The US-China trade war will impact negotiation dynamics of the WTO
To paraphrase Mark Twain, reports of WTO’s impending demise may be both premature and exaggerated.
The World Trade Organisation (WTO) which entered into force in 1995 with much fanfare was, in its heyday, the most powerful multilateral institution, not least because of a rigorously enforceable dispute settlement mechanism. It used to be said that if a country secured a bailout from the IMF, its obligations ceased when the loan was repaid in full. In sharp contrast, once commitments were undertaken in the WTO, the country was pretty much beholden to the organisation forever.
So, for an organisation that was the envy of all other institutions for well over a decade, what went wrong? Well, for one thing, the shifting power dynamics from the West to the East had a huge impact on its functioning. With China and India joining hands with Africa and other developing countries, it was no longer possible for the industrialised countries to steamroller the developing countries, as they did in the Uruguay Round. Then, there was the broken promise of the Doha Development Agenda which was never implemented. The last straw was when a highly disillusioned United States started vetoing the appointments of the appellate body Judges one by one, beginning in the Obama era. President Trump, however, has taken it to a whole new level by proving to be a wrecking ball for the WTO. What he has done by way of punitive tariffs on foes (China), allies (EU and Canada) and friends (India) is quite unprecedented and constitutes a violent assault on the bedrock of the multilateral trading system ie the Most Favoured Nation (MFN) principle. In doing so, he has also completely disregarded the dispute settlement mechanism of the WTO. He has accused it of bias, of judicial overreach and of creating new obligations for countries.
The US also has a major grievance with the WTO about its alleged inability to deal adequately with China’s brand of “hybrid state capitalism” and the latter’s potential to distort international trade. The WTO was conceived on the basis of free trade and comparative advantage and it is true that it was not designed to deal with economies such as China. President Trump has therefore argued that pending far reaching reform of the WTO, he will use whatever bilateral instruments he possesses to tackle Chinese trade measures.
It is now agreed among the vast majority of WTO members that any reform of the organisation must begin with its famed dispute settlement mechanism. This is also because the appellate body is already depleted from its full strength of seven and, as of October next year, this will fall below three, which is the minimum number of Judges prescribed in WTO law to hear a case. Once this happens, the WTO dispute settlement mechanism will grind to a halt. To prevent this from happening, the EU, along with countries such as Canada, China, India, Australia, Mexico and some others, have submitted a concrete proposal in November to break the deadlock on the appellate body. The proposal addresses most, if not all, of US concerns on the functioning of the Appellate Body and will be taken up for discussion in the WTO General Council on December 12 . It is noteworthy that India has decided to co-sponsor this proposal. After all, India has a profound systemic interest in the functioning of the dispute settlement mechanism and, by extension, in the smooth functioning of the multilateral trading system. It is not surprising at all that China too has decided to throw its weight behind the EU proposal.
It is hard to predict how the US will react to this proposal on December 12 at the General Council meeting. The fact that the US has not dismissed the proposal out of hand is seen as a hopeful sign by some observers. Nevertheless, the proposal must be seen as a last-ditch effort to resolve the existential crisis facing this important institution.
The WTO, or for that matter trade, has always been too important a matter to be left only to trade diplomats or negotiators. Hence the deep interest of the recently concluded G 20 Summit in Argentina in the matter. It is a sign of our times that the mere mention of the words “rules-based international order”, “contribution of the multilateral trading system” and “support for the reform of the WTO” in the final G 20 declaration have sent observers into ecstasy. Certainly, the Director General of the WTO has interpreted this as the highest possible political support for an institution in deep crisis. It remains to be seen whether this will translate into willingness of the Geneva-based negotiators to strike deals.
That said, the elephant in the room is the bilateral trade spat between US and China. While it would appear that a temporary truce has been agreed upon in Argentina, it is far from certain that a permanent deal will emerge soon. And, like it or not, this will impact hugely on the negotiation dynamics of the WTO.
Mohan Kumar is currently Chairman RIS and Vice Dean and Professor at Jindal School of International Affairs.
The views expressed are personal