ISPI - Istituto per gli Studi di Politica Internazionale

12/27/2023 | Press release | Distributed by Public on 12/28/2023 11:08

First Steps toward WTO Reform

The world trading system is in crisis with very limited prospects for reforming the World Trade Organization (WTO) in 2024. But failure to update the international trade rules could prove costly, exacerbating current geopolitical and commercial tensions among the world's largest trading nations. There is still time for WTO members to plant seeds for a more fruitful harvest later this decade, but it will require concrete actions at the 2024 WTO Ministerial Conference (MC13) to deflect protectionist measures and joint efforts by the United States, China, and the European Union to formulate new trading rules in key areas.

The WTO needs updating

WTO rules are largely unchanged from the 1990s, even though major technological innovations since then have transformed the way that goods and services are produced, marketed, and distributed. Efforts to update the WTO have been hindered by (1) extensive WTO-legal exemptions built into existing rules that nurture protectionist lobbies; (2) abuse and/or neglect of WTO obligations by rich and poor countries alike; and (3) the disabling of the Appellate Body which allows countries to block the enforcement of rulings against them.

Despite pledges to update the dispute settlement understanding "by 2024", WTO negotiations remain at an impasse. Powerful trading nations can do as they please regardless of WTO obligations by simply filing appeals "into the void"-panel rulings cannot be finalized until the appeals process is concluded and the absence of appellate judges mean they get an indefinite free pass on redressing WTO violations. In so doing, the dispute settlement impasse also deters interest in new rulemaking because there is no assurance that the new rules will be enforced.

With WTO talks blocked in Geneva, trade and investment seem to be reorienting around regional lines as firms respond to trade preferences and investment incentives in regional pacts. Intra-regional trade generally has increased: Chinese exports to RCEP, intra-ASEAN exports, intra-USMCA exports, and intra-EU exports represent a growing share of total exports of the partner countries

Trade is still growing, even though multilateral trade disciplines have diminished impact. But the cost of doing business is also growing. Policy interventions, some responding to geopolitical concerns, are proliferating in the absence of effective multilateral disciplines. De-risking is pervasive. Firms effectively are buying political risk insurance as they diversify their suppliers and export markets. There is a small risk that such actions could devolve into larger-scale decoupling that would be much more costly and disruptive, provoking countermeasures and non-economic retaliation.

WTO MC13: do no further harm

Expectations for the upcoming WTO MC13 in Abu Dhabi are low but the meeting should at the very minimum prevent further erosion of multilateral trade disciplines. The existing body of WTO rules and liberalization commitments are valuable and need to be sustained. To that end, WTO members should extend the moratorium on customs duties on e-commerce as well as the moratorium on TRIPs non-violation claims in effect since the very start of the WTO era, and agree not to restrict exports of food and medicines. Even better if they adopt a short run pause on the imposition of CBAMs (say 2 years to coincide with the phase-in of the EU measure) to avoid a surge of tit-for-tat carbon levies until an agreed framework can be advanced but that issue is not on the MC13 agenda.

Even those limited results cannot be assured, however. WTO members continue to argue about renewing the moratorium on e-commerce levies and balk at calls to refrain from export controls on basic foods and medical supplies. And despite global health and climate emergencies over the past four years, WTO members offer only work programs on climate and pandemic preparedness-a weak substitute for concrete action on these pressing matters.

Over time, WTO obligations will need to be updated and augmented, particularly in areas such as digital economy, climate, investment, and dispute settlement. And more priority and resources needs to be devoted to technical and financial assistance for developing countries, in conjunction with other international economic institutions, to repair damage caused by supply chains disruptions, facilitate the transition to green energy, and finance investments needed to mitigate or adapt to climate change. Little of this will happen without leadership from the world's trading powers, who have responsibility for maintaining the rules-based trading system and will have to make the largest contributions to that effort.


Responsible stakeholders need to take responsibility

In 2005, Robert Zoellick, then US Deputy Secretary of State, called on China to be a "responsible stakeholder" in the world economy. At the time, he didn't doubt that the United States would continue its leadership role in the trading system, later abandoned by Donald Trump; nor did he envisage the revival of contemporaneous hot wars in Europe and the Middle East and fears of military intervention across the Taiwan straits. Today, the world economy has three key stakeholders- the United States, China, and the European Union-and each must take responsibility for managing and upgrading the rules-based international system for the common good and in their own national self-interest.

Despite political tensions, only modestly abated by the Biden-Xi summit in November 2023, there are two areas where the major powers can join together immediately to build trust among themselves so they can jointly promote new initiatives to strengthen the trading system among the broader WTO membership. The first is to develop guidelines for the national security exceptions under WTO Article XXI to make their use more transparent and accountable to other WTO members. The second is to develop trade rules that promote production of clean energy and development and the diffusion of carbon mitigation technologies, as well as programs to help developing countries finance their national decarbonization goals and adaptation policies.

Cooperation should restart from WTO Article XXI and climate action

The first area of big power cooperation may surprise because it is not on the radar screen of most trade cognoscenti but could well be a prerequisite to WTO dispute settlement reform. For most of the postwar era, recourse to exceptions under Article XXI has been limited (about two dozen in all) and had minimal impact on trade and investment. That changed a decade ago with the first Russian invasion of Ukraine, followed later by gross abuse of the security exemption to justify US steel protectionism and the tariffs in the US-China trade war.

No major power will ever relinquish its right to pursue its own self-assessed security interests, but every country should use Article XXI responsibly. That is not being done today. Instead the Article XXI exception allows major powers to avoid dispute rulings, even without the charade of appealing into the void. Simply put, allowing unfettered use of Article XXI effectively devalues prospective dispute settlement reforms. At a minimum, countries invoking Article XXI should notify and consult with WTO members about their derogation before the measures enter into force, so that countries not targeted by the Article XXI actions, but potentially affected by them, could seek appropriate relief or compensation. If the three big powers agreed to do so, a new WTO pact would be 90 percent done.

The second area, trade and climate, is on almost everyone's agenda. Sharply reducing global carbon emissions is the shared long-term goal of almost all WTO members. China and the United States are the world's largest and second-largest carbon emitters, respectively. Substantial reductions in global carbon emissions cannot be achieved without contributions from both. The EU has the world's most comprehensive carbon mitigation program, including a carbon border adjustment mechanism (CBAM) that will impose levies on carbon-intensive imports starting in 2026, including those from China and the United States. Without international rules for the use of CBAMs, big power conflict across the Atlantic and Pacific could escalate in a few years in ways detrimental to both the environment and the trading system.

Because UN climate talks have fostered good working relations among officials in Europe, China, and the United States, the ground is already prepped for trilateral initiatives. Here is a short list of what could be done starting in early 2024: accept a 2-year moratorium on CBAMs to allow time to negotiate new trade-related carbon provisions; collaborate on rules/safe harbors for green subsidies that support R&D in renewable energy; eliminate subsidies for coal-fired electricity generation and prohibit the opening of new plants; reduce emissions from steelmaking, starting with large plants where data on carbon intensities could be compared; and accelerate existing commitments to large-scale reductions in methane emissions. Put together as a package, the major powers could make a large down payment on an important new area of WTO rulemaking… and help preserve the planet in the process!