Trade War: Will the WTO Survive?

Trade War: Will the WTO Survive?
Failure of the World Trade Organisation (WTO) to quell the rising wave of protectionism across economies has independent experts questioning the credibility and survival of the global regulatory watchdog..

Failure of the World Trade Organisation (WTO) to quell the rising wave of protectionism across economies has independent experts questioning the credibility and survival of the global regulatory watchdog. 

In 2017, WTO Director-General Roberto Azevedo warned that the biggest risk to the global trade order is one country taking unilateral action that causes a retaliatory, domino effect throughout the system. 

Background 

The World Trade Organization (WTO) was established on January 1, 1995, under an agreement reached during the Uruguay Round of multilateral trade negotiations. The Uruguay Round was the last of a series of periodic trade negotiations held under the auspices of the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT). 

The WTO is the most important intergovernmental organisation to regulate and govern world trade. It has 140 members and 32 observer governments (most of which have applied for membership), representing over 95% of world trade. Agreements administered by the WTO cover a broad range of goods and services and apply to virtually all government practices that directly relate to trade, such as tariffs, subsidies, government procurement, and trade-related intellectual property rights. Coverage of the agreements is growing through negotiation. 

In March, President Trump announced global import tariffs of 25% on steel and 10% on aluminium. Canada, Mexico, European Union and India have announced retaliatory measures which has slowed supply chain dependent economies across the world and consequently disrupted global markets. The US further imposed tariffs worth over $150 billion on China, who retaliated with $50 billion worth of tariffs. 

US Trade representative Robert Lighthizer said the counter-retaliatory tariffs imposed by the five nations, which make a combined total of $2.85billion (£2.1billion), are illegal under WTO rules. US, a founding member of the WTO, has withdrawn from the TPP and is renegotiating NAFTA. The WTO is one of the last major multilateral agreements that President Trump has not eschewed. 

Analysis 

In the report titled ‘Revitalizing Multilateral Governance at the World Trade Organization,’ experts said that, “Sticking to status quo modes of operating is a recipe for the institution’s gradual demise.” In order to prevent erosion of WTO’s credibility, member states should avoid “unilateral use of protectionist trade policies and ensuring that disputes are resolved effectively and efficiently.” 

Equal trading is ensured among all members through the Most Favoured Nation (MFN) clause. It requires a country to provide any concessions, privileges, or immunities granted in a trade agreement with one nation to all other member countries. Thus, if one country raises import duties by 3%, all member states must increase duties on that state by 3%.  

US cited “national security” in order to circumvent WTO commitments. India, China, Russia, Japan, Turkey and the European Union have all dismissed that claim, citing inconsistencies with the Agreement on Safeguards, entitling them to a combined $3.5 billion in annual compensation. The US had also exceeded the maximum import tariff allowed by the WTO, Moreover, the tariffs were not applied uniformly to steel and aluminium imports from all suppliers, thus, violating the MFN principle. 

Under WTO rules, the United States has 60 days to settle the complaint, after which India could ask the WTO to set up an expert panel to adjudicate. However, uncertainty is hanging over the WTO’s dispute settlement system because President Trump is vetoing the appointment of new appeals judges. Further, the US has threatened to impose  disciplinary duties on countries that export more to the US than they import from it. 

Critics judge the current system as no longer fit for purpose in a world of international supply chains and emerging new trade powers. While the global financial crisis and the subsequent collapse in international trade did not trigger an immediate and rapid retreat into protectionism, recent years have nevertheless seen growing state intervention in trade flows and a gradual, cumulative rise in trade distortions. 

US and Europe’s refusal to cut agricultural subsidies was the first failure of the 2001 Doha Round of trade deliberations. Intellectual property rights and the lack of piecemeal sub-agreements further deteriorated hopes for a successful multilateral agreement. Led by Bernard Hoekman, 14 experts wrote the report and urged WTO’s 164 member states to agree on a new work programme that will address trade-distorting policies to preserve the multilateral rule-based trading system. 

Counterpoint 

The problem is that the attacks from the U.S. president are not striking a unified, strong organisation determined to defend itself. On the contrary, the WTO has been sidelined for some time. It has been largely forgotten by supporters of free trade because most significant trade barriers were removed decades ago. 

Assessment 

Our assessment is that the relevance of the World Trade Organisation seems to be on a gradual decline. We believe that it is imperative for the intergovernmental watchdog to maintain some influence over global trade through the reorientation of existing framework. We feel that WTO must provide express rulings concerning the tariff war before it transforms into a financial crisis.

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