Discussions

Is the WTO under threat?

Is the WTO under threat?

26 Sep 2017

Gerhard Erasmus, tralac Associate, comments on the state of the multilateral trading system

Since its inception in 1995 the World Trade Organization (WTO) has been the formal custodian of the rules-based multilateral trading system. It has served this purpose well, even though agreement on new rules has been difficult. A new Trade Facilitation Agreement entered into force in February 2017 but the Doha Development Round, launched in 2001, has remained stalled. Its aim has been to achieve a major reform of the international trading system through the introduction of lower trade barriers and revised trade rules. Most observers now think it will not be adopted as a comprehensive Round. Developing nations, in particular, may not see the changes they have hoped for.

The WTO is, in addition to a mechanism for developing new rules, a forum for promoting transparency and for resolving disputes in a rules-based manner. The 164 member states are informed about national measures through a system of notifications, and can refer disputes about the interpretation or application of the WTO’s legal instruments to the Dispute Settlement Body.

The organization now faces potentially serious challenges; some of which involve questions about the basic rules of the game. The dispute settlement system stands out as that feature which has brought a large measure of certainty and predictability to a world traditionally characterized by unilateral actions by ‘sovereign’ states. In the WTO, the member states must respect agreed rules and the rights of others when adopting measures affecting trade or when imposing trade remedies. This system might now be under threat. The American trade representative, Robert Lighthizer, recently complained that decisions from WTO’s Dispute Settlement Body had “diminished” what America had bargained for and imposed obligations it had not agreed to when it joined the WTO.[1]Americans look at the WTO or any of these trade agreements and we say, OK, this is a contract and these are my rights. Others – Europeans, but others also – tend to think they’re sort of evolving kinds of governance. And there’s a very different idea between these two things.”[2]

Two developments stand out as potential threats to the consensus embedded in the WTO, and therefore how the global economy functions. The more serious tensions are over China’s industrial strength and America’s criticism of the rules for global trade. These are not of the WTO’s making but can impact the operations and effectiveness of the organization. The WTO is a member-driven arrangement.

China joined the WTO in 2001 and has grown into a dynamic and successful trading nation. It has gained enormously from globalization. However, many now see its success as a threat to the architecture of the dispensation underpinning the WTO pact. President Trump frequently points to a huge imbalance in US-China trade.[3] However, it should be mentioned that he is also concerned about the perceived threat to American jobs posed by other international trade agreements, such as the North American Free Trade Agreement (NAFTA), which is being re-negotiated. Under his presidency Washington has withdrawn from the negotiations to conclude the Trans Pacific Partnership (TPP).

There is nothing wrong with China’s efforts to modernize its economy and to advance its competitiveness. However, there are growing concerns that it is not respecting all the rules of the game. Some of these concerns have been around for quite a time, such as accusations that it is manipulating the value of its currency and that Chinese firms do not respect the intellectual property rights of firms in the West. As one commentator puts it: “There’s a lengthy list of ways China plays by its own rules, but the No. 1 problem is the theft of U.S. business secrets and technology by Chinese companies.”[4] The European Union shares some of these concerns and is worried by a spate of Chinese acquisitions. It is drafting stricter rules on foreign investment.

The Economist recently summarized the challenges about China as follows: “At the heart of these tensions is one simple, overwhelming fact: firms around the world face ever more intense competition from their Chinese rivals. China is not the first country to industrialise, but none has ever made the leap so rapidly and on such a monumental scale…. Undoubtedly, China has form. It kept its currency cheap for years, boosting exporters; it finances its state-owned giants with cheap credit; and its cyber-spies steal secrets. Yet depictions of corporate China as just an undemocratic, state-run monster, thieving and cheating to get ahead, are crude and out of date. Home-grown innovation is flourishing. The innovators are mainly private, not the many heads of a single creature called China Inc. To separate hype from reality, think of Chinese competition as having three dimensions: illegal, intense and unfair. Each needs a different response.[5]

The Economist’s advice is: Don’t get angry. Get even. What does this require? The essence of rules-based trade is that the rules must be respected; violations will be met with sanctions or counter measures. If the WTO dispute settlement system does not provide the means to tackle unlawful action by private firms, appropriate retaliatory measures are justified. They need proper national legislative foundations. In many instances, it will require that affected governments adopt mechanisms for screening Chinese investments and to block genuine threats to national security.[6] The cost of breaking the very rules which allow fair benefits to be reaped from global trade should be demonstrated. Multilateral trade requires more rules, not unilateral retribution.

It will be very difficult for the WTO to generate all the additional legal codes (on e.g. fair competition) now required to guarantee rules-based trade in all its manifestations. New multilateral agreements require consensus; which will be politically difficult and will require years of negotiations. New rules will, therefore, be adopted by organizations such as the EU and by individual states. Some of the action will inevitably happen outside the WTO framework.

China carries a major responsibility to address the legitimate concerns about its policies and the actions of Chinese firms. As a de facto custodian of the global trade system it must protect its integrity. Chinese courts must, for example, play a far more active role in protecting the intellectual property rights of foreign companies. China stands to suffer huge costs if the system breaks down.

What should the US government do? Its responsibilities might be even bigger. American interests will not be served by unilateralism and the demise of an independent dispute settlement system under the WTO. Washington needs the multilateral structures and its rules to protect its firms and to advance its interests. And it will have to accept the challenge of fair competition. The rhetoric of nationalism does not help its own cause.

The world is an inter-connected place. American interests and world peace (think North Korea) require more certainty and predictability, as well as constructive relationships with players such as China.

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[1] The Economist, 23 September 2017.

[2] http://worldtradelaw.typepad.com/

[3] In 2016 the United States bought around $500 billion worth of goods from China. In contrast, it sold only $165 billion worth of goods and services to the Chinese. See: http://money.cnn.com/2016/07/12/news/economy/china-trade-donald-trump/index.html

[4] Ibid.

[5] The Economist, 23 September 2017.

[6] The Trump administration recently barred the sale of an American company Lattice, manufacturer of semiconductors, to a Chinese-backed company, citing national security risks. BBC News, 25 September 2017.