Can the World Trade Organization be Reformed?

The switch for the 12th ministerial conference (MC12) of the World Trade Organization (WTO) has – for reasons beyond its control – been flicking on and off. Ministers are supposed to meet at least once every two years but, due primarily to Covid-19, their last formal get-together was in December 2017. Now, the switch has been flipped on again, with the announcement that MC12 will take place at last in Geneva from June 12-15, 2022.

Will this be a light-bulb moment for the WTO?

The WTO is seen as dysfunctional; many have written it off. Its dispute settlement system was seriously weakened when the Appellate Body became inoperative in December 2019. Trade negotiations have sputtered. It has been difficult to make progress in rule-making in important areas such as digital trade and the environment and, as a result, there has been an increasing tendency to move negotiations to the margins of the WTO. The institutional machinery has a patchy record in monitoring and implementing existing agreements.

It is no surprise, therefore, that there have been increasing calls for radical reform. The G20, with its membership of both developed and major developing economies, could be regarded as a bellwether of opinion among governments. Ritual protestations in leaders’ communiqués in the early 2010s about an enduring commitment to the multilateral trading system in 2017 turned to the need to improve the WTO’s functioning and, later, to a call for “necessary reform”. In 2020, the Saudi Arabian presidency launched the “Riyadh Initiative on the Future of the World Trade Organization”. But tellingly, G20 members were not able to agree on a collective vision on how reform should be advanced.

The G20 has tended to use the WTO as a lightning rod for its own disagreements, increasing the sense of crisis. Major players have vastly differing trade policies, with relations degenerating in some cases into trade wars. They profess attachment in varying degrees to the WTO but have not been prepared to show the flexibility that would be required to enable the organization to make progress, particularly in negotiations. Failure in Geneva reflects the differences between the members, but it is easier to pin the blame on deficiencies in the institution. Yet, the WTO is only a forum.

Despite this caveat, there is no pretending that the WTO as an institution does not have flaws. One of the main narratives in this respect rests on the concept of its “constitutional imbalance”.

Negotiations to produce new trade rules (the so-called “legislative” function) can only succeed if there is a positive consensus among all 164 members, which often seems an impossibly high hurdle. The move from the more club-like atmosphere of the General Agreement on Tariffs and Trade (GATT) to the near-universal WTO membership has been an additional complication. Some success has been achieved – for example the Trade Facilitation Agreement (TFA) which entered into force in 2017 – but there is no doubt that results have been too few and far between.

The “executive function”, meanwhile, presents a mixed picture. It primarily consists of governments’ collective oversight of existing agreements through the network of WTO standing councils and committees. Some bodies are highly active and valued, but others sometimes seem to be going through the motions. In addition, there is a view that the executive function could be strengthened by providing the WTO secretariat, currently severely constrained by a longstanding “member-driven” culture, with more room for initiative. WTO Director-General Ngozi Okonjo-Iweala has been calling for a “transformation”.

As for the so-called “judicial function”, it initially had raced ahead. Members seized with alacrity their newfound ability to litigate festering trade disputes. The Appellate Body did not disappoint them, issuing judgements on a range of controversial issues, notably including the issues of “zeroing” in anti-dumping and the definition of a “public body” in subsidies. Critics, especially the US, accused the panels of misinterpretation and overreach.

It seemed to the US that other parties were seeking to gain through litigation what they had been unable to win through negotiation. As a result, it called time on any appointments to the Appellate Body, which now exists only on paper. When asked about reform of the WTO, Robert Lighthizer, the US trade representative (USTR) in the administration of Donald Trump, indicated that he had “already reformed it”.

Another aspect of imbalance is that, while successful negotiations require positive consensus, Appellate Body reports are adopted unless there is a consensus against (so-called “negative consensus”). This of course could never happen because the “winning” party would always insist on adoption, which then became automatic.

To be fair, this situation was certainly not all of the Appellate Body’s making. It was the WTO members themselves who brought the cases and were determined to pursue them to the end, irrespective of opportunities to settle through other means. In all disputes, it would be argued by one or both parties that a particular WTO provision supported its case, thereby passing responsibility to the Body to make a ruling.

The forthcoming MC12 will not be able to solve all these issues: They are too complex, there is too much division, and too much to do. But it is at least an opportunity to begin to address them.

Assuming that the long-delayed conference does finally go ahead in June, and assuming also that this time the WTO can avoid the near-death experience or collapse which has blighted some previous conferences (certainly a danger in 2022), it is entirely possible that a reform process will be launched.

Many “middle-ground” developed and developing countries who rely on a rules-based trading system are seriously concerned at the prospect of its demise. The Ottawa Group – 14 like-minded WTO members led by Canada and including a range of economies such as Brazil, Japan and Kenya – has been particularly active in contributing pragmatic proposals and analysis to modernize the WTO. Not all their ideas are instantly acceptable to all players but there is appreciation for the input.

China, while having some red lines, also wants to see the system flourish. Although the European Union (EU) has been beefing up its defensive trade instruments, it remains philosophically committed to multilateral trade and is part of the Ottawa Group. The current USTR Katherine Tai has talked about the need to make the WTO more flexible and responsive. Informal conversations are taking place about dispute settlement reform, which the US links with a re-energized negotiating function.

Simply launching a process to advance reform, hard as even that may be, would be the easy part. Actually bringing about fundamental reform will be extremely difficult. It is one thing to agree that reform is needed but there are contrasting visions even as to the purpose of the WTO. For a diminishing constituency, it will be about strengthening market mechanisms and access. For some, it will mean the ability to focus on areas such as labor and the environment; for others, digital trade and services; and for a great number, it will be about creating favorable conditions for development through flexible rules and “policy space”. These are not mutually exclusive categories but illustrate that priorities and aspirations vary considerably, as the G20 discovered.

A fundamental redesign of the WTO, if it ever succeeded, would take a very long time. Multilateral economic cooperation is currently out of fashion and it is not clear when, or if, that may change. The reform effort is nevertheless worthwhile, and some encouragement can be taken from the continuing engagement being shown by member countries and economies. Most would agree that members need to reinvent the WTO.

In the meantime, all is not lost. Largely unheralded, the WTO continues to provide the basic plumbing of the international trading system and, notwithstanding high-profile disputes, most countries continue to play by the rules. The WTO, even in its current maintenance role, would be seriously missed if it were not there.

Virtual conference of the Ottawa Group for WTO reform, January 20: "Middle-ground" developing and developed economies are contributing ideas for modernizing the multilateral trading system (Credit: @mary_ng on Twitter)

A certain amount of “reform by doing” is already taking place. On the negotiations front, frustrated at the lack of progress multilaterally, significant groups of members have launched initiatives on the margins of the WTO in Geneva. Eighty-six of them are engaged in a negotiation on e-commerce; over 100 on investment facilitation for development; 65 on domestic regulation for trade in services; and large numbers on trade and environment and plastics pollution trade. It remains to be seen how outcomes in these areas might be adopted and implemented in the WTO. India and South Africa in particular so far continue to insist that all negotiations can only take place with everyone in the room, which is a recipe for continued paralysis and disintegration. Any WTO reform process would surely have to take account of the reality of these initiatives.

Even on dispute settlement, cases continue to be brought to the WTO, albeit at a slower pace than previously. Some members are finding workarounds for appeals, such as an interim arbitration mechanism put forward by the EU, Canada and others. There are signs that the US may engage more after MC12, no doubt bringing its own unique perspective.

Outside the WTO, the pace of bilateral and regional trade deals appears to have slackened (apart perhaps from a few countries who are playing catchup). Traditional agreements focused on market access have become less fashionable. More complex arrangements involving elements potentially related to governance and security are being discussed.

All this means that, now more than ever, economies and businesses need a revitalized WTO. There are signs that, after MC12, governments will start to grope their way towards that target. Currently, many governments seem to have discounted multilateral cooperation, compromise and self-restraint. But at some point, perhaps when the trauma of the last three years has receded somewhat, they will hopefully rediscover that these virtues serve their mutual interest. They need to be encouraged to do so.

MC12 will not be a light bulb moment for the WTO. It could, however, herald the start of a process which – no doubt with many diversions and delays – will lead us in the right direction.