WTO Paralysis Means Law of the Jungle

(Bloomberg Opinion) -- This week, a core function of the World Trade Organization — founded in 1995 to govern the rules of trade between 164 countries — ground to a halt.

The reason for that was U.S. President Donald Trump, who has never really had much time for multilateral institutions. The WTO has been on his hit-list for some time as an entity that he says has taken advantage of the U.S. and favored China, and now he has successfully moved to paralyze one of its most critical mechanisms: Dispute settlement. After repeatedly blocking new appointments to the seven-member body that decides on appeals at the WTO, the Trump administration has rendered it basically unworkable. Without an effective appeals process, why file a complaint at all?

You could forgive the average person on the street for shrugging their shoulders at the thought of a dysfunctional WTO, which over the past two decades has had its fair share of messy moments. Negotiations in 2001 to lower trade tariffs around the world, called the Doha round, went nowhere. China’s entry into the club has neither opened up its economy, nor created a level playing field when it comes to potentially market-distorting subsidies. And as for the appeals process, the WTO’s most famous recent case — Airbus versus Boeing — has lasted 15 years without a clear winner. In 2016, Airbus’s boss at the time said the spat had only really benefited “the armies of lawyers” paid to fight it.

All that said, there is a real and serious significance to the gridlock. Whatever the WTO’s flaws, and the obvious need for reform, Trump’s campaign has moved beyond constructive criticism and into assault. His weapon of choice is the punitive tariff and his target of choice is China, creating precisely the kind of bilateral trade war that the WTO works to avoid. Indeed, for all of the WTO’s failures to rein in China or deliver tariff agreements, its chief success has been convincing members to stick to a common legal framework rather than fight trade wars. Ralph Ossa, a professor at the University of Zurich, estimated in 2015 that this success was worth $340 billion annually to the world economy.

Couple this with the impending departure of the U.K. from the European Union, which would create new potential barriers between Britain and its biggest trading partner, and this is a true milestone in the backlash against the post-Cold War order. That reaction may be justified in some areas, considering globalization’s legacy on workers’ rights and fair trade, but promising voters a better “deal” by wielding trade policy like a weapon can easily backfire. Trump’s lofty promises to fight trade cheats and currency manipulators have also resulted in a shrinking U.S. manufacturing sector. And across the Atlantic, the Conservatives’ promise to “get Brexit done” has saddled the U.K. with divorce papers that give it barely a year to negotiate a new trade deal with an EU eager to defend its market and economic interests. 

As world trade shifts from organization to disorganization, what is key is the response from actors like the EU and countries in Asia. It’s vital that Europe builds and improves on multilateral institutions. It’s likely the EU will keep finding itself in Trump’s cross-hairs, and the bloc is not in a position to engage in a prolonged trade war with the U.S. without serious internal disunity. Academics in France, Japan and Canada have proposed a “Euro Pacific Partnership” covering 40% of world trade that would defend multilateral dispute settlement at the WTO while also taking a tough line on enforcing intellectual property, government subsidy, human rights and data-transfer rules. Trump’s actions have made initiatives like this more likely: An EU backup plan that would create a way to keep on settling international trade disputes without the U.S. has gained support from Canada, Norway and now China.

The alternative is, as plenty of trade officials have noted, the law of the jungle. That might suit Trump — a self-styled “tariff man” — just fine. But everyone else should worry.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

©2019 Bloomberg L.P.

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