Hard Brexit enthusiasts hold up the WTO as the ultimate insurance policy for Britain. But the survival of the body itself is under threatby Paul Wallace / March 3, 2019 / Leave a comment
The World Trade Organisation is in the spotlight as hard Brexiteers advocate leaving the European Union without a deal on “WTO terms”—a phrase that is supposed to sound reassuring. But regardless of what sort of trade relationship with Europe we eventually settle into, we should all take a keen interest in how much protection this institution really provides.
If our departure from the EU is as hard as some hope, we will know soon enough; if it is softer, then the Brexiteers will grumble about “vassalage”—submitting to European rules we no longer help to write—and continue to agitate for dealing with the continent on WTO terms. And the way politics is drifting they could very well, sooner or later, succeed.
But what exactly is the World Trade Organisation? It is based in Geneva, but where did it come from? What security can it really give? And what lies ahead for an institution that an avowedly “America First” US president is, through a mix of his public diatribes and stealthy black ops, working to undermine? And how worried should we be?
The Road to Geneva
With or without Brexit, the WTO matters because of its role in regulating international trade. For two centuries, since David Ricardo spelt out the underlying rationale, the case for countries to trade with one another has been crystal clear: it works to their mutual advantage, leaving both sides better off overall. Just as fundamentally, international competition drives industries to become more productive. Despite the overall gains, though, trade can create losers—such as lower-skilled workers in more advanced economies—as well as winners, which is why it so often runs up against protectionist pressures. And although history testifies to the benefits of free trade, it also records the frequent misuse of trade policy by governments pursuing their strategic national interests, or offering a sop to domestic producer lobbies.
“The Appellate Body is the cornerstone of the system. But the US is vetoing the appointment of judges. It could soon cease to exist”
There are past eras that support the sanguine view that institutions and policies are, in the end, less important than the sheer logic of trade and the power of technology. Take the first globalisation of the late 19th and early 20th centuries. Britain may have been open in these years, but America and much of the European continent were increasingly protectionist. But that didn’t matter much when steamships were replacing sailing vessels and railways were opening up frontiers in the new world. Tumbling shipping costs stimulated trade growth of over 3 per cent a year in the four decades before the First World War.
In this era of digital technology, which is also cutting trading costs, maybe things will turn out fine. But set against the optimistic perspective of the Victorian world is the chilling experience of the interwar period, which shows how economic nationalism truly can destroy both trade and growth. The imposition of higher tariffs by America in the Smoot-Hawley Act of 1930 prompted retaliation by other countries. It contributed to a ruinous downward spiral in both trade and GDP during the Great Depression. The value of US imports from and exports to Europe fell by around two-thirds between 1929 and 1932.
It was that dismal chapter that prompted the original post-war drive to liberalise trade and to underpin it through a multilateral agreement—a drive that culminated in the creation of the WTO in 1995.
At the same time as the World Bank and the International Monetary Fund were being set up in the 1940s, western nations had hoped to create the International Trade Organisation covering foreign investments and labour standards as well as merchandise trade. But this plan foundered, perhaps tellingly for our present moment, on opposition in the US Congress.
That setback, however, did not thwart the impetus to boost global trade by lowering tariffs. In a series of eight trade negotiations starting in 1947, whose outcomes were codified in the General Agreement on Tariffs and Trade (GATT), customs duties on industrial products fell drastically, from an average of 22 per cent for the US, western Europe and Japan to less than 4 per cent by 2000. The number of countries participating in the GATT, which developed a rudimentary institutional capacity with a secretariat and director-general (the first one was British), rose from 23 at the outset to over a hundred.
The eighth negotiation, called the Uruguay round because it was launched at Punta del Este in 1986, and wrapped up in Marrakesh in 1994, was a step change in ambition. For one thing, it wasn’t only about industry. For the first time, agriculture was tackled in a meaningful way through a plan to eliminate quotas on farm products. Textiles, too, were to be freed from import constraints. The emphasis on goods was now supplemented by two new trade agreements covering services (GATS) and intellectual property such as copyright and patents (TRIPS). Last but not least, the Uruguay round also created the WTO to administer these two new agreements as well as the GATT.
The WTO inherited the language of post-war trade liberalisation, using the formulation “most favoured nation.” What that seemingly contradictory term actually means is that countries must not discriminate between their trading partners—grant one a lower customs duty on a product and you must offer the same to all other member states. It doesn’t make for a natural rallying cry, but that is the logic that underpins any multilateral system.
There are two prime exceptions: groups of countries that have forged free trade agreements or closer ties such as the EU’s customs union, which can levy tariffs on outsiders that they don’t apply to each other; and developing economies, which can be given especially favourable access to markets. A second core doctrine was that of “national treatment”: once foreign goods have been admitted, they should be treated the same as domestic products. Again, this may sound prosaic, but without this rule internal taxes and regulations could be devised purely to advantage home producers. This was, therefore, a precondition of the creation of an integrated global economy.
The WTO represented continuity. But the hope was that with its wider responsibilities and its status as a permanent institution, it could go far beyond the GATT’s traditional focus on tariff cuts for merchandise trade. The new outfit broke the old unofficial rule that reserved the top jobs at the IMF and World Bank for Europeans and Americans respectively. As early as 1999, the WTO’s director-general hailed from New Zealand and its current head, Roberto Azevêdo, is from Brazil.
And in one crucial role—that of resolving trade disputes—the WTO really did have more teeth than its predecessor. Under the GATT, any member state could veto a ruling, even if it was itself the offending party—there was no meaningfully independent trade court. But under the WTO, the tables were turned: a ruling could be blocked only if all countries voted against it.
In theory, that was a huge difference. But in practice the WTO remained an intergovernmental body, generally operating through consensus between the member states. When it comes to writing the rules, as opposed to enforcing them, everyone still had a veto. Unlike the IMF, for example, the WTO does not have an executive board. The highest decision-making body is the ministerial conference of all the member countries, usually held every two years.
Similarly, the Council that operates between those meetings is made up of members’ national representatives. And even in settling trade disputes, where the WTO does have some autonomy, its locus is limited to the member states: unlike in the EU, individuals and businesses cannot bring cases. A state found in the wrong does not have to pay a fine but must instead promise to put an end to the violation. It’s as though a court could extract nothing more from a criminal than a promise to do better.
Despite these in-built weaknesses, the WTO was born amid high hopes—and in the middle of an exceptional boom in global trade. Reflecting the integration of China into the world economy, and also that of the countries emerging from the break-up of the Soviet Union, cross-border commerce was thriving as never before. In the post-war era as a whole, trade grew at one-and-a-half times the rate of expansion in global GDP; in the two decades running up to the financial crisis of 2008, though, it expanded at fully double the rate of world growth.
Stop the world, we want to get off
To many politicians, it all seemed permanent and irreversible. New Labour’s Peter Mandelson, for example, would mock those who queried globalisation by saying they wanted to “stop the world and get off.”
But long before Brexit and Trump revealed that many voters did indeed want to “get off,” and long before even the crash, the breakneck pace of globalisation was running into some discontent. The anti-globalisation movement was born in late 1999 in Seattle, where the WTO held its third ministerial conference. Talks about a new trade round collapsed amid the dramatic protests for which the event is now remembered.
Despite this early warning, the WTO retained a spring in its step. In the late 1990s, further agreements among many member states were reached on IT, telecoms and financial services. The attacks of 11th September 2001 provided a brief spur to a new trade round as America sought to link collective security and shared prosperity. Those negotiations, launched in Doha in late 2001, were focused on how liberalisation could help poorer countries. Mike Moore, the WTO’s director-general, styled the new round the “Doha development agenda.” In another boost, China joined.
“The prospect of WTO terms was spelt out recently: an 8 per cent knock to projected GDP in 15 years’ time”
But it did not take long for the Doha round to run into trouble. In 2005 an exasperated Pascal Lamy, who had become the WTO’s director-general that year, waved a wand at a ministerial conference in Hong Kong to make the point that he could not conjure a breakthrough in stalled negotiations. By 2008 the Doha round was dead in all but name—though it was not until December 2015 that the final rites were read.
And today, almost a quarter of a century old, the WTO has only one noteworthy multilateral agreement to its name—a deal to smooth customs procedures for the movement of goods across borders, which came into force in 2017. This sought to speed the transit of goods and, though a step forward, it certainly does not avoid the need for border controls. Still less does it offer any solution to the Brexit Irish border conundrum. In 2015, the WTO scored another success when its IT agreement was extended to cover new products such as GPS navigation systems. But overall its record has been blighted by the failure of the Doha round.
The difficulties the WTO has faced in negotiating further liberalisation in part reflects the growing heft of emerging economies. Previous trade rounds might have been called international, but it was the “Quad”—the US, the EU, Japan and Canada—that called the shots. But now China, Brazil and India have more clout. There are more power blocs to co-ordinate but nobody—certainly not the WTO—with the power to broker a deal between them, and make it stick.
Even before Trump, stealthy protectionism was making a comeback. Trade was slowing prior to 2008 and, over the past few years, it has sagged—at times growing even more sluggishly than anaemic global GDP. A bounce back in 2017 has tapered away; and with the Chinese economy slowing and Trump’s trade aggressions already hurting, the outlook is far from bright.
The WTO’s problem is not reach: it has 164 members, with 22 countries seeking to join. Rather, its problem is one of clout, and the culture of the times. The increasingly unilateral actions of Washington—picking fights with China, the obsession with eliminating bilateral trade deficits—are making a mockery of the multilateral order that the WTO is supposed to uphold.
At the G20 summit late last year in Buenos Aires, Trump’s animosity to the WTO bore fruit. He assented reluctantly to some warm words about a “rules-based international order,” but only in return for other leaders signing up to an unspecified and ominous “necessary reform of the WTO to improve its functioning.” The aim is to spell out what the reform might mean by June when the next G20 summit takes place in Osaka.
But more sinister than the public grandstanding is the quiet undermining of the ability of the WTO to discharge what it describes as its main function: “to ensure that trade flows as smoothly, predictably and freely as possible.” The US, which in the distant days of the Uruguay round had pushed for a WTO with the teeth required to settle trade disputes, could very soon render it impotent.
Panels of independent arbiters do the day-to-day sorting out of trade quarrels, but states can appeal against their rulings to the Appellate Body. Though it sounds as obscure as Dickens’s Circumlocution Office, the Appellate Body is in effect the WTO’s appeal court, described by the Jacques Delors Institute as “the cornerstone of international trade regulation.”
Any stone, though, can be dislodged with enough determination. Since Trump took office, the US has been vetoing any replacements to this seven-strong body, from which a minimum of three must be fielded to hear a case. There are only three judges left and when two more depart in December as their terms of office expire it will cease to exist. Any panel ruling could then be stymied simply by appealing it. In effect, the US would have wound the clock back to the GATT before 1995.
If and when this happens then—taken together with the WTO’s failure to broker a trade round—the purpose of the organisation could come into question. Today’s reality is that when trade is liberalised, it is through bespoke arrangements between willing partners—not by across-the-board multilateral negotiations. In this new world, it could soon become hard to remember what the point of the WTO is.
Rhetorically, Brexiteers shelter behind the imagined protection of the WTO. But perhaps, in their hearts, even they know this will not count for much. They have made a battle-cry of striking nation-to-nation deals with fast-growing emerging markets. Even if we indulge their delusion that Britain’s bargaining clout will increase once it is outside the EU, this is a revealing ambition. It speaks volumes about the lost multilateral dream, and—by extension—about the folly of seeking to head out into a cold world on “WTO terms.”
The grim prospects of what trading with the EU on WTO terms alone would mean was spelt out by a recent government estimate: an 8 per cent loss of GDP in 15 years’ time, compared with the trajectory if the country remained in the EU after all. In a December speech delivered in Washington, Alan Wolff, one of the WTO’s deputy director-generals, confessed that he found these prospective costs “disquieting, from the viewpoint of what it says about the multilateral trading system.” But he did not dismiss them. Even the WTO itself, then, seems to harbour doubts about how much fall-back protection it can really offer for a major economy leaving an integrated regional bloc.
The underlying problem for the WTO is the blurring of trade policy and strategic rivalry between great powers. Though Trump and China’s leader Xi Jinping appear to be sparring only over trade, in reality we are witnessing America contesting the rise of a rival superpower; the American alarm is more about Beijing’s growing technological prowess than the bilateral trade balance.
Once again, there is nothing new about this. Britain imposed Navigation Acts in the 17th century to curb Dutch power. Napoleon’s “Continental System” aimed to bring Britain to its knees by blocking access to European markets. America, for its part, has never shied away from trying to use trade sanctions to influence countries, going back to colonial boycotts on Britain before independence, and Thomas Jefferson’s embargo on trade with both Britain and France during the Napoleonic wars.
Even with the best will in the world, a technocratic body like the WTO is always going to struggle to deal with brute political power play. And right now, it is operating in anything but a good-will environment. The many useful things that this inherently feeble body can usefully achieve are slipping beyond its reach—because it is as strong or as frail as its most powerful members, above all America, want it to be.
Paul Wallace is an economic and financial commentator. He is author of “The Euro Experiment” (Cambridge University Press)