Who will save the WTO?
20 Jun 2019|

The World Trade Organization is heading towards an end-of-year train wreck. Next weekend’s G20 leaders’ summit is now one of the last opportunities to switch the points to a safer track.

The United States appears determined to shut down the ultimate WTO body for settling trade disputes, which would jeopardise the organisation’s ability to set law for the conduct of global trade.

In the absence of globally accepted rules, the terms of international commerce would be set by the exercise of power. It would be a much harsher world for mid-sized nations like Australia and would raise the risks of global conflict.

The long-time US secretary of state during the late 1930s and 1940s, Cordell Hull, pressed the case for a post-war, rules-based global trading order, arguing that ‘unhampered trade dovetail[s] with peace; high tariffs, trade barriers, and unfair competition, with war’.

The 1947 General Agreement on Tariffs and Trade laid the foundations that the WTO, established in 1995, built upon to provide a more formal institutional framework for negotiating trade agreements, establishing consistent and transparent rules and adjudicating disputes. Trade rose from 40% of global GDP to a peak of 60% in the 20 years after the WTO’s formation.

Six months from now, the WTO has a date with destiny. On 10 December, the terms of two of the three remaining judges on the WTO’s appellate body expire. The WTO treaty requires a minimum of three judges, so unless something happens before then, it will no longer be able to hear disputes.

The US has been blocking the appointment of replacement judges since the beginning of last year. This has already led to four unfilled vacancies on what the treaty sets as a seven-member panel.

The US believes the appellate body, which has churned out a large volume of jurisprudence governing global trade, has over-reached in a number of its decisions. The US is concerned that the WTO contains no legislative mechanism for over-riding appellate decisions.

Although the US has won more cases than it has lost, the appellate body has consistently rejected the US method for calculating punitive tariffs on steel and aluminium imports. Some see the hand of the US steel and aluminium industry behind the Trump administration’s aggressive approach on trade; both commerce secretary Wilbur Ross and trade representative Robert Lighthizer had strong links with these industries before gaining office.

To restrict steel and aluminium imports from Europe, Japan and Korea, Washington controversially deployed a rarely used provision in the WTO treaty that allows countries to raise trade barriers if they believe their national security is threatened. The US has threatened to do the same on motor vehicles.

While the US has been the aggressor in the assault on global trade rules, it has been far from alone. The WTO was in trouble long before the election of Donald Trump. Repeated efforts to renegotiate the treaty have failed because the consensus required for WTO decisions is no longer attainable.

When the global financial crisis struck in 2008, there was a clear risk that countries would resort to protectionism to defend their domestic businesses. With the knowledge of how destructive this response was following the Great Depression in the 1930s, the G20 nations made a commitment to foreswear raising trade barriers.

However, G20 nations have, since 2009, imposed around 20,000 policy measures affecting the relative competitiveness of their domestic industries with imports, according to analysis by the Global Trade Alert, which is produced by the Centre for Economic Policy Research.

The report estimates that more than 70% of world exports now compete in markets with trade distortions that were not present when the global financial crisis began.

The G20 formally abandoned its pledge to eschew protectionism at the Buenos Aires summit last December after the US refused to sign any communiqué that included it. Since then, G20 nations have imposed 288 protectionist measures affecting about US$1.2 trillion of trade, of which the US–Chinese trade war accounts for only about a sixth.

The Global Trade Alert argues the WTO’s dispute settlement mechanism was falling into disuse before the Trump administration brought things to a head. The number of cases brought for adjudication annually has hovered between 10 and 20 for most of the past decade, despite growth in trade volumes and the rising resort to protectionism.

The US appears uninterested in proposals to reform the WTO and has made no proposals of its own. The appeals body is only one of its complaints about the organisation. It is also strongly opposed to countries having the ability to designate themselves as ‘developing countries’, entitling them to higher tariffs and greater use of subsidies than otherwise. It believes the WTO rules don’t capture the full range of subsidies offered by nations like China. There’s also concern that the WTO has failed to grapple with the challenges posed by digital trade.

The US rejected a reform proposal from the European Union, which also had the support of Australia, Canada, China, Iceland, India, Korea, Mexico, New Zealand, Norway, Singapore and Switzerland.

A meeting of G20 trade ministers in Japan earlier this month made no headway. Developed countries opposed proposals for a formal and graduated method for designating developing country status. And the US blocked any mention in the communiqué of protectionism, unilateral measures or the crisis in the WTO appellate body, while China vetoed any mention of unfair subsidies.

Another effort will be made at the G20 summit in Osaka. Indonesia has flagged it will present a fresh proposal at the weekend meeting which would include a path forward, with or without the support of the US. People who have seen the Indonesian proposal consider it has the potential to achieve a breakthrough, which would be a triumph for a nation that has long preferred the sidelines to the centre of the world stage.

The Indonesian proposal reflects its concern that the US and China will do a bilateral deal that ignores WTO rules and damages the trade interests of everyone else. All but the super powers have much to fear from a trade world in which it is each for themselves, and the devil take the hindmost.