It’s odd isn’t it? We’ve had all that discussion about “crashing out” of the European Union on “WTO terms”. Yet we’ve heard very little about the World Trade Organisation itself, how it makes its rules and whether they can be enforced. Isn’t it about time we did?
For it seems almost entirely to have escaped political attention that, just at the moment we are contemplating relying on it, the WTO faces a political crisis. It is already unable to make rulings on some of the cases before it. Before this year is out, it may be unable to make any rulings at all.
A bit of history first. In 1948, 53 countries signed the Havana Charter which envisaged the creation of an International Trade Organisation (ITO). The body was to sit alongside the World Bank and the IMF, and would help to open up free trade. It would drive reforms of global tariffs, regulations, employment standards and economic development and adjudicate on domestic decisions in these areas.
The ITO was doomed. American politicians, suspicious of the powers it would have over them, rejected the plan, and the other signatories followed suit. Instead, for almost half a century, they used what was supposed to be a temporary arrangement: the General Agreement on Tariffs and Trade. It wasn’t until 1995 that the WTO was finally established.
What brought the ITO dream to an end, Amrita Narlikar writes in her short history of the WTO, was the surprising coalition of perfectionists (who thought too many compromises had been made to allow nations to keep restrictive practices) and protectionists (who thought too few had been made).
This coalition, of those who argue that particular trade arrangements aren’t perfect because they favour one member over another and those who are outraged by any intrusion into sovereignty, dominates today’s debates about trade. Perfectionists and protectionists act together to oppose the EU single market and customs union, for instance. The same coalition is at the heart of the WTO’s crisis.
The WTO is weaker and less ambitious than the ITO was intended to be, but that doesn’t mean it has been any less controversial. It makes rules for global trade and its appellate body makes binding judgments in disputes. So of course it is controversial.
Its meetings have produced riots so violent that they paralysed decision making. Much of this was caused by protests against the perceived failure of the organisation to take labour and environmental standards seriously enough.
But the greater danger to its existence now comes from those who believe the WTO is overweening and failing to protect the domestic interests of its members. And in the vanguard is the Trump administration.
The US trade representative Robert Lighthizer has become one of Washington’s most powerful figures. His signature policy is to squeeze the WTO as part of a trade war with China. Lighthizer’s view, and the president’s, is that the WTO is biased against the US. He has long regarded its binding judgments as anti-democratic and some of the appellate body’s recent pro-China trade rulings have deepened his feeling that it has grown too big for its boots.
So the US is simply vetoing new appointments to the body, which is now down to three judges, the minimum needed to constitute a judging panel. It would not be quorate if there was a further dispute between China and the US, as judges would have to recuse themselves. And by the end of the year two of the current body finish their term. Unless the US removes its veto, the WTO will not be able to rule on its own rules. Beyond that the president has threatened that America might withdraw from the WTO. Something that proved the death sentence for its predecessor.
This is obviously of great concern to us, as we contemplate having to rely on WTO rules if we leave the EU without a deal this year. But there is a broader point. The WTO row shows that all the ingredients of our Brexit dispute will persist whatever happens.
Trading rules restrict the ability of countries to do what they want. That, after all, is their entire point. They stop nations engaging in a destructive competition to erect barriers against other nations.
Jeremy Corbyn provides the perfect example when he complains about the way the EU prevents countries from taking steps to promote domestic industry, so-called state aid. But the reason for keeping such rules in place is simple. State aid is like standing up in a crowd in order to get a better view. It makes sense for you in the few seconds before everyone stands up so they can carry on seeing. In the end, everyone is standing but no one has a better view.
So it makes sense to have an international agreement that prevents the sort of unilateral state aid that distorts competition. But that creates a problem: who makes these rules and who judges them? The judges have to be neutral, and the international bodies they represent are bound to seem remote from voters. So a democratic deficit develops.
The economist Dani Rodrik in his book The Globalization Paradox argues that democracy and globalisation inevitably clash. I would put it this way. At the extremes, there are three choices. First, to ignore democracy because it is just too hard to govern global trade democratically. Second, to ignore social policy, and have lots of free trade with labour standards decided at national level so the voters have control. Or third, to dispense with globalisation despite its economic advantages.
None of these is desirable or even practical. So you have to compromise. Lose a bit of democratic control, tolerate global trading that has some frictions, share control of social policy between national and international bodies.
Finding the correct compromise is what the Brexit debate was all about and it’s why, despite my disagreement with it, I don’t think Brexit is intrinsically crazy. It’s just another imperfect solution to an insoluble problem.
But what this means is that even once we finalise our arrangements with the EU, the Brexit debate — the debate about the right compromise — isn’t going away. It’s never, ever going away. Happy new year.
Daniel Finkelstein writes a weekly political column for The Times. Before joining the paper in 2001, he was adviser to both the prime minister John Major and the Conservative leader William Hague. Daniel was appointed to the House of Lords in 2013 and named political commentator of the year at the Editorial Intelligence Comment Awards 2010, 2011 and 2013.