A triple threat is putting the multilateral trading system at risk. What can the WTO do about it?

Blame COVID. Or China, or Russia, or globalization itself. Responsibility for the emerging trend of countries launching their own industrial policies must lie somewhere. Even if the forces contributing to the spread of protectionist policies and increased government interventions in the market are hard to dissect, the implications for the World Trade Organization (WTO) and its elaborate system of agreements and rules are immense. These policies threaten the most fundamental rules and principles of the multilateral trading system, such as those requiring all members to treat one another equally and not favor local goods over foreign ones. If the foundations are crumbling, can the edifice still stand?

There are other threats to the multilateral trading system, which has been in place for the past seventy-five years. Regional trade agreements have challenged the non-discriminatory principles of the WTO for years now, and new anxieties about strategic competition with China have inspired measures among WTO members to decouple markets, moves that are seemingly at odds with the WTO’s goals of global economic integration. Add to the mix COVID-19 and Russia’s war in Ukraine, which have quickened the pace of these trends, and one might wonder whether the WTO stands any chance to remain relevant in coming years—or even survive.

For decades following World War II, a process of liberalizing markets, dismantling trade barriers, and extending non-discriminatory treatment globally was relentless and seemingly irreversible. The General Agreement on Tariffs and Trade led to the establishment of the WTO in 1995, which extended the rules and scope of the multilateral trading system to cover agriculture and textiles, intellectual property rights, trade in services, and more. Seismic geopolitical events, including the breakup of the Soviet Union in 1991 and China’s entry into the WTO in 2001, reinforced the global opening of markets. As Francis Fukuyama famously declared, it was the end of history, as global conflict, tyranny, and state control of markets would fade away. Unfortunately, we all know better now.

Insidious industrial policies

A recent speech by US Trade Representative Katherine Tai presents the industrial policy roadmap in clear relief. She suggested that domestic industrial policies must complement trade policies. Although she went on to reassure her audience that this approach does not mean the “global economy devolving into a kind of state of nature—where might makes right,” the implications are that common, shared global economic interests are no longer a central priority for the United States. US actions to buck WTO rules on subsidies, close off its government procurement market from foreign suppliers, and maintain high tariffs imposed by the Trump administration have led even close allies to suggest that they need to follow suit to defend their economic interests.

Some view industrial policies as an effective response to too much globalization. As Tai noted, the “need for correction is clear, and industrial policy is a part of that re-balancing effort.” However, this perspective may too casually cast aside questions about economic efficiency; the power of coddled industries to keep protections in place for years, even after their limited efficacy is demonstrated; and the reactions of ally and foe alike to put into place mirror-image measures. Even if one acknowledges a counterargument that national economic interests should prevail when other global players don’t play fair, the threat to the WTO is inescapable. When its rules, particularly the most fundamental ones, are ignored because they are deemed inconvenient, they lose their force in influencing national behavior, and the organization directly suffers in its ability to advance the global good.

Regional trade on steroids

Unlike many features of industrial policies, free trade agreements (FTAs) are specifically allowed under WTO rules. That does not mean they are fully compatible with WTO principles, especially most favored nation (MFN) treatment, which requires equal treatment for all WTO members. But the rules provide for limited exceptions for preferential tariffs under FTAs, so long as they cover “substantially all trade” between the parties. It also does not mean that FTAs pose no threat to the multilateral system. As more and more countries favor negotiation of FTAs and devote less time and fewer resources to WTO negotiations, the WTO’s stature diminishes further.

However, on the bright side, FTAs can serve as laboratories for testing new approaches to trade agreements, even in areas such as labor and the environment. Progress on fisheries subsidies in recent years in the Comprehensive and Progressive Trans-Pacific Partnership and the US-Mexico-Canada Agreement inspired renewed efforts to conclude a fisheries agreement in the WTO at its 12th Ministerial Conference in June. Good regulatory practices—which encourage greater transparency, predictability, and accountability in national regulatory measures—have been pioneered in FTAs and could be taken up soon on a broader scale in the WTO. I know from my own negotiating experience in the Trans-Pacific Partnership and the WTO the tremendous impetus that FTAs can offer to rule-making in the WTO.

The most significant threat that FTAs might pose to the future credibility of the WTO is the inclination to negotiate half-baked “interim” agreements, such as the US-Japan trade agreement and Australia’s recent agreement with India, that fall far short of WTO requirements that they cover substantially all trade. The global trade landscape in recent decades has already shifted dramatically from a generally non-discriminatory one to a very preferential one in which many different levels of tariffs proliferate for the same products. This kind of approach could lead to the exception swallowing the rule in ways that fatally undermine MFN treatment—one of the WTO’s fundamental principles.

Decoupling as strategic policy

The United States and its allies, which view China as a strategic competitor that is bent on upending the existing global balance of power and related institutions, have compelling arguments for restricting commercial engagement, particularly if that engagement might feed a military buildup that threatens national security interests. However, the greater the decoupling, the greater the threat to the WTO.

After many years of hard negotiation, China joined the organization in 2001. At the time, most observers viewed accession as a critical step in China’s market-opening reform process, which would provide the economic underpinnings to a more integrated and safer world. I was then serving in Geneva, where negotiators expressed a collective relief that China’s economic behavior could be tamed by it being in the WTO. Instead, China effectively exploited gaps in WTO rules to advance its export-driven strategic interests in ways deemed unfair and dangerous to the economic and strategic interests of other countries.

At this point, it would be improbable to return to the economic landscape that existed before China’s accession. And a significant decoupling between China’s economy and those of other major WTO members would seriously strain the framework of WTO rules. While the WTO provides wide latitude for a country to deviate from WTO rules based on its interpretation of its “essential security interests,” a full abandonment of a WTO relationship between the United States and China, for example, could test the WTO to its breaking point. Earlier precedents, such as Cuba and the United States or India and Pakistan, are hardly relevant to the circumstances of the United States or the European Union and China because of their sheer size and the extent of the connections between the economies.

Headwinds ahead

These multiple threats suggest that the future for the WTO is far from assured, even if a sudden collapse or departure of a critical player is unlikely. There are opportunities to turn the tide.

Policymakers who are concerned about the implications of widespread industrial policies in major economies should call these measures out. They are short-sighted, of limited effectiveness (particularly if others respond in kind), and contrary to important WTO obligations. If they persist, the WTO’s rule of law could collapse.

FTAs will, and should, continue. They can increase trade, enhance supply-chain resilience, and cement strong strategic relationships. However, it’s best to avoid the shortcuts of interim FTAs. If they are to support, rather than undercut, the multilateral trading system, they should be generally comprehensive and not just an easy alternative to hard work in the WTO.

Finally, economic decoupling between the first and second largest economies in the world would be globally destabilizing and likely cause the eventual end of the WTO. Some disengagement is inevitable, and necessary, if the United States or European Union, for example, need to take truly justifiable actions to protect essential security interests. But the system will not be able to survive for long if the two or three largest members are ignoring the rules with respect to each other.

Slow and steady offers long-term relevance

As Assistant US Trade Representative Andrea Durkin recently noted, the WTO can “reform by doing.” Although her comments focused on the possibility of small, negotiated trade agreements, such as those concluded at the 12th Ministerial Conference, the sentiment is relevant to countering these existential threats.

For example, it is critical that the WTO’s dispute-settlement system become fully operational again, so that industrial policies that run afoul of its rules are effectively contested. Only then might there be deterrence so that WTO members are more inclined to formulate subsidies and trade-restrictive measures that are consistent with WTO rules. This requires a resolution to the current Appellate Body crisis, in which the United States has blocked appointments to the Appellate Body because of concerns with its record of exceeding its mandate, thus preventing trade disputes from being meaningfully adjudicated in the WTO. The United States plays the most central role in finding a compromise, but others will have to do their part in preventing future Appellate Body overreach.

The WTO’s scrutiny of FTAs should be intensified, particularly to shed light on partial agreements that do not adhere to WTO requirements and potentially undermine the credibility of the organization. A healthy and complementary co-existence of FTAs and the WTO will benefit all.

Finally, the WTO should continue as a forum to discuss the implications of specific actions to decouple economies. The WTO must be more assertive in highlighting the dangerous implications to the organization and the system that has delivered economic growth for more than seven decades if major economies continue to disengage, resulting in less global trade.

For several years, there has been attention focused on the breakdown of the WTO’s negotiating function. However, if the WTO is to survive this moment and eventually thrive for the long term, its members will need to go even further to show that they value its role in curbing some of their worst instincts.

Mark Linscott is a nonresident senior fellow at the Atlantic Council’s South Asia Center and the former assistant US trade representative for South and Central Asian affairs, and WTO and multilateral affairs.

Further reading

Image: Director-General of the World Trade Organisation (WTO) Ngozi Okonjo-Iweala attends the opening ceremony of the 12th Ministerial Conference (MC12), at the headquarters of the World Trade Organization, in Geneva, Switzerland, June 12, 2022. Martial Trezzini/Pool via REUTERS