The new head of the the World Trade Organisation, Ngozi Okonjo Iweala, has a challenging to do list if she is to re-establish the WTO’s authority over the world trading system. Its effectiveness over the past five years has been damaged through a failure of multilateralism: members states have been acting in their own interests through the pandemic; the US has undermined its dispute settlement system; Russia, China, Japan and the US have imposed trade restrictions and tariffs on national security grounds; the organisation has not been able to prevent China from providing heavy and distorting subsidies to state-owned enterprises; most importantly of all, it has failed to prevent an escalating trade war between China and the United States that has spilled over into finance and technology as well.
In short, the WTO has been as effective in preventing trade conflict since the last financial crisis as the League of Nations was in preventing the escalation of tensions between nations in the inter-war period. The reasons have been similar: shfits in spheres of influence and an underlying sense of nationlism caused by erratic and unequal economic growth leading to populist politics at a member country level.
There are a number of things that the new Director General must address. As the Biden administration has shown itself to be more multilateral in tone than the Trump administration, if she is to make an immediate impact she needs to prioritise quickly.
First, the dispute settlement system is ripe for reform. The two stage system, of an expert panel first and a full appellate body subsequently has lost its legitimacy, and not just because it is no longer quorate. President Biden will not rush to unblock the appointment process of judges unless the process is simplified into one that focuses on factual breaches of laws governing world trade. At present, the system is long-winded and complex and favours litigation by countries against other member states simply because there is always an ultimate Court of Appeal.
Second, the WTO promotes “non-discriminatory” and “open” trade. In other words, each country should treat businesses from abroad as it treats its domestic businesses and not promote any differentiation between home producers and those from abroad. In the febrile environment of populist and nationalist politics, this has proved impossible. Covid has exacerbated this trend with some 98 countries imposing restrictive measures on trade in Covid-related supply chains. National security has been used as a justification for the breakdown of the trust between nations and restoring that trust is in the interests of trade multilateralism in the coming decades.
Third, the WTO is a child of its time and needs to grow up into the digital era. Like the General Agreement on Tariffs and Trade, it was configured for contemporary challenges – in 1995 those of the beginning of the “globalisation” era. It’s predecessor, GATT had covered trade in goods and the laws governing national security were largely centred around anti-dumping. These were carried into the WTO at a time where there was a need to create international agreements around the free flow of people, ideas, technology, goods, services and capital across borders. The sense of a shared and multilateral interest meant that a tighter definition of “national interest” was not prioritised.
26 years later, the dissatisfaction with everything that globalisation stood for has manifested itself in economic nationalism as governments seek their own identity in a world that is dominated now by digital trade, digital trade finance and digital intellectual property. Digitalisation genuinely is a matter of national security. Now, warfare is “all means”, and includes strategic competition over cyber security, control over data and digital communications as well as economic reach and influence. The recent invocation of GATT “national security” clauses in pursuit of nationalist interest means that there is an urgent need for redefinition if the WTO is to maintain an acceptable balance between multilateralism and national sovereignty.
Fourth, the WTO needs to provide a compelling reason for conducting trade negotiations and agreements through it rather than outside of it. Robert Lighthizer, President Trump’s trade representative, talked of the Free Trade Agreement “land grab.” By that he meant the preponderance of deals that were done, particularly by the EU with smaller nations which he viewed as redolent of a colonial master shackling smaller countries to its orbit.
But this is a bigger issue in the digital era where trade agreements, such as the recent one between the EU and China, cover some areas of investment, intellectual property and national interest as well. There are large trading blocs outside of the WTO that have strengthened recently – the Regional Comprehensive Economic Partnership (RCEP) is one and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership is another. The Phase 1 deal between the US and China also falls outside of the WTO.
Finally, the WTO’s biggest challenge is to make itself relevant to the future of world trade. Ms Ngozi needs to go into her role with characteristic humility realising that the WTO’s crisis of legitimacy has been triggered by the very inequality in economic opportunities that its “globalist” structures were supposed to prevent. In pursuit of “open and fair” trade, it has allowed a perception of unequal access and unfair practices to develop while inequality has grown and environmental destruction has continued apace. But globalisation, with all its faults, is not trade between nations – the WTO needs to take this point on board in everything it does if it is to make trade genuinely sustainable.
Despite an obvious pivot towards Multilateralist language, there is no evidence that trade will be any less weaponised in the near term than it has been over the past five or so years. President Biden’s new “Made in America” policy, for example, is technically also in breach of the WTO’s core principle of non-discrimination. And while America remains economically isolationist, there is a danger that the path towards an ever-closer resemblance to the League of Nations leads inevitably towards the fragmentation of the world trade system. That is not in anyone’s interest.