At the WTO, Hopes For a New Dawn

The sigh of relief in trade ministries around the world at the departure of the administration of Donald Trump is almost audible. It may now be possible to think in practical terms of appointing a new director-general of the World Trade Organization (WTO) and, eventually, reconstituting its dispute settlement system – steps that would in due course make the global trade body whole again.  

Even taking these steps for granted, many issues – which, to be fair, predated Trump – will continue to bedevil the WTO. With typical candor, outgoing deputy US trade representative Dennis Shea put his finger on some of them in a valedictory speech in Geneva. He cited an unwillingness by some governments to accept that the WTO is a market-oriented institution (code for the “China problem”); the preoccupation of some members with extracting benefits from the organization while exempting themselves from its rules; and the poor record on concluding negotiations. Whether one agrees with Shea’s blunt characterization or not, these and other complaints are likely to remain significant aspects of US trade policy.

The US – and other relatively market-oriented economies (such as the EU and Japan) – would probably start from the premise that the status quo is not an option. That has failed and something needs to change. China and no doubt some others might, on the other hand, consider that they paid a high price to join the WTO in its current form and that the goalposts cannot be moved now. If the US forms a coalition in the WTO to try to constrain China with a new set of rules, is that likely to be a formula for a new modus vivendi or will it plunge the multilateral trading system into another crisis?

A key issue, because it is at the heart of China’s state-led economic model, is the question of industrial subsidies. In January 2020, a joint statement issued by the trade ministers of the US, EU and Japan called for WTO rules to be strengthened. They canvassed several propositions, including the addition of new types of prohibited subsidies, measures to address distortions of industrial capacity, a reversal of the burden of proof so that subsidizing countries would have to demonstrate that there are no serious negative trade effects, and reinterpretation of what constitutes a “public body” in WTO law.

This trilateral initiative was to have been broadened into a wider coalition and launched at, or in the margins of, the WTO during the course of last year. The pandemic and the strong preference of the Trump administration for unilateral tariff measures (not only with respect to China but also US allies) inhibited early action, however. The plan remains on the books and awaits US Trade Representative-designate Katherine Tai’s attention.

China has seen this initiative coming for some time and has been sending negative signals. US sallies in the WTO during 2020, backed by Japan and Brazil, on the importance of market-oriented conditions to the world trading system have been batted away as “scene-setting” for the expected push on subsidies. It has been pointed out that there are no intrinsic WTO rules requiring market orientation and that developing countries should remain free to adopt whatever development model they prefer. The adoption in many democracies of massive subsidy programs to cope with the economic fallout of the pandemic has also not gone unnoticed.

Some eminent trade economists think that existing WTO rules on subsidies are no longer fit for purpose because they emphasize mechanical modalities of intervention rather than reflect policy objectives. Piecemeal efforts in some preferential trade agreements, or through the trilateral initiative, might be a basis on which to build but are too narrow in focus. Geopolitical and economic tensions call for international cooperation, especially among trade superpowers such as the US, EU and China, to revise and develop rules to guide both the use of domestic subsidies and responses by governments to the cross-border competition spillover effects. As a first step, they should cooperate in compiling and sharing information and analysis of subsidies with a view to resolving conflicts.

Sensible as this prescription is, questions remain as to whether the main protagonists are indeed prepared to cooperate in such an exercise, and whether they have the necessary political headroom and patience.

Frankly, this seems like wishful thinking. It is not clear why China, even in the light of the Trump experience, would be attracted to such a discriminatory arrangement. China in the 2020s is not like Japan in the 1980s. And in any case, such a scheme could easily undermine rather than reinforce multilateralism.

The use of anti-dumping measures, originally the preserve of a few rich countries, was expanded by them as a selective tool, with scant justification in many cases, to inhibit rising developing country exports. It was a lesson that many developing countries learned the hard way and they are now, as night follows day, increasing users themselves. WTO statistics show a total of 41 members implementing 1,926 measures in mid-2020, compared with only 14 members and 805 measures when the WTO was established 25 years ago. Do we really need yet more?

All this is not to say that multilateral cooperation between the three trade superpowers – the US, EU and China – is impossible. There could be areas of WTO reform where, with goodwill, progress can be made. The key could be to identify areas where interests overlap to some extent and then build up gradually from there. Possible candidates could be reconstitution of the Appellate Body, some aspects of the relationship between trade and health and the environment, increased transparency, reinvigoration of standing WTO bodies, and some ongoing negotiations.

We may comfort ourselves for the time being with the thought that Trump has gone and that better times for trade multilateralism are just around the corner. However, we are not about to witness a new golden age. The reality is likely to be that many of the same struggles will be played out in the WTO. The tone may change but many of the underlying issues and tensions persist. There is now an opportunity to make progress but seizing it will require skill, patience, self-restraint and commitment.