[SCMP Column] Reforming the WTO

October 27, 2018

As the US has over the past year begun to wage war with many trading partners (none more so than China), abandoning the multilateral negotiating channels for settling disputes and instead picking one-on-one fights in the style of a playground bully, there has been a deafening silence from the one dog that should have been barking its head off. That is the World Trade Organisation.

There is a tragic irony that the one organisation in the world forged by four decades of multilateral negotiation that has liberalised world trade for the benefit or the entire global economy has sat silent as the world’s leading trading economy – and by far the greatest beneficiary of liberalisation – has launched a systemic assault on the multilateral trading system, and threatened a return to anarchy in trade that would harm us all.

For good reason – and in a desperate attempt to staunch this collapse into global trade anarchy – both the European Union and Canada have launched separate initiatives to tackle the WTO’s failings. Canada’s proposals underpinned international discussions in Ottawa this week. The EU’s thoughts have been released for public discussion, and will hopefully be taken up at the G20 meeting in Argentina next month.

China is not directly engaged in either initiative, but if it is to lend credibility to its claims to be committed to multilateralism, and to parry the US’s tariff onslaught, then this must change.

It must urgently lend backing to these initiatives and play an active role in drafting the reforms that are needed to make the WTO fit for 21st century purpose. And perhaps even more significantly, since many of the complaints about the WTO focus on practices by China as a WTO member, it must look seriously at how it can open and liberalise its own economy.

If Beijing fails to take a long hard look at the imperative for reform, and does not play a credible role in restoring the credibility of the WTO, then the WTO, and multilateralism, are in jeopardy, and Beijing may have only itself to blame.

The EU paper elaborates clearly its staunch support for a multilateral trading system, which “has provided the basis for the rapid growth of economies around the world and for the lifting of hundreds of millions of people out of poverty.

“It has been the guarantor of trade at times of growing tensions and the backbone of the international system of economic governance. Even at a time of the harshest economic conditions during the great recession, it has helped avert recourse to the trade wars that have fuelled economic decline in the past.

“As such, the health and centrality of the multilateral system needs to be preserved. Its marginalisation, weakening and decline have to be prevented at all costs… It would mean going back to a trading environment where the rules are only enforced where convenient, and where strength replaces rules as the basis for trade relations.”

As someone present at the birth of the WTO, and passionately in agreement with the EU’s assessment of its value, I share their disappointment at its underwhelming impact since 1995. Its failure to deliver any meaningful liberalisation in the past 23 years is nothing short of embarrassing. Its failure to embrace and develop rules for the many changes that have occurred since 1994 – most obviously in the development of IT and the Digital economy – is inexcusable, as is its failure properly to enforce the rules agreed in 1994. Its role in settling international trade disputes has been its one invaluable contribution, in spite of ferocious US complaints over its “over-reach”, and US efforts to strangle this role are deeply troubling.

Both the EU and Canada focus on three urgent areas of reform: modernisation of the rules, to cover things like digital trade, international investment, domestic regulations, the role of state-owned enterprises, industrial subsidies and forced technology transfer; changes to the crippling “consensus” rule that blocks any reform if any one of the WTO’s 192 members object; and rescue of the dispute settlement system.

One of the most important rule changes would be to rein back on the members that claim “developing country” status. Around two thirds of the WTO’s members have declared themselves as “developing”, and use the “special and differential treatment” rules applying to developing countries to duck out of liberalisation commitments.

But there are no clear rules for deciding whether or not a country is developing or developed, and it is left to each country to decide for itself.

China is clearly in the firing line here and will need to think hard about “graduating” into the developed economy category that will give it less freedom to opt out of liberalisation commitments. My own conclusion here is that if China wants its trading partners to accept its claim that it supports multilateral liberalisation, it has no choice – and would probably benefit anyway from further liberalisation.

Both the EU and Canada papers tackle head on the paralysing “consensus” rule that has allowed certain economies – in particular India – to hold the WTO hostage, blocking important liberalisation initiatives. Both recommend amending this rule, allowing “alliances of the willing” to move ahead with liberalisation as they wish, and leaving laggards to follow at their own pace.

This principle is at the heart of the Trade in Services Agreement (TiSA) currently under negotiation by 20-odd WTO members, and of “plurilateral” agreements like Trans-Pacific Partnership, ASEAN, the Pacific Alliance, Nafta, or even the European Union itself.

China is at a critical crossroads. It can embrace these efforts to shore up the multilateral system, at the same time using the multilateral process and multilateral rules properly to address the international business complaints about illiberal obstacles to trading with and investing in China, or it can put itself at the mercy of bilateral negotiations with the US while others watch on unsympathetically, waiting for their turn to haggle bilateral deals. The choice should be obvious.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.

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