With the coronavirus putting the world economy into its worst dive in almost a century, it would help if the surviving trade in goods and services between countries was continuing in an orderly way. But, as if we didn’t have enough problems, the future of the international body responsible for ensuring free and fair trade, the World Trade Organisation, is in grave doubt.
The eternal temptation in international trade is protectionism: please buy all our exports, but we’ll be importing as few as possible of your exports. It’s tempting because, to the voters in every country, it seems just common sense to favour your own industries over their rivals in other countries.
Only when you’ve learnt a bit of economics – about the gains from specialisation and exchange, in particular – do your realise that first, it’s the consumers of the protected products and all the local industries you don’t protect who pick up the tab, and second, when you try to steal a march on other countries, they usually retaliate, which ends up meaning you’re both screwed.
That’s why the WTO was set up: to help its 164 member countries reduce their import duties (“tariffs” as economists call them) and other restrictions on imports, and then keep them down, so all the members are better off.
As explained in a report from the Lowy Institute, prepared by Dmitry Grozoubinski, a former trade negotiator with our Department of Foreign Affairs and Trade, the WTO has three main roles.
First, the negotiation of successive “rounds” of mutual reductions in tariffs and import bans or quotas by all the members. After the establishment of the Geneva-based General Agreement on Tariffs and Trade (GATT) after the end of World War II, eight multilateral rounds of reductions were negotiated.
In the early rounds, the members were mainly the developed countries and they concentrated on reducing the tariffs on manufactures that had built up in the 1930s as countries tried to use protection to end the Great Depression, but succeeded only in making it worse.
The result of the rounds was hugely increased trade between the rich countries, which many economists believe contributed greatly to the post-war period of rapid economic growth, rising living standards and full employment, but which ended with the coming of “stagflation” – high inflation and unemployment – in the mid-1970s.
By the “Uruguay round”, completed in 1994, the negotiations had broadened to cover textiles, agricultural subsidies, services and intellectual property. Many developing countries had joined the agreement and benefited from the liberalisation of trade in clothing and textiles, and rural products.
But the round’s most spectacular achievement was turning the GATT into the World Trade Organisation, still based in Geneva. Many more developing countries joined, as did China in 2001.
The WTO’s second role is to monitor member countries’ compliance with the rules agreed on during the rounds. One rule is that once a tariff reduction has been agreed on, it’s then “bound” and mustn’t be increased.
But the most important rule is “most favoured nation”: no other country should be given a special deal. So the lowest tariff you impose on some nation must be the one you impose on every other member. Another key rule is “national treatment”: imported and locally produced goods must be treated equally.
The point of these rules is to keep world trade both free and fair; to discourage countries from backsliding and help governments resist local pressure to revert to protection. In particular, to stop small countries being pushed around by big countries.
And so you see why a middle-size country like ours has much to gain from living in a world where every country sticks to the rules – and much to lose when the big boys on the block decide to start throwing their weight around.
The WTO’s third role is to formally adjudicate trade disputes between its member countries, thereby enforcing its rules. Serious disputes go to a court-like “dispute settlement body” and, if necessary, to an “appellate body”.
So, what’s the problem? Why is the WTO in deep trouble? Because, in Grozoubinski’s words, “all three pillars are wobbly, and had been long before the Trump administration started taking a sledgehammer to them. Unquestionably, however, the picture in 2020 is grim.”
The first role – negotiating further rounds of reduced barriers to trade – is, he says, “hopelessly stalled”. The “Doha round” was launched in 2001, but was unable to reach agreement, partly because it’s much harder for so many developed and developing countries to find common ground. The last attempt to make progress was in 2013.
Meanwhile, countries have shifted from seeking multilateral agreements to doing any number of bilateral (misnamed) “free-trade agreements,” which breach the spirit if not the letter of WTO rules such as “most favoured nation”.
The second role – monitoring members’ compliance with the rules – “relies on international peer pressure for the bulk of its enforcement,” but the world is in the grip of a trade war between the United States and China, meaning the US has gone from decades of getting everyone else to agree on sensible rules and stick by them to ignoring any rules it finds inconvenient in its quest to “make America great again”.
As for the third role – a binding dispute settlement mechanism – in December the US used a procedural blockade to render the WTO’s appellate body “impotent and unable to convene the required quorum of three panellists,” thus rendering the formerly legally binding system of arbitration optional.
If that wasn’t enough, the US is refusing to approve the organisation’s budget, and Congress has bills that would withdraw the US from the WTO (but which are unlikely to be passed). The outfit’s director-general has resigned, and any member could sabotage his replacement. The next conference of trade ministers has been delayed until at least 2021.
And all this is happening at a time of pandemic and escalating protectionism. Well done, chaps.
