The World Trade Organization is regularly in crisis, but this time could be different

Two months before a critical ministerial meeting, governments around the world really do need to get their acts together on multilateral trade.

Through its member governments, the World Trade Organization (WTO) runs the multilateral rules-based system that underpins most of international trade. It now faces one of the biggest crises in its history and risks becoming irrelevant. Peter Ungphakorn and Robert Wolfe argue that the chorus of calls for “WTO reform” puts too much emphasis on Geneva when the real solutions can only be found in the capitals of its 164 members.

Fisheries subsidies negotiations: Oman’s minister speaking in an online meeting, July 15, 2021, while Geneva-based delegates listen | WTO

By Peter Ungphakorn, Vaud, Switzerland; and Robert Wolfe, Kingston, Ontario

On December 8, 2019, The New York Times predicted the possible “end of the […] World Trade Organization itself.” Earlier, a Bloomberg headline spoke of a “fatal blow” to the WTO.

Two years later, the WTO is still up and running. Even the crisis in dispute settlement, where first-stage rulings can no longer be appealed—the cause of those doom-mongering news reports—has failed to stop it. Yet the WTO does face serious problems. Dealing with them has become more urgent.

In its 26-year history, crises in the WTO are nothing new. But the current batch of problems are so numerous, and in some cases so serious, that member governments now really do have to demonstrate their commitment to multilateralism in trade policy and act to avoid those predictions coming true.

That means the solutions must come from the capitals of the WTO’s 164 members before anything significant can be done at the WTO’s Geneva headquarters.

The next milestone is the Ministerial Conference, scheduled from November 30 to December 3 this year. The Ministerial Conference is the WTO’s top decision-making body. It usually meets every two years, but this conference has already been postponed by two years, partly because of the Covid19 pandemic. How governments respond to the pandemic in their trade policies will be added to an agenda already crowded with a mix of old issues (such as agriculture) and new ones (digital trade).

Failure to crack these problems still won’t kill the WTO, not in the foreseeable future. But it would further undermine the organization’s credibility and the confidence of governments that they can resolve their differences by talking to each other. The WTO will become increasingly irrelevant in the eyes of the general public.

Eventually, that could mean the end of the WTO. But we should not be tempted to conclude that everything would be fine because countries can simply work in smaller groups. They do already, in regional trade deals such as the US-Mexico-Canada trade agreement, the 11-nation Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and the many agreements of various depths between the European Union and its trading partners. By the beginning of September 2021, the WTO’s 164 members had notified 350 bilateral or regional trade agreements currently in force.

Those agreements improve on WTO rules, but they can’t replace them. Losing the WTO would be disastrous for the groups of countries that have additional trade agreements. They need fully multilateral rules for issues such as subsidies and fair trading practices—for example, anti-dumping measures (known collectively as “trade remedies”). None of the regional trade agreements have strong institutional arrangements comparable to the WTO’s Secretariat and its dispute settlement system.

But we are getting ahead of ourselves. To understand what’s going on, we need to look first at what the WTO is and does, how it works, and then at some of the challenges that make a change of approach in its member countries so necessary. What have journalists and headline writers missed with their dramatically wrong predictions?

Underlying this state of affairs are tensions among major players—the United States, the European Union, China, India, and others—and often, a disconnect between governments in capitals, their representatives at the WTO in Geneva, and their publics back at home.

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The misunderstood role of the WTO

The journalists and headline writers were wrong because they overestimated the importance of one of the WTO’s functions, dispute settlement, which is now handicapped because of American objections to the way appeals are handled.

The New York Times spoke of “the loss of the world’s primary trade referee,” and predicted the WTO’s demise because “the system for settling disputes has long been its most effective part.” The New York Times missed the point completely.

While the WTO is often defined as a forum for negotiations, or as a means of settling trade disputes, those two functions are only some of the tools created to serve the WTO’s real objective: to help international trade flow as smoothly and as freely as possible, within a system of predictable and transparent rules.

In that, the WTO has been pretty successful. It still is. In normal, non-pandemic times, US$20 trillion worth of goods and services per year—and growing—flows freely around the world. Most of that is trade between WTO members, and its compliance with WTO rules can almost always be taken for granted.

WTO rules are written by member governments. They are the product of negotiations and agreed by consensus. They are, officially, “WTO agreements.” For the system to work effectively, it needs three elements:

• Rule-making—i.e., negotiations among members, resulting in agreements.

• Implementation—so that the agreements are put into practice and are not just words on paper.

• Dispute settlement—to resolve any legal questions about whether the agreements are being implemented properly.

All three elements are essential for the WTO to function properly and for the multilateral trading system to be stable and predictable. Certain principles are also crucial, particularly transparency.

What the headlines miss is the critical role of implementation. WTO members notify each other through the WTO Secretariat when they introduce new trade measures. If they have any problems, they discuss them in the WTO’s committees. That is the main, routine work of the WTO that keeps trade flowing smoothly within the agreed rules. Any remaining legal problems can then be taken to dispute settlement.

How important is this implementation role?

Take standards and regulations applied to goods, potentially some of the most significant trade barriers aside from tariffs (or import duties). Out of the tens of thousands of measures notified in the WTO, only about 2 percent are questioned in the committees, meaning 98 percent are accepted without any query. Eventually, only about 0.07 percent become legal disputes—99.93 percent are not challenged legally.

Dispute settlement is important for clarifying WTO law. Some disputes also have a high profile politically, such as the cases treating subsidies to Airbus and Boeing. Even so, governments largely comply with the WTO agreements.

That’s why the WTO is still a success story. It’s why “the world’s primary trade referee” is not only the dispute settlement system, but—especially—the members themselves, in those all-important routine meetings on implementation. It’s why US$20 trillion per year of trade flows largely without any hitch.

Yet the WTO is indeed in crisis.

On the plus side, negotiations have produced sporadic agreements on, for example, some service sectors, cutting red tape at the border, scrapping export subsidies in agriculture, and eliminating import duties on information technology products.

But an ambitious attempt to negotiate a package of issues, known as the Doha Round, effectively died in 2008. Talks on many of the issues continue, but only a few have reached a conclusion. As a result, WTO rules are lagging behind developments in both traditional and new forms of trade.

Dispute settlement is handicapped because appeals can no longer be heard. Even implementation needs to be strengthened through improvements in transparency.

The negotiation function of the WTO is not dead, but its revival is overdue. To resolve all of this requires real engagement by governments in capitals, not just the usual rhetorical flourishes. They have to sort out major problems in their relationships with each other. That has to start with the major powers. Inevitably, many of the WTO’s problems involve the United States. But not all of them.

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Dispute settlement

When Joe Biden replaced Donald Trump as US president, many thought the WTO’s most serious problems would ease. Eight months later, little has changed.

The biggest issue is the deadlock that has blocked the appeals stage of dispute settlement. US concerns date to the Obama Administration, or even earlier. They are about the methods appeals judges have used in their rulings.

The issue is legally complicated, but it boils down to the complaint that the judges have altered the rights and obligations negotiated in the WTO agreements, resulting in legal interpretations that go beyond what was agreed.

The Trump Administration worsened the crisis by blocking any appointments to extend existing Appellate Body judges’ terms or to replace them. By December 2019, too few judges were left to hear appeals and now there are none at all.

The US under Obama, Trump, and Biden has said what it thinks is wrong. But it has never offered its own solutions nor responded to those proposed by various groups of members, including the EU and Canada.

This impasse has not stopped the WTO from operating. It has not even prevented new disputes coming before the WTO, as first-stage rulings are still possible. Some countries have developed ways of working round the Appellate Body blockage, either by agreeing among themselves not to appeal, or by using a less formal type of appeal known as arbitration.

Nevertheless, the deadlock does seem to have had a damping effect on new disputes, which were down to only five in 2020 and are up slightly to eight so far this year. The average, over the life of the WTO, is about 22.5 per year.

The problem is not only legal. Shortly after taking office, Joe Biden declared “America is back.” In the WTO, that is only partly true.

The US has made some concrete proposals in some WTO negotiations. At first, it raised hopes of new engagement by endorsing the idea of suspending intellectual property protection to deal with Covid19 (known as the “TRIPS waiver”—i.e., waiving some protection under the WTO agreement on “Trade-Related Aspects of Intellectual Property Rights”). But since then it has offered no concrete suggestions about which provisions would be waived, on which products, and how. Nor has it supported the actual proposed text on the table.

Having created this blockage in dispute settlement, the best the US seems to be able to offer as a remedy is the possibility of working on the problem after the Ministerial Conference. Outside the WTO, it has maintained many of the Trump Administration’s policies, notably with respect to China.

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The real problem: low priority

The fact is that governments are not really making the WTO a priority. That seems to be true of almost every country, except a handful. The lack of engagement—or in some cases lack of constructive engagement—is a more serious problem for the WTO than the tinkering with its structures and other proposals under the fashionable but distracting rubric of “WTO reform.”

The US was once a leader in driving the WTO forward. Now it pays lip service to the need for results. It has almost no ambition for the year-end WTO Ministerial Conference.

“We see little scope for negotiated outcomes and caution against a host of new work plans or working groups on issues where there is little chance of consensus,” the US told a meeting of all ambassadors discussing the WTO negotiations in July.

The US does seek a handful of decisions from the conference—revised transparency rules, a statement on food safety and animal and plant health, and an agreement on fisheries subsidies that includes a ban on forced labor—but all are controversial among WTO members.

The main focus on trade in Washington under Biden has been on reworking the US-Mexico-Canada Agreement, particularly on labor, and other regional deals. Beyond that is the US relationship with China, which is hampering cooperation not only on trade but also on a range of other issues, including climate change.

On trade, the US accuses China of exploiting loopholes in WTO rules and in China’s WTO membership agreement. This, the complaint goes, has allowed China to get away with providing subsidies and other policies that favor real or quasi state enterprises. A few Western lawyers argue that WTO dispute settlement is still the best way to deal with these issues since China tends to comply with WTO rulings, but that is not enough for many governments.

Relationships with China also preoccupy other members, notably the EU and Japan. To resolve many of the issues in the WTO, including negotiations on a range of new and revised rules, for example on digital trade or agricultural subsidies, key members will have to sort out their broader political relationships as well as their narrower differences on trade.

With China playing a lower-key role most of the time in the WTO, the only other potential leader comparable to the US is the European Union. Like the US, the EU is preoccupied with other matters, including its own free trade agreements and a proposed new carbon border adjustment mechanism—effectively a new tax on carbon embodied in imports. It is also resisting WTO rules on fisheries subsidies that would require major changes to its own policies.

India and South Africa have submitted numerous proposals on a range of subjects, with little regard for whether they can build a consensus around them. Their general line is that they want blanket exceptions for all developing countries—a loose category in the WTO because it is based on self-identification and includes a wide range of levels of development.

Some countries have tried to be constructive. In an attempt to broker compromises that would help the WTO to progress, Canada created an Ottawa Group of 13 WTO members (or 40 if the EU’s 27 member states are counted separately as well as the EU itself). The group deliberately does not include the US and China.

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“Reform” and the ministerial conference

A long list of subjects could be put to WTO ministers when they meet at the end of this year. Two of them are crucial for the trading system and its reputation: reviving the appeals stage of dispute settlement, and fisheries subsidies. They require urgent solutions.

A third is specific to Covid19. It could be a short-lived conversation, or it could produce changes that last long term. It is about the way governments respond in trade to the pandemic.

Over 50 sponsors (counting the EU as 28) have proposed a declaration on Trade and public health: Covid19 and beyond. Although a declaration is non-binding legally, this one would aim politically to ensure access to essential goods, including therapeutics and vaccines, by avoiding unnecessary restrictions and enhancing transparency. The draft carefully fails to mention the proposed waiver on intellectual property rights.

At this stage, the prospects for the other two topics are not promising. On resolving the problems in dispute settlement, the US has clearly signalled it will not move until after the conference at the earliest.

As for the talks on curbing harmful fisheries subsidies, they are as much a symbol as a real issue. Even if they produce a ban on all harmful subsidies, this is unlikely to be enough to conserve depleted marine fish stocks. But it is a necessary condition, it was written into the United Nations’ Sustainable Development Goals, and WTO member governments have already missed the UN’s 2020 deadline for completing the negotiations. Failure to reach agreement before the end of this year will cause serious damage to the WTO’s already dented reputation.

A deal on fisheries subsidies would take the WTO into new territory. Existing WTO disciplines on subsidies are about avoiding unfair competition, an important traditional trade concern. The fisheries subsidies talks, by contrast, are about conservation and sustainability.

They can be seen as a symbol of member governments’ willingness to tailor trade rules to climate change and other environmental priorities. They could also be a model for tackling subsidies on fossil fuels. Carbon border adjustment taxes are already becoming an issue outside the WTO and are bound to be brought into the discussions in the WTO as members focus increasingly on climate change.

The talks on fisheries are in the WTO because it has tools for disciplining subsidies and because in normal times, it has a dispute settlement system to adjudicate whether agreements are being respected.

Judging from the state of play in these talks, governments will have to yield a lot of ground to meet in the middle. They may want to see that happen, but so far there has been little sign that they are willing to compromise on the details such as exemptions for developing countries, dealing with fuel subsidies that are not specifically targeted at fishing, and whether money spent on managing fish stocks sustainably can be used to offset that provided in the form of harmful subsidies.

Dispute settlement and fish subsidies represent two strands of proposed “WTO reform.”

One is “fixing the machine”—i.e., reforming a range of working practices, particularly dispute settlement, and priority areas for cooperation. The content includes how the Appellate Body interprets WTO law and improving transparency, a core WTO principle.

The US and a number of other countries want governments to supply better information, more promptly, so that the membership can monitor how the agreements are being implemented. The pandemic has increased pressure on governments to provide more information on disruptions to supply and the way they’re reacting. Some developing countries are resisting this, on the grounds that submitting currently-required notifications already imposes a heavy bureaucratic burden.

“Fixing the machine” also includes working methods, such as how negotiations are organized: dealing with differences in economic development, and whether negotiations among only part of the WTO membership can take place, and if so, how the results can fit into the WTO framework.

The consensus rule—a decision cannot be taken if any member objects—makes reaching agreement among all WTO members extremely difficult. Many see negotiating among subsets of the membership (known as “plurilateral” talks) as the way round this. Countries that are not ready to join do not have to, provided certain principles are respected so that non-participants are not disadvantaged.

But India, South Africa, and some other countries complain this violates the multilateral nature of the WTO. They may use the need for consensus to block incorporation of the results into the WTO. However, the vast majority of WTO members (more than 140 out of 164) are involved in at least one of the five subjects being negotiated among only part of the membership: electronic commerce and digital trade (86 members); domestic regulation in services (65); investment facilitation for development (105); micro, small and medium-sized enterprises (91); and trade and gender (127).

The other reform strand is rule-making—the subjects of the negotiations. Some are traditional but unfinished business, for example, agriculture and services regulation. Others are new to the WTO, such as digital trade. All are supposed to modernize the rules. None are likely to see concrete agreement at the conference. That means members will fall back on “work programs.” Sometimes, work programs genuinely give new direction to negotiations; too often, they’re just a way to keep deadlocked talks going. Therefore the Ministerial Conference might produce lots of work programs and declarations of good intentions, but little else. If it does fail to produce anything substantial, the reasons will not be in the conference itself.

The reasons have already been with us for several years. Real reform has to come from WTO member governments back in the capitals before anything can be done at the WTO in Geneva. If they really believe the multilateral trading system needs to be mended, they have to rethink their approach to these issues. They have to be more open with each other. And they have to be prepared to give ground when they negotiate in Geneva, not just issue demands. The signs so far are not promising.

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Find out more:

·      On the WTO website: Understanding the WTO, Ministerial Conferences

·      Primers and analysis of latest developments: Trade β Blog

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Robert Wolfe is Professor Emeritus of Policy Studies, Queen’s University, Kingston, Ontario. He has written extensively on WTO reform issues. Follow him on Twitter: @BobWolfeSPS.

Peter Ungphakorn is a journalist and former senior information officer in the WTO Secretariat, currently blogging at Trade β Blog. Follow him on Twitter: @CoppetainPU.

Text and graphics © the authors. Graphics are made available under Creative Commons CC BY-SA 2.0. The authors thank Ronald Steenblik for his helpful comments