The future of the WTO

Alan Wolff is the current Deputy Director General of the World Trade Organization. What follows is an excerpt of a speech Mr. Wolff delivered on November 13, 2017 at the Center for Strategic and International Studies. TradeVistas presents it here as the second of two articles.

“Without change, the organization is at risk of not remaining fully relevant”

The WTO, as with all institutions and sets of rules, needs to change in a number of respects, particularly but not solely, to keep pace with the evolution of world trade. Without change, the WTO is at risk of not remaining fully relevant.

The institution needs renewed leadership on the part of its member countries — a challenge that must be met for progress to be made. Countries other than the United States may be able to fill this role, but that is far from certain. The United States should return to a leadership role, working with others for common objectives.

Adaptation is a constant imperative as trade is evolving rapidly

There are areas in the WTO in which members would like to see improvement. One of these is implementation of the current WTO rules. There are wide variations in members’ performance with respect to notifications and responsiveness to requests for information. There are also areas where trade disciplines would be desirable where the WTO has either no or insufficiently effective substantive rules, such as very prominently in the case of domestic subsidies. Many members wish to see these deficiencies to be addressed.

Adaptation of the WTO as an institution and its rules are also constantly needed due to changes in the nature of world trade. To date, this has taken place on occasion with hard-won success. What is traded and how trade takes place is evolving rapidly. Vast super-container vessels move monumentally greater volumes of goods, as have air parcel delivery systems. The Trade Facilitation Agreement, estimated by some to be when fully implemented the equivalent of eliminating more than a 14 percent tariff, is helping to meet that challenge. The expanded Information Technology Agreement is designed to deal with the changing nature of trade in cutting edge IT products. As a result, global value chains have sprung up for information technology products which are largely free of customs duties. This is the good for world trade and for enhanced economic growth for all.

Two valuable innovations were the inclusion of services and intellectual property

Some earlier great steps forward are aging. Two of the valuable innovations of the Uruguay Round were the inclusion in trading system of agreements covering trade in services and trade-related intellectual property disciplines. Now over two decades ago, these agreements were a huge step forward in modernizing the system to cover much more of international business and trade as it exists today.

The General Agreement on Trade in Services (GATS) in particular, started life as an agreement with a much broader scope than the GATT, with its inclusion of services traded not only across borders, but also when consumers travel abroad, as delivered by commercial presence of foreign companies, and as delivered by foreign individuals temporarily in the domestic market as intra-corporate transferees or foreign professionals. This coverage, by default, has meant that the GATS has enormous implications for promoting good governance overall and fairness for all, not only foreign suppliers, in domestic regulatory regimes in which the domestic and foreign service suppliers compete.

World commercial services exports were $4.8 trillion in 2016. That’s just over 23 percent of total world trade. Perhaps underappreciated at the time they were concluded, both GATS and the Trade Related Intellectual Property Agreement (TRIPS) could to some extent prove to be increasingly valuable as the digital economy takes hold. Services such as telecommunications, banking, express delivery and computer services form the global infrastructure for the digital economy and intellectual property rights (IPRs) are crucial to software and IT innovations needed to secure effective electronic trade platforms and data systems for global on-line trade.

But, “some earlier great steps forward are aging”

Coverage of services by the WTO`s rules, however, is limited both in terms of both countries making commitments and the sectors covered by those commitments. And it is not clear that new technologies will always be covered by the existing framework of rules (although internet gambling, for example was an instance where the rules reached forward to new activities.) Freeing up more trade in services is an area of vast potential that could create jobs well into the millions. Enforcement of the rules protecting intellectual property and the rules themselves are in need of review.

It is essential that the WTO adapt to future changes in the world trade. We are witnessing an increase in the rate of change that is astounding and there is no reason to believe that any international system of governance can continue to keep pace or even follow closely on the heels of change in the world around us. The WTO system did meet the first wave of changes as noted above with the Trade Facilitation Agreement and the expansion of the Information Technology Agreement, but the fact is that it is not clear that future modes of delivery of goods and services, and the goods and services themselves, will be recognized by the current rules.

The WTO must be nimble, not incremental

Consider the following scenarios:

• Where is the cloud really located and how much does that matter to technology companies as compared with national policymakers?
• What treatment for commercial products manufactured or services sourced from space?
• What of an app from one country that provides the medium for delivery of a product or service from another via a cloud contained in servers located anywhere, and where sourcing may shift about from nanosecond to nanosecond?
• Where there is remote diagnosis by over the web by a physician who is specialist located in one country for patients in another, what sort of licensing will be required, will it be feasible?
• When language is taught by a holographic teacher, what is its country of origin if the content is provided from one part of the world but it goes through processing and transformation in a number of others, before delivery in yet another end market?
• One of the primary benefits of the internet age is the availability of internet services. Will the rules permit their free flow across borders?
• How will standards and rules of access be applied to 3-D printing?
• Airplane engines are being designed with hundreds of sensors to indicate not to their owner but to their manufacturers what changes in design are needed for greater efficiency and safety. The information may not even be fed back primarily to humans but to robots on the assembly line. This is a forerunner of the future, it is here now.
• Smart bolts are being used in construction of structures that must stand up to stress. The bolt can report when a key element of a bridge or building may fail. Who needs that data, who can interpret it, what service will be based upon it? Will it be able to function cross borders?

Customs nomenclature and classification will evolve. Is an autonomous automobile still an automobile? Is the answer the same if it has a means of propulsion that is external to it? What if it no longer needs roads? What category will a bio-chip fall into? What about its offspring? Goods and services traded may begin to move outside of existing categories. This is the beginning of the data driven industrial revolution.

The WTO members will collectively have to be very nimble to keep up with changes in the physical world, but that is not the nature of the evolution of the world trading system, which is incremental. Counter-pressures will exist for preserving policy space. Lawlessness characterized the frontiers during earlier centuries, and we will all be at the technological and economic frontier increasingly. “Lawlessness” can be positive if it would otherwise mean the imposition of regulations that strangle innovation, but obviously the state of nature can be very destructive as well. The future WTO will need to mediate opposing values, and seek to achieve the right balance.

It’s a question of leadership

A question is how to move forward both on the current negotiating agenda and on the areas where the current rules do not apply. Here there is a new problem: it is unclear what role the United States — for the seventy years the country that led and shaped the world trading system — will take going forward. At present the United States has simply stopped playing its leadership role. We only know that its role will be different and that multilateral approaches are deemed by Washington to be deficient in several respects and not a preferred path. The effects of this potentially revolutionary development are unknown. The bottom line is that other WTO members have not yet adapted to the drastically changed position of a key member.

Will another member or group of members step forward to increase the rate of progress at the WTO? Is collective leadership possible? Or will there instead be an acceleration of the negotiation of bilateral and regional agreements? Will they be WTO plus and a positive factor for world trade or prove divisive and counterproductive in terms of both efficiency and total benefits for WTO members?

Bilateral results yield greater gains when adopted broadly

President Trump was right about a central aspect of trade. Either from instinct or experience he was right about the importance of bilateral negotiations. In the Trans Pacific Partnership (TPP), there was a core bilateral negotiation, that of the United States with Japan, and it was very heavily a bilateral process. Market access questions are often in the first instance addressed on a bilateral basis. This is true whether the item in question is auto parts or pork. The core of the Environmental Goods Agreement (EGA) last year was also in trade terms, for the United States, two bilateral negotiations, one with the European Union and one with Japan. Other countries had their own bilateral TPP and EGA negotiations, which were no doubt very important to their trade bilateral interests. Right now, the pace of accession process for the new applicants to the WTO is also heavily determined by bilateral negotiations. So, the multilateral trading system, particularly when it comes to market access is very much accustomed to bilateral negotiations.

It is the next step which requires focus — what is done with the results of these bilateral efforts. To have a really large impact in terms of trade coverage, the negotiation must become more like a multi-party real estate development covering many projects and developers. It is more like planning a new city, not a new building. It is the packaging of the deal that is the next step. Switching metaphors, were this a poker game, there needs to be a large enough in the pot to make the game worth the effort, and that requires many contributors and more than two players. It is impossible to reach that next stage, the giant deal, without sweeping in more countries and much more trade. No bilateral agreement can reach this level of importance to the world economy.

Negotiating market access bilaterally, and then assembling larger deals is a process needed to cover most of world trade. It is also impractical to establish global rules for international trade in bilateral agreements. To accomplish that, multilateral deals are needed. And yes, enforcement is a problem. This is true with any agreement, but it is one which must be faced and can be solved.

The bottom line, America needs to find a way to join back in and work with others to make the system work. Failing that, others will have to fill this gap.

“The WTO is our heritage, bequeathed by generations of American leaders”

From experience, I can tell you that patience is needed with respect to major path-breaking outcomes. I know. I was acting head of the US Delegation in 1975 during the Tokyo Round of Multilateral Trade negotiations, a period of at best, quiet preparation and the results were not final until 1979. U.S. Trade Representative Carla Hills hoped for a conclusion of the Uruguay Round in 1990 and the results of her efforts and those of her successors were only harvested by the next U.S. administration, again four years later. This experience is not predictive of the timing of dramatic progress going forward in the WTO, it is just a statement of fact. Making improvements in the world trading system takes time.

I agree with the trade minister I quoted at the outset – the strong critic of the current WTO — who concluded “If the WTO did not exist, it would have to be created.”

In the end, once the bilateral hurdles are cleared, the multilateral approach is the best path forward to the extent that it is feasible. Making the case for a working multilateral trading system that evolves to meet the changing needs of international trade is a job for all of America’s institutions – the press, think tanks, academia, unions, NGOs, and not the least companies and their trade associations.

It would be a costly error to take the WTO for granted. It is one of the indispensable international institutions that underwrite the functioning of the world economy. The WTO is our heritage, bequeathed by generations of American leaders and their foreign counterparts, dating back to Cordell Hull, and Franklin Roosevelt and Winston Churchill. It is vitally important that the WTO be valued, maintained and continually improved and updated to meet new challenges. I am optimistic that this generation can do exactly that.

Part one was published on December 7, 2017. The author wishes to be clear that the views above are his own, not those of the Secretariat or WTO Members.

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