Is the World Trade Organization (WTO) in trouble? It certainly seems so, since US president Donald Trump has described the institution as a “catastrophe" and a “disaster". On 30 August, he went further and declared that the WTO is “the single worst trade deal ever made" and “if they don’t shape up I would withdraw from the WTO". Previous US administrations have had their problems with the WTO, especially with its negotiating process which is based on consensus, and can prevent trade negotiations from moving forward if even one country objects. But no president has ever suggested that the US might want to leave the WTO. The threat naturally has major trading partners worried.
Unilateral Action and a Trade War
The US has not just criticized the WTO. It has also walked the talk by announcing a series of unilateral tariff increases outside the WTO framework. These include (a) safeguard tariffs to guard against a surge in imports of solar cells and washing machines, (b) imposition of 25% tariffs on import of steel and 10% on imports of aluminium from all countries, (including India) ostensibly on national security grounds and (c) discriminatory tariffs on imports of about $50 billion from China under Section 301 of the US Trade Act. Safeguard action is allowed under WTO, but to be WTO compatible, it has to follow a process that involves consultation between the parties, and a possible resort to the WTO to determine WTO compatibility. No such consultations took place.
The imposition of tariffs on steel and aluminium on national security grounds is even more questionable. Such action is tolerated when taken against imports from countries which are seen as national security threats. In the present case, it is being used against countries some of which are actually allies, and it is directed at specific commodities for purely protectionist purposes.
The imposition of discriminatory tariffs against China is a punitive action taken in response to its non-transparent subsidization of enterprises and also alleged arm twisting to force US investors to part with technology as a condition for entry into their market. This too is inconsistent with WTO, where subsidization has to be addressed through dispute settlement and retaliatory tariffs can only be imposed with explicit WTO sanction.
Predictably, US action has led to retaliatory tariffs being applied by China and the EU. India has said we will consider retaliation but have not imposed tariffs so far. The US has escalated the conflict with China by imposing another 10% duty on other goods, which will go up to 25% in January 2019. China may retaliate if this happens.
All this adds up to a real threat of a trade war, which can easily spiral out of control. In a world characterized by global supply chains, tariffs on China will affect countries upstream of the supply chain. It will create uncertainty about investment decisions and weaken the global economy, which already faces downside risks.
Not surprisingly, the major trading countries are deeply worried. The EU has had a meeting to discuss possible areas of reforms that might address some of the concerns of the US. Last week, Canada invited 12 “like-minded countries" to Ottawa to consider what can be done. The meeting included the EU and Japan and also Brazil, but the two principal contestants— the US and China—were not invited.
What Options Do We Have?
The Ottawa meeting reaffirmed the importance of a “rules based multilateral trading system" and stressed the “indispensable role the WTO is playing in facilitation and safeguarding trade". We can all agree with this part of the communique, although Trump may not agree with the endorsement of the importance of the multilateral trading system. The meeting concluded that action is necessary in three broad areas. No details were provided, but in what follows I offer some comments on each of these areas, and suggest what our position could be.
Improving the WTO’s Dispute Resolution Mechanism
One of the major improvements in the WTO compared to its predecessor the General Agreement on Tariffs and Trade was the establishment of a strong dispute resolution system. Disputes are first referred to a dispute resolution panel and appeals against the decisions of the panel go to an appellate board. The US had taken the lead in setting up this system, but it now seems determined to unravel it.
The board has seven members. The US has blocked appointments to replace members retiring at the end of their term, including reappointments. As a result, the board is now down to three members only, which is the minimum for a quorum. One of the members retires in December 2019. If the US does not change its position and agree to new members being appointed, the dispute resolution process in the WTO will be crippled in a little over a year from now.
No one is really sure what the US wants. If the intention is to make the WTO dysfunctional, there isn’t much that can be done, though Pascal Lamy, former director-general WTO has suggested that the WTO could go ahead and appoint new members even without US approval on the grounds that this is not an action that needs consensus.
There is some evidence that the US is unhappy about some specific rulings of the appellate board which arise from the board taking too wide a view of what it can pronounce on. If this is indeed the problem, it could be addressed through discussions. This is an area where we should support reconsideration of the practice in dispute settlement as it has evolved.
Monitoring the Transparency of Member Country Trade Practices
This relates to the issue of the practices of member countries in reporting open and hidden subsidies. It is argued that the current provisions are not sufficiently clear, and are also not effectively enforced. Compliance with reporting requirements is largely ignored.
The problem is general and applies to many countries, but the complaint is really directed at China because it is a highly successful competitor. No one really worries about non transparent subsidies to an unsuccessful competitor, but these practices obviously attract attention if indulged in by the world’s most successful exporter. This aspect of China’s practice is a matter of concern not just to the US, but also to European countries and Japan. China’s announcement of its plans to become a world leader in selected high-technology industries by 2025 is seen as a direct threat to hitherto unchallenged dominance of the US in these areas. The prevalence of a very large state controlled sector in China has spurred the demand for greater transparency in subsidy policies.
The problem of non-transparent subsidies is not unique to China. Similar subsidies exist in industrialised countries also. For example, much of the technology behind iPhones, touch screens, and AI, have benefited from defence-sponsored research. It may seem unfair that the issue is being raised now, in the case of China, when it was not in the case of the existing industrialised powers. However, whatever the past practice, it is reasonable that common degrees of transparency should be expected from all countries. It is not clear what exactly can be done to make the system more transparent, but there is surely room for negotiation here, and we should support it.
Reinvigorating the WTO Negotiating Process
The Ottawa communique lists a number of issues related to strengthening the negotiating process which include making progress on new trade issues along with making progress on existing issues, and also keeping the focus on development. This is a tall order, since these issues have proved difficult to resolve in the negotiating process. The communique only says that the officials of the countries will work on these issues and report back when the group meets next in January 2019. One issue that is relevant in trying to break the negotiating logjam is to reconsider the WTOs consensus rule itself. The rule gives each country a veto. We could move to decisions being taken by qualified majority. Voting strength of each country could be based on share in world trade, and the qualified majority needed could be say 85%. This would mean that any proposal accepted by members accounting for 85% of world trade would go through.
An alternative approach would be to allow plurilateral agreements within the WTO which become effective for those members who enter into them. This would enable members who want a higher level of commitment to enter into an agreement provided it is open to other WTO member countries to join later if they wished.
Both these proposals would meet with strong objections. However, we should be willing to consider them if the alternative is the collapse of WTO. Of course for the change to be implemented, the shift would have to be approved under the existing consensus rules
The G20 Could Play a Role
If the multilateral trading system is really as much at risk as many fear, it is an important enough issue for the heads of government of the G20 to get directly involved. The next G20 Summit is scheduled to take place later in November in Argentina and trade is not on the agenda. The next one will be in Japan in July 2019. Perhaps the G20 Summit in Argentina should consider appointing an eminent persons group, which could come up with some core proposals, which the G20 leaders could consider in Japan next year. If Trump can be persuaded to do this we might have an opening for reform a year later.
The G20 summit made all the difference in 2008, when the finance ministers by themselves were unable to agree on how to save the global financial system. Ten years later they need to repeat the performance this time to save the world trading system. Once they have approved a broad approach, the trade ministers could take over again in Geneva.
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