A Requiem for the World Trade Organization

The most fundamental issue clouding the WTO’s prospects is whether it is too invasive – whether it does too much to compromise national policy autonomy – or not invasive enough. A column by Barry Eichengreen.

Barry Eichengreen
«Frustrated by this lack of consensus, countries could turn to bilateral and ‹plurilateral› agreements.»

A requiem is typically played at a funeral. There is now the very real question of whether we should be playing one for the World Trade Organization. The terms of two remaining members of the WTO’s Appellate Body expire this month, and the Trump Administration has blocked the appointment of replacements. If governments are denied due process – if they unable to appeal WTO decisions on the propriety of their policies – then they will refuse to allow the WTO to take such decisions in the first place. Cue the funeral march.

It is worth asking how we got to this point. A simple answer is Donald Trump. Trump is a self-proclaimed «tariff man,» which is to say he opposes the very concept of a rules-based trading system. He displays temperamental disregard of anything that hems in his freedom of action, not just global rules but, indeed, the U.S. Constitution. He is critical of international agreements such as NATO and the WTO that do not put «America first.»

In this view, the WTO’s existential crisis is a byproduct of the 2016 U.S. presidential election. The uncertainty is whether, once Trump is no longer president, the United States will walk back from the brink, and if so how quickly rules-based trade will be restored.

Agreement no longer up to date

But another view is that the crisis in the WTO reflects deep-seated problems with the organization and the global trading system itself. A small point is the inefficiency of WTO decision making, starting with the Appellate Body itself. Cases drag on forever. Appellate Body members work part time, and their Secretariat has few resources. To avoid having to start over, members of the Appellate Body decide cases that continue after their terms have expired, something that does not enhance the legitimacy of their decisions.

A more substantial point is that the WTO agreement is no longer fit for purpose. It was negotiated before China became the world’s leading trading power and prior to the advent of digital commerce. China’s weight in world trade has brought to the fore hidden subsidies for state enterprise and forced technology transfer. These are the issues at the top of the U.S. policy agenda, yet the WTO agreement says little about them. It provides scant guidance on which aspects of «China 2025,» Beijing’s state-directed development plan, are WTO compliant and which are not. It fails to address forced technology transfer. The European Union has issued a «concept paper» proposing rules to prevent forced technology transfer, but the WTO has yet to adopt them.

Turning to digital commerce, the EU proposes to tackle barriers to cross-border sales, which is standard WTO parlance and procedure. In addition it proposes guaranteeing the validity of e-contracts and signatures, consistent with the WTO’s standard-setting function. But it also proposes rules prohibiting the forced disclosure of source code. Moving in this direction would again require WTO rules against forced technology transfer. Since WTO decisions are taken by consensus, it is far from clear that China will agree to such measures.

U.S. and China not opting in

It is possible, of course, that China’s attitude will change now that it is a producer rather than just a consumer of intellectual property, and now that it is a leader in e-commerce. But another possibility is that China is more no more likely to agree to fundamental changes in its national development model in the context of WTO negotiations than it is in bilateral trade talks with the United States.

Frustrated by this lack of consensus, countries could turn to bilateral and «plurilateral» agreements. The U.S. and willing partners could negotiate rules for technology transfer and digital commerce amongst themselves. They could mount a united front in negotiations, creating pressure for China to opt in. Similarly, governments disturbed by Trump’s arbitrary and capricious trade actions could negotiate free trade agreements amongst themselves, along the lines of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (the TPP without the United States), thereby pressuring the U.S. to opt in.

In practice, unfortunately, such agreements are costly and difficult to negotiate and operate. They are second best to global agreements in that they give rise to trade diversion as well as trade creation. So far, they have not shown the capability of forcing the U.S. and China to opt in.

Core issue «judicial overreach»

The most fundamental issue clouding the WTO’s prospects is whether the agreement is too invasive – whether it does too much to compromise national policy autonomy – or not invasive enough. The United States seems to want it both ways. On the one hand it objects to the extension of «special and differential treatment» to self-designated developing countries. Such countries receive access to foreign markets without having to grant comparable market access themselves. Half of OECD members, including for example South Korea, enjoy this designation despite long since having graduated to middle-income status. Forcing them to open their markets, in the manner of the U.S. and Europe, would be a move in the direction of a level playing field.

In addition, there are those in the United States who insist that the WTO should do more to rein in unacceptable practices at the national level. Senator Elizabeth Warren’s trade plan, published in conjunction with her campaign for the Democratic Party presidential nomination, would require countries to adopt international standards for labor and human rights, to sign the Paris climate accord, and to adhere to anti-corruption and money laundering agreements in order to be party to any trade accord.

But at the same time the U.S. objects to the «judicial overreach» of the Appellate Body. Even before the advent of the Trump Administration, U.S. officials argued that the Appellate Body diminished the rights of governments by reinterpreting WTO agreements on its own volition, limiting members’ freedom of action in varied areas including subsidies, antidumping duties, anti-subsidy duties, standards, technical barriers to trade, and safeguards.  The WTO, in this view, prevents national governments from making trade and industrial policies as they see fit.

Looking for a way out

One effort at squaring this circle is the recent joint statement of three dozen U.S. and Chinese economists and legal scholars («U.S.-China Trade Relations: A Way Forward»). They argue that the WTO should focus on discouraging national policies and practices that are explicitly beggar thy neighbor while permitting the rest. As examples of beggar-thy-neighbor policies, they list closing domestic markets to foreign investors with the goal of achieving economies of scale on world markets (think e-commerce), and systematically undervaluing currencies (think the renminbi before 2015). As examples of «the rest,» they cite industrial subsidies and the maintenance of SOEs, which, they argue, benefit countries like China while not damaging the rest of the world.

This approach is fine conceptually, but it is not clear that it works practically. Is it really the case, for example, that the Chinese government’s subsidies to SOEs hurt only individual U.S. firms but not the U.S. economy as a whole, even in the long run? Does it make sense to argue that closing China’s markets to foreign investment can allow Chinese firms to acquire scale and dominance of world markets, but that subsidies for those same firms cannot?

Be this as it may, this group of scholars is focusing on the right question. Agreeing on what constitutes «judicial overreach» and what are the fundamental issues for the WTO is key to bringing the institution back to life.