The Path Forward on WTO Reform

The Path Forward on WTO Reform
The WTO headquarters in Geneva. Photo: Getty Images.

The global trading system – with the WTO at its heart – is facing a ‘make or break’ moment. All three of the WTO’s functions are under pressure and in need of reform: administering multilateral trade rules, serving as a forum for trade negotiations and providing a mechanism to settle trade disputes. But despite this gloomy outlook, there is reason to be cautiously optimistic.

The most immediate flashpoint is addressing the shortcomings of the dispute settlement system. Though President Donald Trump’s repeated threats to pull the US out of the organization are a cause for concern, this is unlikely to happen given the role of Congress and the economic costs involved.

Instead, the real danger lies in the current administration hollowing out the rules-based international trading system from within through such actions as raising tariffs in the name of US national security and blocking the appointments of members to the WTO’s Appellate Body. If the latter practice continues, the Appellate Body will not have enough members to hear cases come December when the terms of two members end, thereby risking that the WTO dispute settlement system effectively ceases to function.

Many of the current concerns raised by the US pre-date the Trump administration and are shared by other WTO members – especially regarding procedural aspects (for example, a disregard for the 90-day deadline for issuing rulings, or the continued service by Appellate Body members on cases that continue after their terms have expired). The Trump administration has also voiced substantive concerns about ‘judicial overreach’ by the Appellate Body, which is a more controversial issue and will be difficult to resolve.

The current US administration seems to want to go back to the days of non-binding dispute settlement of the General Agreement on Tariffs and Trade (GATT), which preceded the WTO. Even though the US has been the most vocal in its criticism of the WTO dispute settlement system, it has offered no specific proposals for reforming the Appellate Body.

To quell US concerns, the EU has made concrete proposals and Canada convened a meeting of trade ministers from 13 WTO members in 2018 to discuss reform. The trilateral discussions that commenced in 2017 between the US, Japan and the EU are primarily aimed at addressing China’s trade practices but do spill over into WTO reform efforts.

Thus far, the Trump administration has rejected other countries’ reform proposals and it remains unclear what suggestions would be enough to assuage US concerns. Nonetheless, the current Appellate Body crisis has a silver lining: it forces the WTO members to do some soul searching and address valid shortcomings of the current dispute settlement system.

Moreover, without the traditional US leadership, other WTO members are beginning to take on a more central role and advocate for the global rules-based international trading system. While it is important that increased leadership comes from major trade powers (such as the EU and Japan), smaller and medium-sized players should take on larger roles as well. For them, safeguarding the WTO is especially important because the organization provides the main path to participate in setting the rules for new trade policy areas.

Efforts to resurrect the WTO’s relevance as a forum for trade liberalization is another area where green shoots are sprouting. The effective collapse of the Doha Round in 2008, which was launched in 2001 but then stalled over agricultural subsidies as a major controversial issue, raised questions about the viability of conducting trade talks involving more than 160 members based on the principles of consensus (meaning that all members must agree) and a single undertaking (whereby nothing is agreed until everything is agreed).

The failure to conclude the Doha Round also impeded WTO members from focusing efforts on updating the rules of the global trading system in order to address the changes that have occurred since the WTO was established in 1995. In particular, the WTO is not currently fit for purpose to deal with the increased role of state-owned enterprises or digital trade.

To tackle some of these new trade issues in the wake of the Doha Round impasse, trading partners turned to bilateral free trade agreements or larger regional ones – such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). A subset of WTO members has pursued plurilateral negotiations by focusing on narrower issues. Most recently, 76 WTO members – including the US, China, Japan and the EU – agreed to start negotiating rules on e-commerce. Plurilateral efforts are no panacea, but they can fill important gaps.

Finally, the seeds of reform have been sown for improving the ability of the WTO to administer and monitor member states’ trade policies. The failure by many countries (including China) to comply with the WTO’s notification requirements – for instance to notify government subsidy programmes – has been a topic of concern for years. But now WTO members are seeking to address the notification issue – with the US, EU and others suggesting penalties for noncompliance.

Another area for reform concerns the problem that there is no agreed definition as to what constitutes a developed or developing country at the WTO and that members self-designate their status.

WTO members that use the latter designation benefit from so-called ‘special and differential treatment’. The fact that 10 of the G20 countries – including China, India, and South Korea – currently claim developing country status at the WTO is a major point of contention. Brazil’s recent decision to forego its developing country designation is a potential milestone and could inject momentum into the discussion about setting quantifiable criteria to clarify a country’s development status.

To be successful, reforming the WTO will have to address all three of its functions. But, because decisions at the WTO are based on consensus, the chances for a fundamental overhaul are slim. Therefore, WTO reform should cover broader institutional issues and members should revisit some of the organization’s principles and system of decision-making.

In the short-term, efforts to reform the WTO dispute settlement system should be prioritized to avert an acute Appellate Body crisis that looms in late 2019. This narrower reform endeavour has more chances of being successful.

The Trump administration’s rhetoric and actions towards the WTO could be a blessing in disguise as it could help to intensify and expedite long overdue reforms. By shaking the tree, some fruits will hopefully fall. But, to paraphrase the WTO Director-General Roberto Azevêdo, the organization’s members should make sure they don’t kill the tree by shaking it too hard. A dead WTO would lead to more trade barriers as well as a less predictable, transparent and enforceable trading environment.

Marianne Schneider-Petsinger, Geoeconomics Fellow, US and the Americas Programme, Chatham House.

This article is part of the AIG Global Trade Series project in which Chatham House is a partner.

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