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The Current State of the World Trading System and Its Likely Future

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This speech was originally published by the Lowy Institute on 18 September 2019.

On 17 September 2019, the Lowy Institute hosted Ambassador Alan Wm Wolff, Deputy Director-General of the World Trade Organization, for a discussion of the risks and opportunities facing world trade at this decisive moment.

Mr Wolff became WTO Deputy Director-General in October 2017, after a long career in international trade, including as chief trade lawyer of the US executive branch, Chairman of the National Foreign Trade Council, as a senior US trade negotiator, and private law practitioner. He has served and advised both Republican and Democratic administrations.


Check against delivery

For international trade this is a time of climate change. The climate that I am referring to is political. It is the retreat, perhaps loss, of the spirit that animated the creation of a liberal world order, of which the multilateral trading system and therefore the WTO is an integral part. The liberal world order is under more severe stress than at any time since its creation in 1947.

The evidence is abundant. International agreements in general can no longer be fully relied upon to stay in force. Exchanges of salvos of increased tariffs between the two largest trading nations dominate the current news. The singular and remarkable characteristic of the WTO, that it provides enforceability for its trade obligations, is likely in three short months from now, no longer to exist in its current form.

The movement toward global supply chains is losing momentum. This is in part cause and in part effect of slower world economic growth. While international trade has still been growing, the rate of growth has been declining, and could soon enter a period of decline.

For the global economy, the pendulum is poised between global economic integration and quite literally dis-integration, fragmentation. This does not mean collapse, but a prospective unravelling.

This is not a cause for despair, far from it. It is a call for increased engagement, a redoubling of effort to retain the multilateral trading system which has been painstakingly built over 70 years — and to improve it.

I do not take continuing trade hostilities or the threat to WTO dispute settlement as being insurmountable challenges. In human history, wars are never permanent. Relations are sorted out, often in stages, as new equilibria are reached even if temporary. With respect to WTO dispute settlement, pragmatism can overcome institutional challenges. And at some point, the exit door from international agreements will be considered less attractive and a path less taken. None of the current series of damages to international trade is irreversible. Stability and then progress will return.

More worrying than the challenges just listed is that the foundation of the multilateral trading system, non-discrimination, the rock upon which the WTO is built, has been crumbling for years, and the process of decline in adherence to that principle is accelerating. All countries still pledge themselves to abide by the first article of the GATT, anachronistically also known as “most-favored-nation” treatment. But is better described as the principle of non-discrimination. The precept is very simple — that all trade, regardless of source, will be treated equally. It may be that this norm is still applied to the majority of international trade, but it is not the direction in which government policies are trending. Most emphasis at present is on concluding preferential trade agreements on a bilateral or regional basis. This is true in different ways for all three of the largest trading entities — the United States, China and the European Union.

The United States, while making proposals for improving the WTO, is actively engaged in seeking bilateral arrangements with Japan and the European Union. The EU for its part has spent enormous energy over the last two decades on obtaining close to one hundred bilateral arrangements. China is actively pursuing its One Belt One Road program, which does not claim to be a global scheme, but deepens economic relationships for Beijing with a wide range of countries individually. The developing countries in their statements in general aspire to what they would consider equal treatment through catching up through better than equal treatment. The last successful attempt at across-the-board multilateral solutions was the creation of the WTO itself, and that accomplishment belongs to a prior generation. The broad multilateral attempt that followed, launched in 2001, failed to be concluded in 2008, and there is no consensus to make further attempts.

Douglas Irwin in his excellent discussion of the origins of modern trade policy traces the objectives that were to be ingrained as the rules of the new multilateral trading system — an endeavor unprecedented in human history. In 1943, in the middle of the Second World War, US planners for the postwar period held the belief that had an overriding objective:

“A great expansion in the value of international trade after the war will be essential to the attainment of full … employment in the United States and elsewhere, to the preservation of private enterprise, and to the success of an international security system to prevent future wars.”1

As a central pillar of their blueprint for the postwar era, the US interagency planning committee called for “the elimination of all forms of discriminatory treatment in international trade”. The expansion of trade on a non-discriminatory basis was to be accompanied by elimination of rigid control by the state and the elimination of subsidies on export and domestically.

The decline in the practice of non-discrimination is most worrying because it is widespread. It is not confined to a limited set of measures and arrangements. As a result, it will likely take the long time to repair. That said, the restoration of non-discrimination as the centerpiece of the global trading order is highly likely with the passage of time.

The entire striving of humanity is toward more equality and less discrimination and this will ultimately prove to be true for international trade as well. Trade will once again become aligned with this core principal of the founders of the multilateral trading system — non-discrimination. Sub-multilateral arrangements will be superseded by worldwide rules. The chief exception will occur in the case of nations seeking to move toward a single market in a specific region, because deeper economic integration is not practical on a broader geographic scale.

Current challenges and opportunities

Before getting to a better place for world trade on a multilateral basis, a number of hurdles exist.

The ability to legislate

The greatest challenge for the world trading system is not one that cries out from the headlines. It is whether it is possible for all the trading countries of the world to legislate — that is to make new rules needed to update, improve and keep the multilateral trading system relevant. The failure of the legislative function contributes substantially to the central problem faced by the WTO dispute settlement system and it is a serious threat to the future of the organization. Where rulemaking cannot take place, the WTO can neither address new problems nor fill gaps in existing rules. The last major rule-making endeavor of broad scope was the creation of the WTO itself in the Uruguay Round, which ended in 1993. In that last great round, there were a series of all-Member agreements with respect to agriculture, tariffs, intellectual property, and services. There has not been a successful attempt since that time to have an all-inclusive inter-related set of agreements, although there have been some important individual agreements reached — on trade facilitation, on banning agricultural export subsidies, and on expanding the product coverage of the information technology agreement.

Matters that should have been ripe for negotiation faded away. Neither the environmental goods agreement nor the further expansion of the coverage of the Information Technology Agreement have even been mentioned in Geneva in the last two years.

This does not mean that there are not some potentially very positive developments. There are. There is a broad commitment to reach agreement by this December to discipline fisheries subsidies — a potential agreement that is vitally important for developing countries which are coastal states as well as for the environment, and there are a series of open plurilateral negotiations underway — the most advanced of which address E-Commerce and Investment Facilitation.

Trade conflicts

Today’s trade headlines mostly concern current confrontations. These are all too often seen as a failure of the WTO. However, no international treaty ever prevented a war. In addition, it should not be surprising that the emergence of a new economic power is accompanied by trade friction. This occurred in the case of Japan nearly 50 years ago and lasted for a quarter century or more, and it is now the case with China. The issues involved are not just the product of commercial rivalry but involve the nature of the competition. Tensions are heightened where the organization of the domestic economy of the new power differs from that of the incumbents. An unanswered question raised by academic commentators is whether the WTO can or should provide scope for co-existence of differing economies rather than convergence.

The resolution of a trade conflict must rest primarily with the parties to it. The potentially positive aspect of a confrontation is that if the combatants come to an agreement where some elements are possibly of broad applicability, such as with respect to state-owned enterprises or industrial subsidies — subjects that the United States, the European Union and Japan have said they will address — these can be incorporated into the WTO rules.

As systemically challenging are those matters which one of the parties may consider non-justiciable. This occurs currently in many instances where national security is invoked. In some instances, WTO dispute settlement can aid in finding an outcome. But the area is a very sensitive one.

Preserving WTO dispute settlement

Under a consensus system of governance, all must agree for any action to be taken — with the exception of adoption of panel and appellate reports, in which case all must disagree with the quasi-judicial outcome to prevent a report from being adopted. The United States is blocking a consensus to begin the process of nomination of new Appellate Body members. This effectively means that on December 11, no new appeals can be filed.

The argument between the United States and most of the other WTO members is whether the Appellate Body (AB) is legislating, that is creating new rights and obligations, and whether this matters. The United States contends that the AB has added to the rights and diminished the obligations of the Members. Some Members would probably contend that this has not happened, and many might say that this does not matter. Were this a domestic court, the legislature could overrule the court and change the result in a matter or on an issue if it felt that the court had exceeded its authority. But as noted, the legislative function of the WTO has been more absent than present. So, there has been no corrective were the AB to exceed its mandate.

This can have an unintended result. On its face, the WTO Dispute Settlement Understanding provides that where a Member appeals a panel decision, it is not final and cannot be adopted. This would allow the filing of an appeal to block an outcome. In this situation, a disappointed complainant might choose to retaliate, and the respondent might choose to counter-retaliate. This could ignite a series of trade conflicts. It is exactly what WTO dispute settlement was designed to prevent.

In the near term, rather than an apocalypse occurring, Members will likely find pragmatic outcomes, such as agreeing that a panel report is final and will be abided by or that the parties will arrange for some form of arbitration. Ad hoc arrangements, however, are far from optimal. Lost would be consistency of outcomes and a clear ability to correct erroneous panel decisions in the rare cases in which they might occur.

Can the impasse over WTO dispute settlement be solved? Clearly it can. There should be enough recognition of the common interest to do so. Pragmatism helped create the current dispute settlement system, and it can yet save it.

The future governance of world trade

I do not number myself among the declinists. The near and even the medium term may continue to be challenging, with less adherence to international agreements, with the WTO dispute settlement system in disrepair, with regional and bilateral agreements being deemed an easier route to progress. But the creation of trading blocs and preferential arrangements, and a resort to protectionist measures is not a natural state. It is a state of nature in the sense that it is less civilized. It is not as efficient and likely to lead to conflicts, perhaps not all of them commercial.

World trade needs a single set of rules, with allowances made for varying degrees of capability. The peoples of the world have tasted the benefits of non-discrimination and more open markets. Domestic policies in many countries have not created an equitable sharing of the benefits of world trade, and that must be corrected. This is primarily a matter for domestic national policies. Keeping open borders for e-commerce can help greatly because the ability of individuals and small and medium-sized business to gain enhanced income through participation in the global digital economy is enormous. For that new rules are being sought by interested countries.

Conclusion

As for the future of the multilateral trading system, and the movement toward equal treatment of all international commerce, no departure from what has been achieved can plausibly be permanent. Governments can be forgetful, and on occasion may have to relearn hard lessons, but they will return to trend. Ultimately, they will determine that the multilateral trading system and the liberal international order that it supports are essential to the economic well-being of their peoples. The good news is that they are still striving to improve the world trading system and success is within their grasp.


Note

1 Douglas A Irwin, Clashing over Commerce: A History of US Trade Policy (Markets and Governments in Economic History) (Chicago: University of Chicago Press, 2017), 461.


About the Author

Ambassador Alan Wm Wolff is Deputy Director-General of the World Trade Organization.

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