Why the WTO Has Been Caught in Trade-War Crossfire

(Bloomberg) -- After a quarter century serving as the global arbiter of commerce, the World Trade Organization is facing an existential moment in an era of rising protectionism. The U.S. under President Donald Trump called for a fundamental reset at the institution and sabotaged its ability to settle disputes. A key U.S. goal at the WTO has been to challenge China’s state-led approach to trade and investment, an aim shared by President-elect Joe Biden. Acknowledging that the WTO has failed to adapt to shifts in the global trading system, some observers see an opportunity for reform. What’s unclear is whether the U.S. approach will result in the WTO’s reinvention or obsolescence.

1. What is the WTO?

The WTO, based in Geneva, provides a forum to negotiate deals, settle disputes and monitor trade practices. It started life in 1995, replacing the General Agreement on Tariffs and Trade, which was developed after World War II. While the GATT regulated trade in goods and reduced tariffs and other barriers, the WTO also covers services and intellectual property. A smoothly running WTO provides businesses with the certainty they need to invest and operate abroad, and fosters growth and economic integration. Since its creation, global trade has almost quadrupled in value. Yet, in recent years the WTO has fallen behind the massive shifts in the global economy, such as the proliferation of digital trade.

2. What are the rules?

The WTO’s 164 members, representing 98% of world trade, make commitments not to discriminate between trading partners or between their own and foreign goods and services. They also agree to lower trade barriers; to have predictable and transparent trade policies; and to discourage unfair practices such as export subsidies. Some exceptions are allowed for protecting the environment, health and national security. Least developed countries receive technical assistance, duty-free treatment and quota-free access to foreign markets.

3. Why is the WTO dysfunctional?

The U.S. under Trump paralyzed the WTO appellate body by blocking appointments to the seven-person panel for more than two years. A global court for trade, it has been unable to issue judgments on new cases since December 2019 because there aren’t enough active members. Although WTO nations can still receive an initial ruling on a dispute, a losing party can now appeal it into legal limbo. As a result, governments can impose measures without fear of WTO-sanctioned retaliation. Trump’s complaint was that the WTO evolved into a legal tool for nations to exert pressure on the U.S., and his top trade official called it a “litigation-centered organization.” Biden has not offered any specific details about his plans for the WTO but he has advocated greater collaboration with America’s allies to resolve common problems.

4. What about the U.S.-China dispute?

The U.S. had accused China of discriminating against foreign companies and providing advantages to local rivals through direct subsidies, cheap land and electricity. The Trump administration also argued that China’s WTO status as a developing country — which it’s had since joining in 2001 — provides it with unfair advantages. Any nation can declare itself a developing country upon joining the WTO, giving it more time to implement tariff cuts and increased access to foreign markets. China, now the world’s second-largest economy, has resisted efforts to rescind special privileges that it argues were hard-won concessions obtained during its entry into the organization. Few, if any, expect tension with China to go away under Biden, but his advisers say he will work with allies to repair economic relations that are in disarray.

5. What do other nations say?

There’s broad agreement that the WTO needs reform. While many nations agree with the Trump administration’s concerns about the WTO appellate body, most disagree with the strategy of shutting it down entirely. The WTO generally has a poor record of negotiating trade deals and the most recent round of trade talks — the Doha development agenda — failed spectacularly. Over the past 25 years the organization has only approved one multilateral accord, the Trade Facilitation Agreement, which is designed to simplify and harmonize global customs procedures. The system is also cumbersome: All WTO decisions must be adopted by consensus, which means any nation can block an agreement for any reason.

6. What are the prospects for reform?

Efforts to make changes stalled in the run-up to the U.S. presidential election in November 2020. Now that Biden has been elected, movement may be reinjected into the process. Meanwhile European Commission President Ursula von der Leyen said she wants the European Union to lead reforms, and established an interim arbitration system for trade disputes while the WTO appellate body is paralyzed. While the U.S. has made several reform proposals, none have the full backing of WTO members. The EU — as well as Japan, Canada, Australia and New Zealand — does support some U.S. recommendations. These include encouraging governments to submit timely and comprehensive details about their trade practices.

©2020 Bloomberg L.P.