The challenge of reforming the global trading system

Imagine trying to book a vacation with an even bigger group of individuals—at least 50 from your company—and figure out how to effectively cater to the needs of everyone and manage to fairly sort out payment for the trip at the end.

 If the vacation analogy were extended further to include 164 different organizations, each with specific demands from their members, and the final decisions about the trip were to be made legally binding for possibly decades into the future, we would be getting closer to the challenge of officials grappling with administering the global trading system in the World Trade Organization (WTO).

It is, perhaps, no surprise that the system for managing trade has gotten stuck.  The last time the global “rule book” had a major update was 1995. 

Talks that started in a spirit of comradery after the September 2001 terrorist attacks fizzled out long ago.  After much effort, the WTO managed to pull off a smaller agreement on trade facilitation to improve trade at the borders in 2014 that is still in the process of implementation.

The WTO does four things for members:

* Provides a forum for negotiations, including a platform for liberalization commitments that opens trade between countries and writes new rules for trade. 

* Administers the system. 

* Provides transparency on trade.   

* Adjudicates disputes between members to ensure the rules are followed.

In all of these settings, the WTO is not an amorphous bunch of bureaucrats, but rather the 164 members of the organization.  The Secretariat is quite small and has little independent power.  Members come together to write new rules for trade or to agree on specific liberalization packages in “rounds.”

Now, however, the WTO is mostly consumed with handling disputes, which have skyrocketed.  There are more than 20 different cases underway over elements of the US Trump Administration policies alone.  The Director General of the WTO warned today that the rising litigation within the organization risks breaking the institution.

At a time of rising trade tensions, the WTO has been hamstrung and unable to respond effectively, beyond holding ever more disputes based on an increasingly out-of-date rule book. 

So what is to be done? 

An earlier Talking Trade post highlighted the critical need for the WTO.  In particular, smaller poorer countries are especially vulnerable.  While regional free trade agreements like the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) can help bolster the system in times of trouble, they are not a replacement. 

One solution that has been pursued with increasing enthusiasm is called a plurilateral or critical mass approach.  This will carve off particular elements of trade that appeal to subsets of members in the hope that these portions can move ahead.

The most likely candidate for a plurilateral now is e-commerce and members are beginning to shape and structure discussions now in Geneva. 

There are two types of plurilateral deals in the WTO.  One sort is done by a subset of members and the benefits, once finished, are extended to all (like the Information Technology Agreement or ITA).  The other is a plurilateral done by a closed group of members who retain the benefits only for members (like the government procurement agreement or GPA). 

It is too early to tell which way e-commerce will eventually go.

The basic problem, however, with such agreements, is that they dilute the interests of members in ever tackling the larger problem—the missing update of the global rulebook. 

The last time members tackled trade rules in a global setting was the early 1990s.  Since then, trade has changed in many ways totally out of recognition.  Members have become increasingly confident negotiating over trade in bilateral and regional settings on all sorts of different topics.  Yet they remain reluctant to do so in the WTO.

Part of the reason is that the WTO couples rule changes with market liberalization in packages.  At this point, too many members see little benefit in further market opening.  This stymies necessary updates to the rulebook.

It leaves members increasingly fighting disputes over older and older rules.  Often these rules must be “bent” to fit modern trade, which can lead to more disputes. 

To be clear, not every rule is hopelessly out of date.  In fact, it is quite surprising how well many WTO provisions have held up over time.  But the system as a whole would clearly benefit from a refresh and having items frozen in amber is not helpful.

Having negotiations just over rules will require flexibility by members because it will be much harder for members to return home and clearly point to “gains” from WTO changes.  In many places, adjustments to specific provisions could even lead to short term challenges.

But without any way to address legitimate demands by many members to more accurately reflect the situation in the global trade regime in 2018 and beyond, the system itself is under increasing threat.

We have forgotten how important the WTO has become to the business world.  It operates like air.  It is only when it is missing that it becomes obvious how much it was needed.

Without creativity and flexibility by all members, the WTO is at risk of evaporating.  The focus ought to be on updating the global rule book, rather than increasingly carving up and out smaller and smaller bits of the economy to be tailored for various member interests. 

FTAs already manage this task quite well, often to the detriment of businesses and many WTO member states.  The last thing the global system needs is more internal hollowing out.