The World Trade Organization (WTO), founded in 1995, is composed of 164 countries representing 98% of world trade and aims to maintain the principle of free trade around the globe. Under a system of free trade, goods and services are traded with minimal or no trade barriers such as tariffs or artificial price-fixing. However, the WTO is on the brink of becoming irrelevant as it is failing to adapt to the modern realities of increased protectionism and the tense political climate, especially between the United States and China.
Is the WTO becoming irrelevant?
The main purpose of the WTO is to regulate trade relationships by setting and enforcing trade rules. For instance, suppose that country A has a trade agreement with country B, but country A decides to heavily subsidize a particular industry which allows said industry to sell its product at a much cheaper price everywhere. Then, country B, whose similar industry suffers as it is unable to sell both at home and abroad due to its relatively high price, may complain to the WTO on the grounds of unfair competition. The WTO dispute settlement mechanism named the Appellate Body would then determine whether country A has violated the trade agreement with country B and what course of action is needed to ensure that its rules are followed. For example, a recent complaint lodged by the United States in 2016 against China over subsidies on agricultural products such as rice, wheat, and corn ultimately resulted in a WTO ruling in 2019 that forced China to implement an artificial price for its goods. However, as this dispute was between two relatively equal economic powers, this example does not reveal how the rules of the WTO are often tipped in the favour of stronger economies whose bargaining power is larger. Because the WTO tends to privilege dominant economic powers, there tends to be a sense of distrust towards the WTO from developing countries.
The power of the WTO can be problematic because most developing countries with weaker economies are subject to the same rules, with some exceptions of administrative nature which is referred to as special and differential treatments for developing countries, as much stronger economies, even though they may lack the technical and financial resources to properly abide by the WTO’s rules and to keep their respective comparative advantage. In addition, weaker economies are often systemically forced to open their markets to foreign economies as otherwise, they will miss out on certain economic opportunities such as foreign aid, foreign direct investment, or foreign capital flows. In sum, the rules set by the WTO and enforced by its Appellate Body perpetuate the status quo in the global economic system where the weaker economies remain weak while strong economies become even stronger. In other words, the economic and legal framework established by the rules of the WTO not only allows but also maintains the unfair balance of economic bargaining power in the world economic system.
WTO members determine the rules of global trade through holding rounds of negations. Since the creation of the WTO’s predecessor, the General Agreements on Trade and Tariffs (GATT), there have been 8 successful rounds of negotiations that aimed to harmonize and determine trade rules. Although the most recent one, the Doha round, initiated in 2001 promised major reforms in trading rules but failed to generate consensus and was later abandoned. Most points of contention arise from the unwillingness of the strong economies (US, EU, UK, Canada, and so on) to make concessions to the weaker economies (such as India, some African countries, and, at the time, China). For instance, the ultimate stalemate at Doha stemmed from the lack of concessions on specific requests for change regarding agriculture’s subsidies, rules on e-commerce, and a better settlement dispute mechanism. Such a stalemate defeats the main purpose of the WTO as for now trading rules are based on the economic system of 2001 and fails to address modern concerns. The stalemate in the Doha round also means that multilateral agreements (agreements among many countries) are becoming less attractive due to rules failing to adapt to modern realities which disadvantage countries that excel in specific industries.
The rise of regionalism
Since then, many countries have begun to favor regional agreements, such as the Trans-Pacific Partnership (TPP) that includes Canada, Mexico, Japan, and eight other countries, which are outside of the WTO’s reach in the sense that the rules of regional agreement supersede WTO’s rules. The former North American Free Trade Agreement (NAFTA) which is now the United States-Mexico-Canada Agreement (USMCA) is another good example of such a multilateral agreement. These regional agreements function roughly the same way as a WTO agreement in the sense that they promote minimal trade barriers, but they are more attuned and calibrated to the strength and weaknesses of each participating country. Such agreements also provide more bargaining weight to each participating country when compared to the WTO. In sum, those regional agreements better calibrated to the countries’ economic situation and the set of outdated rules of the WTO, coupled with the beginning of a trend in which world trade is in decline – between January 2019 and 2020, world trade declined by 1.5% – are jeopardizing the relevance of the WTO.
A breath of fresh air at the WTO
On February 8th, 2021, Nigeria’s Finance Minister Okonjo-Iweala was appointed as the new Director-General of the WTO after initial opposition by the US under the Trump administration. This means that the Massachusetts Institute of Technology-trained development economist became the first African and female to lead the WTO. As most global political economists and political scientists agree, her main task is to demonstrate the relevance of the WTO. To do so, she must score points early on in her appointment.
To begin with, she needs to work towards repairing the damaged relationship between developed and developing economies as seen in the US’s increase of its tariffs on steel and aluminum in 2018. To do so, there are a few paths that she could potentially take. First, she could tackle long-standing issues such as securing fishing grounds along the African continent for African countries protecting them from foreign industrial crawlers, which would be a significant victory for African countries.
Second, she could reform the WTO dispute settlement mechanism, which historically had an approach of “special and differential treatment” based on a country’s designations, in a way that would be fair for all WTO members. For example, countries such as China (the 2nd most powerful economy globally) and India (6th most powerful) are still designated as developing countries granting them special rights such as waivers on specific requirements to comply with WTO rules, among many others. As such designation is on a self-declared basis, it is dependent on a country’s own assessment of their economic situation and therefore is highly relative and subjective. A proposition to counter such an approach is to get rid of the preferential treatments and ensure that there are protection mechanisms for developing countries such as in the fishing grounds example above.
Thirdly, the dispute resolution mechanism urgently needs to be reformed. Currently, the Appellate Body has 3 trade judges, originally set to 7 rotating members, to process complaints. However, the US has opposed the appointment of any new members to the Appellate Body arguing that the judges too often overstep their jurisdiction, rendering the dispute settlement mechanism very slow and inefficient. In contrast, regional agreements such as the USMCA uses mediation and a panel consultation to find remedies to disputes which are more efficient than a permanent body due to the panel members’ knowledge of the specificity of the complaint.
Despite the promising appointment of Okonjo-Iweala to address the ills of the WTO, it remains that the future of the organization is uncertain. Regional agreements seem more promising, economically viable, and calibrated to the countries’ economies. It nevertheless remains that the economic system of free trade is still well in place. However, in the future, the reemergence of mercantilism, which must be understood as a form of economic nationalism, as seen in the distribution of COVID-19 vaccines, may supersede free trade.