The world can’t afford a dying World Trade Organisation (WTO)

WTO: A not so invisible hand?

As trade economists often argue, it is arduous to convince politicians about the gains from free trade. On the other hand, for the proponents of protectionism and inward orientation, it doesn’t take much to create a case for erecting barriers to free trade. Since the profits of import barriers are concentrated and the costs widely spread out in space and time, politicians don't shy away from using restrictive trade instruments for short-term gains. It is in this context that the presence of the World Trade Organisation (WTO), as the nodal agency for trade negotiation and dispute resolution has ensured that member countries gain from free trade by keeping aside domestic political compulsions. WTO has also been immensely successful in protecting the interests of small and developing countries against the unipartite decisions of large and developed countries. It has ensured that prosperity through free trade doesn’t remain confined within the shores of developed economies.?

Various trade theories predict that comparative advantage, factor abundance, and economies of scale give rise to increased welfare and prosperity of trading partners. It wouldn’t be an exaggeration to say that the presence of WTO has led to the real manifestation of such predictions on the ground. After all, the invisible hand is not so invisible when it comes to international trade. ?

A weakening WTO

Like any other international organization, even the WTO is subject to the contemporary political dynamics of the world, which in turn is intricately connected to the economic interests of the member countries. After Donald Trump’s election in 2016, the WTO witnessed scathing attacks on its efficacy to meet the ends it was created for. The Trump administration blocked the appointment of judges to the appellate body of the WTO, meaning thereby, the decisions of the WTO dispute resolution panel can’t be appealed against due to lack of quorum in the appellate body. It technically means that the member countries can now get away with their unilateral decisions. That the events in the WTO are closely tied to the US-China trade war is no secret. The vociferous criticism of the WTO by the previous administration stems from some of its rulings against the US in favor of China. The US is also against the principle of the verdicts of the appellate body becoming precedents for future disputes. It also considers the restrictions imposed by WTO rulings an infringement of its sovereignty. Even though the Biden administration has reiterated its commitment towards the WTO, the current policies appear to be a continuation of the Trump-era policies.

US policies and fallouts of a diminished WTO

The US has been at the forefront of WTO negotiations, playing an important role in the way international trade laws and agreements take shape. A retreat of the US from the WTO or even its disinterest is closely tied to the domestic politics in the US. The Trump era clamor for bringing manufacturing back to the US and creating job opportunities for its citizens led the administration to impose retaliatory tariffs against China. As President Biden has promised 5 million jobs, there is no guarantee that protectionist policies to insulate domestic producers from ‘cheap’ international competition won’t continue, a scenario quite contrary to the founding principles of the WTO.?

In the likely eventuality of the US continuing its policies, the WTO will weaken even further. It will create disincentives for its member countries to stick to the rules of the game. With the binding clause gone due to the absence of an appellate body, the possibility of utter chaos can’t be denied. The decline of the WTO will be highly detrimental to the interests of the small and developing countries. Imagine a scenario in which the US imposes high tariffs against Mexico. Even if Mexico retaliates by imposing tariffs of its own, the losses to the US will be too small to prompt it to remove the tariffs. On the other hand, Mexico will suffer huge losses as its export-oriented industries will be devastated. As unlikely it may sound, the fallouts of a protracted US-China war can spill over the WTO and weaken it beyond the point of repair.?

Searching for alternatives?

In the backdrop of these developments and stuck negotiations on agriculture, intellectual property rights, investments, etc. many member countries have already taken recourse to alternatives. Plurilateral negotiations or agreements among subsets of WTO members have continued in many areas. Plurilateral negotiations are much easier to negotiate because of their narrower focus and the fact that not all member countries of the WTO are bound by them. For example, at the 2015 Nairobi talks, 53 WTO members agreed upon the Information Technology Agreement (ITA) to reduce import tariffs on a wide variety of IT products. The agreement covered almost 97% of all the global IT trade. Similarly, another significant plurilateral agreement in progress is the Trade in Services Agreement (TiSA) among 23 members that include the US the EU but excludes China. In 2019, more than 70 countries launched talks to have an agreement on e-commerce, an important trade issue. Many member countries have also turned to bilateral free trade agreements (FTAs) or even the larger regional ones such as the Regional Comprehensive Economic Partnership (RCEP). However, not all countries have the political capital or the financial wherewithals to reach such agreements.?

Conclusion?

The WTO is dying and we will miss it when it is gone. Without the WTO, governments will take decisions that are politically popular but detrimental to both their domestic economies and to the global economy. A reinvigorated U.S. commitment to the WTO is crucial to reviving the WTO. The WTO would not have been created, and cannot move forward, without the U.S. leadership.?