The WTO at 30: The return of higher tariffs

My thanks to Director-General Ngozi Okonjo-Iweala for the opportunity to share my views in commemoration of the WTO’s three decades. Participants were asked to assess current challenges, examine the WTO’s role in meeting them, and look to the institution’s future. Five years ago, I spoke on behalf of my WTO colleagues on the occasion of the 25th anniversary of the founding of the WTO. The event took place in the middle of the COVID pandemic, and I delivered my remarks online in the largely unoccupied hollow expanse of the WTO Council Room. The event today once again takes place under conditions of stress. The difference is that the current crisis is created by national policies and the threat is directly to trade.

When the multilateral trading system came into being on January 1, 1948, under the General Agreement on Tariffs and Trade (GATT), the trading world was in an even worse condition than during COVID or additional layers of tariffs. Europe and Japan lay in ruins. China, Eastern Europe, and Russia, like much of the world, bore the deep scars of war. The Global South was striving to enter a post-colonial era. Then, something very positive happened. Successively, trading nations understood that substantial economic progress could be made through global economic integration, through having a rules-based global trading system. The new institutional arrangements delivered economic growth unparalleled in human history. But there is still much more work to be done.

It is all too easy to conclude that the Trump April 2 tariffs plan mark the beginning of a new era for international trade policy, a departure and new course from all than went before. The prior, increasingly open, rules-based system which was applied by the United States from its inception with relatively few exceptions up until the announcement in the White House Rose Garden has clearly been cast aside by the Trump Administration. America had led that world order for most of its history. Now that system is in crisis. Obligations are in many cases simply ignored. Chaos is threatened, and those engaged in trade got a taste of it, before President Trump announced a 90-day suspension of higher than 10% tariffs, on the first day they were to be applied, April 9. An exception to the tariff truce is the trade war between the United States and China, with each applying tariffs to the other above 100%. This is the current state, at least when these words are drafted, of trade relations between the world’s two largest trading countries.

How does this all end? Where are the brakes on conduct that on its face clearly does not conform with the rules. This is more than a problem limited to the United States, although it is the US that has been a primary actor in the current great uncertainty in world trade. What must be added in any analysis are the responses from other countries, any underlying trade problems that may exist, deals that might be struck in bilateral negotiations with the US, and from potential and actual retaliatory measures. Constraints on the US administration must be found domestically, within US governmental structures (Congress and the courts) and in the impact that financial markets have on the economy. Constraints can also be found internationally in responses abroad of whatever kind (trade concessions and/or retaliation).

What is the potential role for the World Trade Organization (WTO), the steward of the world trading system, in these circumstances? This must be a key question for consideration at this juncture in the life of the WTO as it turns 30 and in the almost 80-year-old liberal international order, of which the world trading system is a fundamental part.

US trade policy and its constraints

On the current trajectory, the odds of the US slipping into recession are increasing and serious damage to world trade is to be expected. While a return to the world as it existed previously is highly unlikely, a US rethinking of its current plans for tariffs can come about in a number of ways. The easiest to implement is that the US President removes (even temporarily) the country-specific tariffs in excess of the 10% base that he plans, which a number of us predicted on April 8 and which happened on April 9 mid-day. The inducements for him to do so are the costs to the economy from a steeply declining stock market and the negative reactions of business and consumers to uncertainty, but the claimed rationale were the offers of concessions from 50 to 75 countries. Some of any settlements reached in urgent bilateral negotiations may not adequately take into account the interests of others. There may be lasting retaliation by a number of America’s trading partners. The US Congress can reclaims its constitutional role in imposing tariffs. But legislating is a slow business and is especially difficult if opposed by the President. It would take a two-thirds vote in both houses of Congress to override a presidential veto, which has been threatened.

It is far more likely that the US Supreme Court will find that the President does not have authority under prior delegations by Congress for the imposition of most of the tariffs in question under the International Economic Emergency Powers Act (IEEPA). A finding that the President acted beyond his delegated authority under the International Economic Emergency Act (IEEPA) as always likely, in my view, for imposing a blanket tariff and for the vast array of tariffs announced on April 2 styled “reciprocal” tariffs. This outcome hould be beyond question, but decisions of this Supreme Court against this president are not fully predictable. It is hard to see how establishing tariffs against some 60 or so countries at levels above 10% and the rest of the world at 10% does not constitute the full exercise of a nondelegable function of setting tariffs vested solely in the Congress. A caveat: how quickly the Court makes its determination is within its discretion. Moreover, some tariffs under the authority of IEEPA may be found to be justified under this delegated authority. This could happen if the Court decides that the President was exercising his foreign affairs power along with any delegation of authority in a time of emergency with respect to China, given the strategic rivalry that exists between the two countries.

Potential roles for the WTO

In applying the April 2 tariffs, President Trump is indisputably acting in violation of America’s international obligations. Although this is beyond question, it is likely that some or even many WTO members will nevertheless file WTO dispute settlement cases against the United States if for no other reason than to use the dispute settlement system to establish as a formal matter that the US is acting contrary to its international obligations and so justified a trade response. To avoid an adverse finding becoming final, the US would likely appeal any adverse panel ruling to the Appellate Body, a body that ceased to exist over five years ago when the US blocked appointments to it. The US would thus, if it stays in the WTO (it is not at present current on its payment of its dues) freeze any panel determination by the ruse of what has become called “appealing into the void”. Since many countries may have retaliated against the US already, in violation of their own obligations, the legal minuet of WTO dispute settlement would have had no direct effect on trade. There is also a question of timing. Panels, if established, might not reach their conclusions any time soon, hearing whatever the US proffered and weighing it against the system’s rules, assuming the US participated in the proceedings.

The WTO must strive to avoid the fate of irrelevance at a time of international trade crisis. If one walks along Lake Geneva from one’s hotel to the WTO’s building, one passes the Palais Wilson, once home to the League of Nations. The League is known for its failures, the most well-known of which is its ruling in 1935 against Italy, voting for economic sanctions that were never fully applied. Italy ignored the sanctions, quit the League and ultimately annexed and occupied Abyssinia after it had won the Second Italo-Ethiopian War. A primary result of the crisis was discrediting the League.

There are few, if any, WTO members—the 166 members range in economic heft from the European Union, China and the United States, to the poorest and smallest members, such as Chad, Benin, Vanuatu and Nauru—whose economies will be left unscathed by the promised “reciprocal” base line Trump tariffs, should they be imposed, by retaliations against the measures, and by the trade diversion that would take place. Need the WTO necessarily be no more than a bystander to the onset of this global trade war? Its ingrained means of proceeding by consensus (in effect, requiring unanimity), a blocked dispute settlement system (at least insofar as the US is concerned), and the use of threats to its budget to control activities, could impair its ability to rise to this occasion. But its members should strive to avoid this outcome.

The issues surrounding the looming trade war should be deliberated with the seriousness they deserve in a dedicated formal setting at the WTO. There is precedent and authority for accomplishing this. When the United States was clearly facing a serious balance of payments crisis in August 1971, President Nixon imposed a 10% import surcharge. The contracting parties to the GATT (predecessor to the WTO), the major trading nations of the time, convened a working party immediately to address the situation. In that pragmatic era, the working party was to examine the US surcharge and other measures that “have an impact on international trade”, look at the balance of payments difficulties, consult with the IMF, consider the effects on the economies of others, record the exchanges of views, and submit a report within a month’s time. It was part of a process of the international community coming to grips with that crisis. This was not part of any litigation. The GATT Council established the working party “without prejudice to the legal issues involved.”

It is true that countries affected by the Trump tariffs can resort to dispute settlement and ask that a working party rather than a panel be convened, which could occur very quickly. That might not be the best way to proceed, however. Any findings would be seen as politically motivated rather than legally sound, and the net result from invoking formal proceedings might be that the United States opts to leave the WTO, which might only bake in divisions in global politics, reducing the likelihood of restoring some form of equilibrium to the world trading system. This is provided for in an Article XXIII (formal dispute settlement) proceding.

There is another option. The current conditions of world trade should be made the subject of a Trade Policy Review (TPR). The TPR is designed to provide surveillance of national trade policies, which the WTO website describes correctly as “a fundamentally important activity running throughout the work of the WTO”. At the centre of this work is the Trade Policy Review Mechanism (TPRM). All WTO members are reviewed individually, but the extraordinary TPR proposed here would not be confined to the trade policies of any individual country. The motive for convening this TPR would be that current circumstances call for complete transparency, of new measures, particularly tariffs, retaliatory measures, trade measures which are in whole or in part stimulated by likely trade diversion, and the results of any negotiations resulting the amelioration of unilateral measures or otherwise having systemic implications. How else would members outside of any given bilateral negotiation, particularly developing and least developed countries, and members of the public, know how their interests are being affected by bilateral negotiations. The review would be ongoing for so long as is necessary. It would be based on the reporting by the Secretariat, supplemented by information supplied by the WTO members. As with all TPRs, it would not be considered a prelude to litigation.

The WTO is built on the foundation of transparency, of reporting, analysis and monitoring. When there is a proliferation of measures affecting trade flows, this calls for the use of a special TPR, this one horizontal, examining trade measures from any source, and not vertical, having a focus on a single WTO member. The circumstances requiring the convening of this review are of such importance that if its establishment were not agreed by consensus, a vote would be automatically triggered, and then, commanding support of a majority of members, one member having one vote, it would be constituted. Optimally, this would be a process led by an ambassadors drawn from the members, acting not in their country representational role, but as facilitators of the review. There would similarly be discussants and presenters, all supported by the Secretariat acting without political interference.

A meeting of the General Council can supplement, but cannot replace the utility of a more structured process made possible by TPRM.

Needed WTO Reforms

There has never been a stronger need for strengthening the WTO as an institution. I have written about this often, including in my 2023 book, entitled, Revitalizing the World Trading System, (Cambridge University Press). For today’s purposes, I will just list several necessary changes:

• Willing members must be able, once again, to conclude agreements within the WTO in which not all members participate.
  • The nonparticipant veto must not be allowed.
• Restoration of binding dispute settlement for all members should be negotiated.
  • This would probably require
    • Revision of the WTO essential security exception to exclude the provision’s use as a substitute for safeguard measures
    • Restoring the balance between trade liberalization and the use of trade remedies when appropriate
    • Dealing effectively with non-market government economic interventions
• Effective governance of the organization must be constituted
  • A structure similar to that of the Bank and Fund should be created, with a Board of Permanent Representatives (ambassador-level), similar to Boards of Executive Directors
• Executive leadership is needed
  • The Director-General should have a similar role to that the chief executives of the World Bank (its President) and the International Monetary Fund (its Managing Director), tasked with chairing meetings of the board of local member representatives, providing policy leadership, making proposals for adoption by the members, participating in setting the agenda.
• Funding
  • The organization should be placed on an independent financial footing, with funding no longer used as a backdoor method for controlling the organization’s agenda by individual members.

Conclusion

As I wrote recentlyinWill the world trading system survive Trump’s tariffs?, justbefore April 2nd, there is cause for a degree of optimism that, but for the United States, in the main, WTO members are likely to largely maintain their commitments toward each other. With many bilateral negotiations envisaged, the coming trade war may also be a limited war. The WTO will endure due to a combination of countries political commitment to the WTO, a belief that their countries would be much worse off without the WTO-administered world trading system, and, although this is more a hope for the future, a wish to keep open the possibility that the United States recommits to a rules-based trading system at some point.

As one sharp American critic of the system once acknowledged, “If the WTO did not exist, we would have to invent it.” The leaders of the world’s trading countries and their trade ministers should add, “These are the rules we will live by until we invent something better.” That would constitute a standstill, valuable, but more can be achieved. The leaders who believe in having a global trading system should go beyond this. They should commit themselves to strengthening the WTO as an international organization. This will likely pay very large dividends for a relatively modest investment.

Member countries should act in the spirit of enlightened optimism displayed by Nelson Mandela when he spoke at the newly created WTO in 1998:

As we celebrate what has been achieved in shaping the world trading system, let us resolve to leave no stone unturned in working together to ensure that our shared principles are everywhere translated into reality.