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The most prominent new challenge to the world trading system is the stated intention of the recently re-elected US president to apply tariffs of 10 or 20% to all imports, other than from China which would attract a 60% tariff. Conversations are taking place in trade ministries in the nearly two hundred capitals right now: Should they offer inducements to get the US president to back off? Should they retaliate? A few will decide that they cannot afford not to if deals cannot be struck.
Will Chinese exports be diverted to third country markets to the point of causing harm to their economic interests? Will the United States double down and adopt restrictive rules on Chinese content of third country exports to the US market?
From the vantagepoint of the global economy, the overriding challenge is for the members of the WTO to resist the gradual disintegration of the rules-based open international trading system. Will they resist the temptation to protect their own economies more broadly.
Can the damage to the trading system be limited?
Even without the election of Donald Trump, the trading system had serious problems. There was a leadership deficit at the WTO. The US had been absent in this role since at least sometime in the Obama Administration, and did not look like it was coming back. The EU was far less effective than could be hoped. China had not stepped up to invest in the global trading system. The gap was filled to some extent by mid-level economies, such as Japan, Australia and Singapore. This did not suffice.
The willingness to liberalize trade further, on a multilateral basis, had largely disappeared among the WTO's members.
There were also serious institutional problems. The level of successful common effort seen in the Uruguay Round trade negotiations, concluded 30 years ago, was never again reached. Nothing approaching the sweeping nature of the agreement on agriculture, the agreement on technical barriers to trade (relating to product standards), the agreement on trade in services, the agreement on trade-related intellectual property rights was achieved in these last three decades. The WTO's best efforts at negotiating new agreements consisted of the elimination of tariffs on most of world trade in information technology products and conclusion of a trade facilitation agreement. But, for the most part, it operated by a rule by consensus which prevented any agreements from being formally adopted by the WTO's members.
Had this conversation taken place a month ago, we would have addressed whether the WTO could again in the near term have binding dispute settlement applicable to all to enforce its agreements. The answer is now clear—not before 2029.
In different circumstances, we would have been discussing whether the Secretariat and Director-General should have a stronger role in administering the trading system, comparable to the role played by the executives in sister international economic organizations, the IMF, the World Bank, the OECD. Despite repeated pledges by all WTO members, far reaching reforms of this sort were never attempted and now are clearly remote.
The world presented a range of new challenges for which action was needed. These included climate change, other pressing environmental issues, providing greater equity, adopting rules for the burgeoning digital economy, remedying to the extent possible food insecurity, to name a few.
The outlook is for a continuing lack of an adequate response to these challenges.
This need not be the case.
Why should we care about having the WTO at all?
The world has experienced an overall growth in prosperity over the last 80 years since the multilateral trading system was founded unparalleled throughout prior history. Most or world trade flows under its rules, some 75%. Adam Smith taught us to envision a geographically wide market as free of barriers as possible, so that all human productive endeavor would be permitted to excel at what it did best, to specialize, to become more efficient. This the world trading system, the GATT and WTO, has delivered.
- World trade volume today is roughly 44 times the level recorded in the early days of the GATT (4400% growth from 1950 to 2023).
- World trade values today have ballooned by almost 370 times from 1950 levels.
- As of 2023, world trade volume and value have expanded 4% and 6% respectively on average since 1995, when the WTO was first established.
The world's current MFN applied tariffs stand at an average of 9%. For the developed countries, tariffs are at about 3% on industrial goods.
It was essential not only to lower barriers to achieve global prosperity but also to have agreed rules. The WTO's rules, first embodied in the GATT in 1947 call for nondiscrimination in the place of the discriminatory trading arrangements which characterized the era before WWII. A solemn contractual commitment requires WTO members not to raise tariffs above the level that they pledged. National treatment is to be given to imported goods once having entered a market. And there is to be transparency, so that all can know about the measures applied to trade.
A means to settle disputes was provided. Agreed rules, not economic power, was to govern trade.
There was to be a balance between trade liberalization and a WTO member's ability to address harms from trade through trade remedies.
There would be limits to rich countries subsidizing their production at the expense of poor.
There was to be universality so that all countries could gain through membership in the trading system. Testimony to the value of the WTO is that twenty-two more countries, less and least developed, seek to join the 166 current members or the WTO.
This is a world trading economy that was built very substantially through the efforts of the United States. The world trading system was instrumental in ending the Cold War with a bloodless victory and has largely prevented the rise of fascist states. It is a system constructed to support peace.
What steps need to be taken to preserve and enhance the world trading system?
Will the other members of the WTO step forward to preserve and enhance the world trading system? Will the EU move to exert leadership, which would require a major increase in its level of investment in the liberal world order, without the United States as a partner? Will China turn away from its export-led model of growth and emphasize consumption? Will it allow market forces to determine competitive outcomes, as it pledged to do upon joining the WTO in 2001? Will the mid-level economies, the like-minded, join with others, most particularly the EU, to put the WTO on a firmer footing, to make it effective?
Institutional changes are needed. Nonparticipants must no longer be able to block agreements reached at the WTO among those who are willing to move forward. Regional and bilateral agreements must be judged on whether they benefit nonparticipants to an extent that trade diversion does not exceed trade creation. A dispute settlement system must be designed to have all WTO members once again agree to abide by binding outcomes. The balance must be restored between trade liberalization commitments and derogations necessary to remedy trade-harms. The new WTO will have to have a workable national security exception assuring that measures will be exceptional and never cost-free, maintaining the balance of concessions. Trust that the system is fair and balanced must be earned and restored.
These improvements will not be achieved in the next four years, or perhaps even for some years thereafter. It falls to a coalition of the willing to work to preserve the world trading system and to improve it, keeping its values, adding new ones—equity, sustainability, dealing with climate change, with food insecurity, being prepared to deal with future pandemics providing support for solutions through the trading system. This next period should be one that is not met in a defensive crouch but with vision and commitment—vision of the kind that created the European Union, the African Continental Free Trade Agreement, and in the first instance, GATT and later the WTO.
This is what is needed. It can be achieved, if necessary, as in the near term is likely, without the participation of the United States.
It will have to be achieved in the face of the US reversing its trade policy from what it was over thirteen presidencies, from Franklin Roosevelt to Barack Obama.
In this period, it may be that the global economic outlook will be less bright than it should be, and trade restrictions may become more prevalent. The US economy would fare less well in a far less prosperous world.
Over time, however, the world's nations will rise to the challenge. As with Newtonian physics, there is also a law of economics. It strives toward individuals making sound economic decisions, and governments allowing them to do so. An improved world trading system will ultimately be achieved to deliver the benefits of doing so.
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