By Lawrence L. Herman, July 28, 2023
The ground is shifting.
The multilateral system overseen by the World Trade Organization (WTO) for the last three decades is undergoing great stress. The WTO is showing itself unable to deal with the most serious global issues of the day – among them: climate change, the Covid 19 pandemic, digitization, and cyber-security. The WTO has become a bystander as world events unfold. We may not recognize it, but we are in the midst of historic changes in the international rules-based trading order.
While optimistic ideas about the WTO’s future are being discussed in policy and academic circles, realpolitik has put the Organization’s continuance as a functioning trade negotiating and dispute settlement body in doubt. This is not to suggest the demise of WTO as a forum for reviewing, monitoring and analyzing global trade issues. But without the WTO’s ability to conclude new agreements or to settle trade disputes, the question is: what kind of multilateral order will emerge as this historic shift unfolds?
Before offering some answers, it is necessary to consider why and how the multilateral trading order and the WTO has been undermined by examining both external and internal factors. External factors include the rapidity of technological change and the corresponding shifts in global business practices, growing political support for protectionist policies in significant jurisdictions, the increasingly fractured state of geopolitics, and security challenges from Russia and China. Internally, a range of stresses besets the WTO, particularly the inclusion of China in 2001, the requirement for unanimity to negotiate new trade agreements, and the paralysis of its once-heralded dispute settlement system.
How the WTO became a bystander in a changing world
The dizzying pace of global events is prevalent — digitization, e-commerce, artificial intelligence, cyber-crime, and the challenges of climate change, to name just a few. Highly structured intergovernmental organizations like the WTO are simply unable to keep up. The trading regime that emerged after World War Two, the General Agreement on Tariffs and Trade (GATT), eventually enshrined in the 1994 WTO Agreement, was developed when the world moved at a much slower pace. The rapidity of technological change and corresponding shifts in international business leave intergovernmental organizations largely in the dust.
Together with this rapid technological change, faith in globalization has been shattered as open trade and liberalized markets have failed to deliver the economic benefits expected in many sectors and in many communities in both the industrialized and the developing world. While the theoretical underpinnings of liberalized trade remain valid, political reality has diminished support among governments, particularly in the United States.
The decline in the multilateral order also has roots in China joining the WTO in 2001. While initially seen as an achievement, it became apparent that China’s system of State capitalism, controlled directly and indirectly by the Chinese Communist Party, is fundamentally inconsistent with the WTO Agreement and the liberal trading order it encapsulates. China’s aggressiveness as a dominant economic power has destabilized the WTO and caused massive strains in its functioning as a global institution.
Added to the above is the paramount concern for national security, always a top priority for Western and NATO allies. Security concerns have been magnified by the economic and military aggressiveness of China and by the Russian invasion of Ukraine. The actions of pariah countries like Iran and North Korea have added to security priorities among Western countries.
A central feature of those concerns is to reduce supply risks, often called supply chain resiliency, de-risking, friend-shoring or near-shoring. Ultimately these terms come down to the same things in trade policy terms: consciously increasing trade with geopolitical allies in order to decrease dependence on bad actors.
As western governments reduce supply chain vulnerability, they have been moving beyond WTO rules by proposing specialized and preferential deals with friendly or allied supplier countries in strategic sectors like critical minerals and microchips. The G7 meeting in May 2023 in Hiroshima reinforced this, issuing a set of major principles on supply chains entitled “Economic Resilience and Economic Security”. These kinds of policies weaken support for the WTO-based multilateral order.
Internally, the WTO struggles to move forward because it functions through consensus among members. Consensus means unanimity under WTO rules and so a single negative vote among 164 members can prevent passing an agreement. This makes it politically impossible to move ahead on a revitalized negotiating agenda.
It was the same unanimity rule that torpedoed the ill-fated Doha Round negotiations (lasting from 2001 to 2016). In almost 30 years of existence the WTO has only been able to finalize two relatively narrow multilateral agreements after years of slogging. The first on trade facilitation in 2014 and a second on fisheries subsidies in 2022 which covers only part of the global over-fishing problem and is still not in force. Both agreements took almost 20 years of negotiation.
This is a bleak record by any standard. As mentioned above, the inability to modernize the rules has left the Organization as a bystander as the world moves on, unable to move ahead on dealing with far-reaching trade challenges of the day. Alan Wolff, a former WTO Deputy Director-General, recently provided a comprehensive review of the governance and other institutional difficulties besetting the WTO, saying that unless these were resolved, the Organization risks “deterioration into irrelevancy” in the face of emerging global challenges.
Included in these internal problems is the complete non-functioning of the Appellate Body — due to American opposition to new appointments — which has paralyzed the WTO dispute settlement system. While a handful of governments have agreed to resolve disputes through voluntary methods and separate ad hoc arbitrations, unless some unexpected miracle appears it is hard to see how the Appellate Body impasse can be resolved. This absence of an institutionalized dispute settlement system is another weakening of the global trading order.
What now for the global trade order?
Where the WTO and participating governments will go from here is an undeniably difficult question. However, general trends are emerging significant enough to hazard some predictions:
- First, the US-China rivalry, and China’s system of State capitalism, will continue prevent any major reform of WTO rules or of the institution itself. Without US-China accommodation, there is little likelihood that the efficacy of the multilateral system can be restored.
- Second, national security interests will predominate Western policies and lead to more intensive, preferential supply chain arrangements outside the multilateral system, notably in highly strategic sectors such as critical minerals.
- Third, in combination with specialized supply chain arrangements will be a greater focus on realizing the benefits of regional deals such as The Canada-United States-Mexico Agreement (CUSMA), The Canada-European Union Comprehensive Economic and Trade Agreement (CETA), The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and others. Attention to these kinds of agreements – outside the multilateral arena – will increasingly predominate the trade policy of Canada and its allies.
- Finally, while the aggregate, long term effect of the above will mean a weakening of the multilateral order and a diminished role for the WTO, it does not mean international trade will face an absence of rules and disciplines. It rather means that the trading order will be more dispersed, much less universal, and thereby more challenging for governments to navigate and less predictable for corporations and international business.
The 1994 WTO Agreement remains a milestone in the progressive development of international law, a signal achievement in international relations not to be minimized. Even if world events and global exigencies have reduced its primacy, the rules and obligations enshrined in the Agreement remain as standards for regional or other preferential trade agreements referenced above.
We are witnessing an historic shift: a diminished relevance for the WTO in the transfer of the order of multilateral international trade down a notch to other, less universal, levels of inter-State relations.
Lawrence L. Herman is international trade counsel at Herman & Associates and Senior Fellow of the C .D. Howe Institute, Toronto.