The WTO struggles to remain the world’s trade rule-maker

Brexit enthusiasts like to claim that if Britain ends up leaving the European Union without a deal, it has nothing to fear because it can count on World Trade Organisation rules to safeguard its trading rights and keep foreign markets open. However, they are wrong twice over.

First, relying just on the WTO would condemn Britain to trading on more disadvantageous terms than any of the organisation’s 164 members. All of them have forged preferential trade deals that offer better access to other countries’ markets than WTO terms alone provide.

Second, the WTO is tottering under the crushing weight of the trade problems it is supposed to resolve. Many trade policy experts now say that it is in a profound crisis that threatens to relegate it to the sidelines as maker and enforcer of global trade rules.

Since Donald Trump became president, the US has strained those rules to breaking point by slapping punitive tariffs on China’s exports, on the dubious pretext that they threaten US national security. Washington is also imperilling the WTO’s machinery for adjudicating trade disputes—the bedrock of its authority—by blocking appointments to the Appellate Body, its final court of appeal. If the stand-off continues, the tribunal will cease functioning in early December.

Other governments are scrambling to try to repair, or at least limit, the damage. However, that task is not only proving politically and technically complex; it faces continuing hostility and obstructionism from a US president who, many believe, wants not to reform but to demolish an organisation that he claims—on the basis of little evidence—treats his country unfairly.

Yet it would be wrong to blame all the WTO’s woes on Trump’s brutal wrecking tactics. In truth, many of the causes have deeper and older roots. The chaotic collapse of two ministerial meetings, as long ago as 1999 and 2003, and the subsequent failure of the Doha trade round, aimed at liberalising and drafting new rules for global trade, were all early warning signals that something was going badly wrong.

The WTO has, it is true, had the odd modest negotiating success, notably an agreement concluded at Bali ministerial conference in 2013, which entered force in 2017, designed to expedite the movement of traded goods. But other efforts to reach deals have foundered or have yet to bear fruit. Early hopes that the organisation would evolve into a purposeful permanent negotiating forum have been decisively dashed.

Most of the WTO’s troubles have been years in the making. One is progressive retreat by the US from its traditional leadership of the multilateral trade system, of which it was principal architect and long the guarantor. Though Washington did not threaten to withdraw from the system until Trump came along, America’s willingness and capacity to bear the economic and political costs of leadership have waned steadily since the early 1970s and its commitment to the system has grown more piecemeal, episodic and self-interested. Yet no other trade power appears ready or equipped to step into its shoes.

Another problem is that much of the easy work of trade liberalisation has been done. In the past, it focused on removing border barriers such as tariffs and quotas. Today the biggest obstacles are national rules and regulations. Not only are they inherently complex; but efforts to tackle them intrude on politically sensitive areas that governments and public opinion have long considered the preserve of national policies. US and EU clashes over trade in genetically modified foods and chlorinated chicken show how easily such sensitivities can flare into conflict.

All successful trade liberalisation requires a willingness by governments to reform their own economies—often because economic crises compel them to. That impulse powered the surge of market-oriented reforms that swept the world starting in the 1980s. However, that wave subsided some 20 years ago. Now, the pendulum has swung to the other extreme, with the rise of assertive economic nationalism around the world. That shift does not favour the concessions and compromises essential to successful international negotiations.

The WTO’s quest for harmony has also been complicated by the rapid expansion of its membership. In the General Agreement on Tariffs and Trade, the WTO’s predecessor, rules were made and deals done by a handful of rich economies, led by the US and Europe. The WTO, by contrast, has struggled to forge consensus among a far larger number of players, most of them developing countries, each eager to promote or defend its national interests and armed with the right of veto. Enlargement, intended to enhance the organisation’s institutional legitimacy, has made it more inclusive, but at the cost of its decision-making efficiency.

Finally, China poses the WTO an existential challenge. The US and much of the west once believed the country’s admission to the organisation in 2001 would accelerate its integration with the global economy, encourage it to embrace market capitalism and, progressively, to liberalise politically.

It has not worked out that way. Though China has been a generally co-operative WTO member, it has not changed its economic model. On the contrary, since President Xi Jinping took office in 2013, it has turned the clock back, expanding state control over many sectors of its economy, subsidising national champion industries and discriminating against foreign companies that it once welcomed with open arms. The WTO’s failure to curb those practices underlies Trump’s impatience with the organisation and his resort to sledgehammer tactics against Beijing.

When the WTO was founded in 1995, its first director-general, the late Peter Sutherland, described it as “the pre-eminent institution for managing global economic integration.” That phrase captured the widespread sense of optimism at the time that the organisation would be steward of a more harmonious world order based on increasing cooperation, shared values and common rules.

A quarter of a century later, that optimism has evaporated amid growing global tensions and instability. Today, the WTO looks less like the herald of a bright new era than a monument to a fast-fading vision of a future that has failed to arrive.

The writer is a former World Trade Editor of the Financial Times