26 Aug 2020

Re-examining WTO’s role in the aftermath of Covid-19

Dr. Ahmed El Safty

The idea of an international organization dedicated to promoting free global trade has always been controversial. Indeed, the history of the establishment of the World Trade Organization (WTO) and the rounds of negotiations under its mandate is its most unequivocal evidence and should explain the dwindling influence of the organization and the challenges it faces during the Covid-19 pandemic era, and even before it.

The WTO was officially established in 1995 to replace the General Agreement on Tariffs and Trade (GATT), which was established in 1948 to be a precursor to a full-fledged organization dedicated to free trade. GATT came into the picture after the International Trade Organization (ITO) failure, which was to be a United Nations specialized agency specializing in international trade. However, the United States and some other countries did not approve the treaty and, as a result, never came into effect.

It took the international community almost half a century to switch the agreement known as GATT to the WTO. Still, the apparent disagreement among the key players and main groups on the major international trade issues always made the work of the new organization challenging and its success frequently limited.

Ironically, the WTO’s challenges intensified when the international community started noticing the importance of international trade and specialization to achieve economic efficiency and prosperity, utilizing the global value chains. According to the WTO, the dollar value of world trade has nearly quadrupled since 1995, while the real volume of world trade has expanded by 2.7 times. While the average tariffs have almost halved from 10.5 percent to 6.4 percent, and today’s trade within the value chains accounts for nearly 70 percent of total merchandise trade. The advancement of international trade far outstrips the two-fold increase in world GDP over the same period[1].

Despite the rise in international trade, the WTO faces mounting challenges. These challenges surfaced almost immediately after its establishment in 1995 and followed the success of the Uruguay Round of negotiations – the eighth and last round under GATT – from 1986 to 1994. The Uruguay Round achieved significant success in WTO’s establishment, in reaching the Multilateral Agreement on Trade in Goods, and the Multilateral Agreement on Trade in Services, in setting standards and mechanisms for protecting intellectual property rights, dispute settlement, and reviews of governments’ trade policies.

However, the following round of negations, the Doha Round – which started in 2001 and never finished – failed and stalled over differences between developing countries and developed countries (and among themselves) on industrial tariffs, non-tariff barriers to trade, and agricultural subsidies.

The challenges to the WTO are intensifying lately, even before the Covid-19 pandemic. Governments have introduced trade restrictions covering a substantial amount of international trade, affecting $747 billion in global imports in the past year alone. The dispute settlement system suffered a setback at the end of 2019, when member countries could not agree on intended reforms[2].

WTO and the US: A rocky road ahead

The US administration’s current challenges for the WTO could be highlighted against globalization and the confrontation with China regarding trade, investment, and government intervention issues. The aggressive US stance against the WTO took several forms lately, ranging from the attempt to strangle the WTO’s Appellate Body, to threatening to withdraw from the international organization completely.

The Appellate Body is a cornerstone for the Dispute Settlement System of the WTO. It hears appeals against the panel’s findings established by the Dispute Settlement Body that works on settling international trade disputes. The body ideally consists of seven members, including the Chairman. By 2019, the memberships were reduced to three – the minimum number needed for hearing a case – as the US blocked the appointment of new members once the terms of old members ended. The situation turned into a crisis by December 2019, as two of its three remaining members’ four-year terms came to an end, and the US continued blocking the appointment of a new member. This meant that the body was left without an adequate number of members and practically ceased functioning[3].

The US administration’s frustration with the WTO culminated with calls and threats to withdraw, as, by law, the US has a chance to vote every five years on staying inside the WTO[4]. This position coincided with the US administration downplaying the importance of globalization and increasingly focusing on strengthening the domestic economy with a zero-sum game in trade, i.e., the gains for the US will only be obtained by taking them away from other countries such as China. This reflects the US administration’s frustration that the WTO could be obsolete since the collapse of the Doha Round, and the perceived negative impact on the US economy since China joined the WTO in December 2001.

The US complained that China took unfair advantage of its membership in the WTO, and gained significantly at the expense of US jobs and industries, as the competition from low-wage Chinese labor. Also, the rapid movement of US companies offshore hit the US middle class much harder than expected[5]. The US accuses China of unfairly benefitting from its ability to claim special privileges inside the WTO as a developing country, despite boasting the world’s second-largest economy[6]. Also, the US is angry that when China joined the WTO, the US made huge concessions expecting China to conform to global trade standards. China didn’t reciprocate and even moved in the opposite direction by letting the state take a more prominent role in the Chinese economy. The US also complains about China’s abuse of government subsidies to the country’s firms, which gave them an unfair competitive advantage. Moreover, the WTO failed to deal with the practice.

However, the US is not alone in this regard. Other countries concerned about the abuse of the system are also actively seeking solutions outside the current WTO regulations. For example, in 2017, Japan brought together the US and the EU in a joint bid to set new global rules on state subsidies and forced technology transfers. With the help of other countries, the US also tried to limit WTO members’ ability to grant themselves developing status, which gave countries such as China and Singapore, a long time to implement WTO agreements[7].

The current stance by the US is expected to enhance pressure on the WTO. It could lead to its failure as the WTO focuses on equal treatment for its member countries regardless of the economy’s size and the ability of some to be market makers. These principles are not compatible with the US administration’s vision of “America First”, which makes it a priority for the US to have the ability to formulate its trade policy. The country takes advantage of its relative weight in the global economy and international trade when it conducts trade negotiations, bilateral or multilateral, outside the scope of the WTO.

Frustration over the distribution of free trade gains

From their point of view, many developing countries felt frustrated by the outcomes of the Uruguay Round. These countries feel that they provided significant concessions, opened their borders for trade flows benefiting the developed countries, and did substantial reforms to trade policy, expecting to face fewer hurdles to their trade flows. However, the benefits didn’t materialize similar to the ones achieved by the developed countries. Under Uruguay round, developing countries agreed to tariff cuts even deeper than those agreed by developed countries, to bind nearly the same percentage of their tariffs as developed countries. The problem these countries see is the continued widespread trade protectionism against their products, which takes forms not perceived under the standard WTO rules.

Many developing countries see that developed countries follow policies and regulations that protect their economies and jobs from foreign competition, using high subsidies and tariffs on agricultural products, and abusing anti-dumping measures and safeguards. Also, the developing countries accuse the developed countries of the establishment of stringent labor and environmental standards, with announced objectives of ensuring a “leveling of working conditions” between developed and developing countries and avoiding “social dumping” by the latter. This idea of developing countries competing unfairly by denying their workers fundamental rights and decent wages and working conditions raises the danger that the movement in the developed countries to establish labor and environmental standards can easily be abused by protectionists[8].

The impact of these fears was apparent in the Doha Round and contributed to its failure. From the beginning, developing nations were reluctant to make concessions because they felt that the Uruguay Round failed to deliver a great deal of what it promised them and insisted on making the Doha Round a genuine development round. The Doha Round collapsed in part over disagreements regarding agricultural subsidies between developed and developing countries and among developed countries themselves[9].

The Covid-19 Pandemic: A perfect storm of challenges

As the WTO faced mounting problems, the Covid-19 pandemic hit in early 2020 to intensify these challenges. Countries closed their borders, and nationalistic agendas started to prioritize free trade to save jobs and ensure economic growth. Numerous countries began to impose trade restrictions – on imports and exports – under the pretense of national security.

As a result, world trade is expected to fall by between 13 percent and 32 percent in 2020. Nearly all regions will suffer double-digit declines in trade volumes in 2020, with exports from North America and Asia hit the hardest. Trade will likely fall steeper in sectors with complex value chains, particularly electronics and automotive products[10].

According to the WTO, trade was already slowing in 2019 before the virus struck, weighed down by trade tensions and slowing economic growth. Even world merchandise trade registered a slight decline of ‑0.1 percent in volume terms during 2019 after rising by 2.9 percent in the previous year, while the dollar value of world merchandise exports in 2019 fell by 3 percent to US$ 18.89 trillion[11].

As for trade in services, the WTO predicts that it may be the component of world trade most directly affected by Covid-19 through the imposition of transport and travel restrictions and the closure of many retail and hospitality establishments. However, some services may benefit from the crisis, such as information technology, the demand for which has boomed as companies try to enable employees to work from home, and people socialize remotely[12].

As international trade plunges as a consequence of the Covid-19 pandemic, the least developed countries (LDCs), specifically, are facing the most daunting challenges during a time where the WTO is least effective. The lack of resources to support an economic rebound is compounded by LDCs’ dependence on a limited range of products exported to a few markets, some of which have been those worst affected by the outbreak[13]. The value of LDCs exports of goods and services declined by 1.6 percent in 2019, a greater decline than that of world exports, and the share of LDCs in world exports also registered a marginal decline, falling to 0.91 percent in 2019. The expected downturn in trade in 2020 is likely to be even more severe for LDCs than at the global level[14].

How to revive the WTO?

The WTO, in its current state, is not suited to tackle the challenges facing international trade. There is a need to reconfigure the international organization to make it ready to respond more efficiently to the current health and economic crises resulting from the pandemic.

According to Alan Wm. Wolff, the Deputy Director-General of the WTO, the institution needs to tackle the following issues to survive and be more relevant to international trade[15]:

  • Ensuring equality: All WTO members have equal rights within the institution’s framework even though there is little equality among nations. In the WTO, the members’ capacity level differ, and the degree of uniformity among member countries depends on whether the members with greater capacity take on proportionally greater responsibilities for the success of the collective endeavor. The issue of greater responsibility by members with higher capacity needs to be stressed in WTO’s work to maintain the gains from free international trade and to improve it further.
  • Focus on non-discrimination: Non-discrimination under international trade and the rules of the WTO takes many forms: first, the WTO promotes the most favored nation (MFN) treatment, which requires a member country to provide any concession, privilege, or immunity to one nation in a trade agreement to all other WTO member countries[16]. However, many bilateral and some regional trade arrangements are designed to offer better treatment to imports from their member countries than products from other countries. Second, the WTO promotes national treatment, a requirement of non-discrimination between domestic and foreign products for internal purposes, such as taxes. However, many member countries do not follow this principle and escalate trade wars under the pretense of national security and antidumping. Such practices need review and more robust rules for application to guarantee fair, free trade to WTO member countries.
  • Rethinking sovereignty: Sovereignty is mainly related to member countries’ ability to have a “policy space” when they commit themselves to the WTO rules. However, the use of policy space possibly can result in the action of one country having adverse consequences for others. A value of the WTO concerning the exercise by members of their national sovereignty is the space the WTO agreements leave for pursuing national objectives. However, the concept of sovereignty under the WTO needs to be clarified, as without constraints, an action by a country under the “policy space” concept, could lead to reciprocity from other member countries that could undermine free international trade.
  • Focus on development: The WTO must rethink its policies, facilities, and the technical assistance it provides for its developing member countries. The premise that trade and specialization will lead to efficiency gains is the foundation of international trade. However, the lack of market and political power for numerous developing countries often results in the perceived unfairness of the global trade system and its governing body, the WTO. A more realistic definition for member countries to qualify as developing countries is also required to guarantee fair treatment to member countries. This will also minimize the resistance and counter-measures from the developed countries who see loopholes in applying these advantages.
  • Enhancing transparency: Even though the WTO rules and processes require information on national measures to be updated and comprehensive, many countries do not provide this degree of transparency. This aspect needs action as increasing transparency in trade practices, and policies would expand the benefits for all WTO members.
  • Reciprocity: In international trade negotiations under the WTO, the degree of flexibility, policy space, and a temporary limitation on sovereignty is often justified by obtaining reciprocal action by other members. That means concessions given are made against concessions received. However, this treatment is not always involved with decisions on trade policies, and WTO members should think of this within the matter of fairness and the need to make a net positive contribution, i.e. giving more than they directly receive, as the positive externalities of more free and fair trade will benefit virtually all the member countries.

In conclusion, to face the mounting challenges facing the WTO before and after the Covid-19 pandemic, new directions and rules need to be explored, and member countries should rethink their trade practices and policies to guarantee the continuation of the gains from free international trade. At the same time, a new understanding of how to solve the grievances between developed and developing countries is needed to prevent harmful and questionable practices from derailing international trade and guarantee the smooth work of the global value chains.

 
References:

[1]World Trade Organization, “The WTO’s 25 years of achievement and challenges”, January 1, 2020,

 https://www.wto.org/english/news_e/news20_e/dgra_01jan20_e.htm

[2] Ibid.

[3] Aditya Rathore and Ashutosh Bajpai, “The WTO Appellate Body Crisis: How We Got Here and What Lies Ahead?”, Jurist, April 14, 2020, https://www.jurist.org/commentary/2020/04/rathore-bajpai-wto-appellate-body-crisis/

[4]  Keith Johnson, “U.S. Effort to Depart WTO Gathers Momentum”, Foreign Policy Magazine, May 27, 2020, https://foreignpolicy.com/2020/05/27/world-trade-organization-united-states-departure-china/

[5] Ibid.

[6] Keith Johnson, “How Trump May Finally Kill the WTO”, Foreign Policy Magazine, December 9, 2019. https://foreignpolicy.com/2019/12/09/trump-may-kill-wto-finally-appellate-body-world-trade-organization/

[7]Philip Blenkinsop, “U.S. trade offensive takes out WTO as global arbiter”, Reuters, December 10, 2019,  https://www.reuters.com/article/us-trade-wto/us-trade-offensive-takes-out-wto-as-global-arbiter-idUSKBN1YE0YE

[8] Dominic Salvatore, “International Economics”, 11th edition, John Wiley & Sons, 2013.

[9] Ibid.

[10]World Trade Organization, “Trade set to plunge as COVID-19 pandemic upends global economy”, April 8, 2020,

 https://www.wto.org/english/news_e/pres20_e/pr855_e.htm

[11] Ibid.

[12] Ibid.

[13] World Trade Organization, “WTO report looks at trade developments in poorest countries in wake of COVID-19”, June 10, 2020,

https://www.wto.org/english/news_e/news20_e/covid_10jun20_e.htm

[14] Ibid.

[15] Alan Wm. Wolff, “COVID-19 and the future of world trade”, VOXEU, June 1, 2020, https://voxeu.org/content/covid-19-and-future-world-trade

[16] Will Kenton, “Most-Favored-Nation Clause”, Investopedia, June 12, 2019,

https://www.investopedia.com/terms/m/mostfavorednation.asp#:~:text=A%20most%2Dfavored%2Dnation%20(,equal%20treatment%20of%20all%20countries.

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