Many Brexiteers see the WTO as a desirable framework for the UK’s trade. Donald Trump dislikes it. Steven Woolcock (LSE) explains how the WTO has been undermined by outdated rules, US trade policy and China’s support for its own industries. It looks like rather a poor alternative to negotiating agreements with major markets.
Two developments are seen as evidence of the rise of populist opposition to the established liberal order: Brexit and Donald Trump. While similar in many respects, they have very different views on the World Trade Organisation. Brexiteers see the WTO as an acceptable – if not preferable – alternative to an agreement with the EU, and presumably a suitable framework for the UK as a global trader. President Trump sees WTO rules as a constraint on US trade policy, too weak or no longer compatible with US national interests. So are WTO rules the key to prosperity – or not fit for purpose?
The purpose of WTO rules, as they have evolved from the establishment of the General Agreement on Tariffs and Trade (GATT) in 1948 to the World Trade Organisation in 1995, has been to:
a) provide a stable framework for increased trade and prosperity;
b) promote a broad balance of benefits across all participating economies;
c) ensure non-discrimination (in the shape of the most favoured nation provision in Article I of the GATT and national treatment for like products in Art III;
d) to limit distortions due to discretionary intervention by states; and finally
e) to provide for an impartial resolution of disputes.
Above all, the WTO is a predominantly rules-based trading system based on consensus and cooperation, as opposed to a power-based system in which the unilateral use of market power alone determines outcomes.
Today the reality is that the WTO does not rule – and the whole multilateral trading system is in a state of crisis, for the following reasons.
WTO rules are sadly outdated. Most of the existing WTO rules date from 1995 when the organisation was established. This was before global value chains became a feature of international trade, before the extensive application of the internet to trade and investment, before China emerged as a trading power to match the US and the EU and before the need to reconcile trade liberalisation with other policy objectives, such as tackling climate change, was widely recognised and accepted. Efforts to update the multilateral rules in the shape of the so-called Doha Development Agenda negotiations launched in 2001 have largely failed. This is the first time such a multilateral round of trade negotiations has failed since 1948.
Today PTA (Preferential Trade Agreement) rules shape the global economy more than WTO rules. As the WTO has failed to keep pace with the degree of integration in the world economy that has occurred in the past quarter of a century, governments have negotiated PTAs to help fill the vacuum. This effort to negotiate PTAs has then undermined the value of the WTO for many countries. PTAs, at least between more developed economies such as the UK and the US, enable a wider range of trade costs and barriers to be addressed quicker than the WTO with its 164 members. The results have been that tariffs within the PTAs are generally fully liberalised, except for a few sensitive sectors that account of 2-3% of all tariff lines. The commitments on services are much more extensive than under the General Agreement on Trade in Services (GATS) that forms part of the WTO rules.
PTAs also include investment, trade facilitation (measures to reduce the costs of customs and border controls) and importantly address differences in regulatory norms or standards, which with the removal of tariffs now constitute the most important cost of doing business internationally. PTAs have also begun to address the sustainability of trade and investment and how trade rules need to be modernised and rebalanced to match wider social and environmental policy preferences.
The WTO is now in crisis. After languishing for some years and being overtaken by PTAs, the WTO now finds itself in probably the most profound crisis since 1948. This has been precipitated by current US trade policy. The Trump administration has reverted to a more power-based approach to trade. This takes the form of threatening and/or actually closing the US market as a means of forcing its trading partners to make concessions. These actions are justified by the use of US national trade legislation, such as Section 301 of the 1974 Trade Act, or by the spurious claim that imports are threatening US national security, under Section 232 of the US Trade Expansion Act of 1962.
With this unilateral action the US is effectively bypassing WTO rules. In claiming national security as grounds for increasing tariffs it threatens the whole trading system. If the US can do this other countries will feel they can also have a free hand to take protectionist measures. But the main point here is that the US no longer sees the WTO as serving US interests, because it is seen as favouring others more than the US and thus failing to ensure a broad balance of benefits.
As the current WTO rules constrain the US from discriminating against countries that have a trade surplus with the US, the Trump administration has resorted to any measure that enables the use of discretion, hence the use of national security to justify tariffs. The Trump administration, as did the previous Obama administration, is also blocking the appointment of members of the Appellate Body of the WTO on a number of grounds, but primarily because the US is no longer willing to accept rulings in Geneva limiting its sovereignty and thus its ability to act. Blocking appointments to the Appellate Body of the WTO will soon render the dispute settlement function of the WTO ineffective.
The other more slow burning challenge to WTO rules is China’s support for its domestic industries. Many countries have provided support for industry, especially in the early stages of development and industrialisation. But none have done so on the scale of current Chinese policy. The existing WTO rules preventing major distortions from national subsidies, the operation of state-owned enterprises or the (absence) of pro-competition policies are not capable to dealing with the scale of Chinese support. China argues it remains a key supporter of the WTO rules-based, multilateral trading system, but in this it appears to mean the current WTO rules, which, as noted above, date from 1995 and do not seriously constrain China’s strategic trade policy. The US action against China outside of the WTO rules is of course a reflection of the weakness of the WTO rules in this respect. But by acting unilaterally rather than seeking a more cooperative solution the US is threatening the fabric of the rules-based trading system.
What can we conclude from the above? Rather than offering an opportunity for Britain to pursue a new role as a global trader, the WTO looks like a rather poor alternative to the negotiation of agreements with major markets. In this the priorities run: first the EU; then all the countries to which the UK has preferential access under the existing EU PTAs; and then perhaps – in the rather distant future, given the difficulty in negotiating such agreements – the US, India etc. The central role of PTAs means that UK exporters and investors will be at a clear disadvantage until the UK government can renegotiate agreements with countries with which it had preferential agreements as a member of the EU. None of this is possible until the UK has settled its trading relationship with the EU.
Beyond this, the UK’s long-term interests must be in preserving an open rules-based trading system. Only the ‘big beasts’ of the US and China can defend their national interests in a power-based order. In pursuing this aim the UK’s interests – as a leading member of a group of WTO members seeking to defend multilateralism – will be closely aligned with those of the EU, as well as other developed and developing economies.
This post represents the views of the author and not those of the Brexit blog, nor LSE.