on the United States, with his top trade official calling it a “litigation-focused organization.”
4. What about the dispute between the United States and China?
The United States accuses China of discriminating against foreign companies and giving advantages to local rivals through direct subsidies, cheap land and electricity. The Trump administration also argues that China’s status in the WTO as a developing country, which it has had since joining in 2001, gives it unfair advantages. But China, now the world’s second-largest economy, has resisted efforts to rescind special privileges that it claims were hard-won concessions during its entry into the organization. Any nation can declare itself a developing country upon joining the WTO, giving it more time to implement tariff cuts and greater access to foreign markets.
5. What do other nations say?
There is broad agreement that the WTO needs reform. Insiders acknowledge some of the Trump administration’s concerns with the appeals process, though most nations disagree with the strategy of shutting down the appellate body altogether. Overall, the WTO has a poor track record in negotiating trade deals, and the most recent round of trade talks, the Doha development agenda, failed spectacularly. Over the past 25 years, the organization has approved only one multilateral agreement, the Trade Facilitation Agreement, which is designed to simplify and harmonize global customs procedures. The system is also cumbersome: All WTO decisions must be made by consensus, meaning any nation can block a deal for any reason.
6. What are the prospects for reform?
Efforts to make changes have stalled in the run-up to the US presidential election in November 2020 and the appointment of a new WTO director-general to replace Roberto Azevedo, expected in the same month. Meanwhile, European Commission President Ursula von der Leyen has said she wants the European Union to lead reforms and has set up an interim arbitration system for trade disputes while the WTO’s appellate body is paralysed. While the US has made several reform proposals, none have the full backing of WTO members. The EU, as well as Japan, Canada, Australia and New Zealand, back some US recommendations. These include encouraging governments to submit full and timely details on their trade practices.
Source: Bloomberg
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