This Executive Summary is taken from a longer publication written by Ignacio Garcia Bercero, Director, Directorate General for Trade of the European Commission; European Union Visiting Fellow, Oxford University; and published by the Bertelsmann Stiftung.
The full paper can be found here.
The World Trade Organization, which in 1995 succeeded the General Agreement on Tariffs and Trade, has been the cornerstone of a rule-based trading system based on non-discrimination, progressive liberalisation and a binding system of third-party adjudication of disputes. During the GATT era, trade expanded from 10% in 1945 to more than 40% of GDP and by 2008 the share had further increased to more than 60%. With the accessions of China and Russia all significant trading nations were subject to the same system of rules.
Despite its achievements, the rule-based trading system is experiencing a profound crisis. The US and China have entered into an era of geopolitical conflict that has trade and technology at its epicentre. There is an increasing questioning as to whether the rules of the WTO are relevant to address distortions due to the role of the party/state in the management of the Chinese economy. The Trump administration has decided to open a trade war with China outside the framework of WTO rules and has taken action to prevent the continuing functioning of WTO dispute settlement. The crisis of WTO has however much deeper roots. The failed Seattle Ministerial of 1999 was a first signal both of the external contestation of trade agreements and of deep divisions of the members as to the direction in which the trading system should evolve. The failure of the Doha Development Agenda has undermined the credibility of the WTO as a forum of negotiations and shifted the centre of gravity of international trade to bilateral negotiations.
The first part of this article presents an argument about the continued relevance of the rule-based trading system. It starts by looking into the root causes of the US-China trade conflict and argues that it is possible to manage competition with China on the basis of an updating of the rules of the WTO. What would be required is the acceptance by China of commitments that correspond to its weight in the world economy and negotiations on improved rules to deal with the negative spillover of industrial policies. The article then discusses what can be considered to be the core tenets of the rule-based trading system. Contrary to the view according to which the WTO represents a neoliberal hyper globalisation compact, it argues that the WTO essentially retained the flexibilities that characterised the GATT “embedded liberalism” paradigm. Moreover, the demise of the WTO and its replacement by a new geo-economic order ,would lead to a world of escalating conflicts that would put in question the basis for international cooperation not only on trade but critically on the recovery from the covid-19 pandemic and the transition towards climate neutrality.
The second part of the paper presents a series of proposals to reforming the Word Trade Organization. In order to build confidence, it suggests that the next WTO Ministerial Conference should agree on some initiatives that show that the WTO can be relevant in the context of recovery from the pandemic and contribute towards sustainability goals It should also open a process of reform that considers improvements of the three core functions of the institution. As regards the negotiating function, it is argued that the WTO needs to be able to accommodate open plurilateral agreements and develop a more pragmatic approach to special and differential treatment for developing countries. As regards WTO dispute settlement, suggestions are made to improve the appellate function, reinforce the fact finding powers of panels, provide for faster proceedings and establish an agreed interpretation of certain provisions of WTO law on trade remedies.
Finally, in order to restore a common sense of purpose to the trading system, it is suggested that to culminate the reform process Heads of State and Government should adopt a Declaration that commits WTO members to support the implementation of the UN Sustainable Development Goals. In order to fulfil this task a number of reforms are proposed to reinforce the role of WTO as a forum to ensure transparency of trade policies and their coherence with the broader goals of the international community.