The WTO doesn’t need reforming – but its members do

In the run-up to this week’s WTO ministerial in Cameroon, calls to reform the WTO have grown into a common refrain.

The sprawling Art Deco pile on the shores of Lac Léman has for thirty years been unable to deliver more than a treaty to simplify border procedures – the Trade Facilitation Agreement – and recently a modest agreement to curb already illegal fisheries subsidies. It’s not much to write home about.

Meanwhile the judicial function of the WTO – often (and wrongly) described as the jewel in the WTO’s crown – is unoperational due to the US government’s refusal to appoint members to its appellate body, the WTO’s supreme court. This means that breaches of WTO law can neither be judged nor stopped.

The US, EU, UK and some others are arguing that with few successes since 1995, with a paralysed judiciary, with China gaming the system, and a growing membership that makes consensus all but impossible, the organisation needs to be reformed, including by doing away with its foundational non-discrimination rule and decisions by consensus.

But this “solution” misdiagnoses the problem: the WTO doesn’t need reform, its rules are mostly fit for purpose. Instead, four WTO members should reform themselves, rather than seek to change WTO rules to legitimise their own breaches and failings.

This should start with the US, which complains bitterly that since joining the WTO, China has abused the system by giving hidden subsidies to companies or stealing intellectual property. WTO rules, the US argues, must therefore change to prevent this. The weakness of this argument is that WTO rules could curb distortive Chinese policies if its dispute settlement system functioned.

It was Donald Trump who decided to block appointees to its supreme court, making enforcement of the rules impossible. The US has chosen not to take a single dispute to the WTO for a ruling for seven years. So for the US to complain about China’s disregard for the rules, having dismantled the very tools to deal with it, is akin to the man who killed his parents asking the judge for leniency on the grounds that he was an orphan.

This hobbling of the judicial system was done partly in pique following a handful of adverse rulings, but more fundamentally because the US is historically averse to international oversight of its domestic policy-making. Recall that at the end of the Uruguay Round the US government promised Congress that WTO would never interfere with US lawmaking.

More recently Trump with his series of “reciprocal” tariff agreements has driven a horse and cart through the basic WTO commitments. All of those agreements fall foul of international law, prompting the US government to propose changing the law to make them legal.

Unless the US remembers the value of binding itself to international trade obligations – via a system it largely created and from which it has benefited enormously – then the WTO will remain dysfunctional, its rules unenforceable. It may bez years before the US finds the maturity to accept occasional decisions against it in the interests of long-term predictability. Perhaps only a cataclysmic event – a global recession, a widespread war or a devastating climate shock – will change its America First stance.

Next up, China. Faced with US unilateral bullying, China is increasingly taking the moral high ground, claiming it is a committed multilateralist. It is not. China regularly breaches WTO rules and is hollowing out other economies in doing so.

Several countries propose renegotiating the WTO subsidies agreement to catch Chinese hidden subsidy practices. But the agreement is not the problem. Without a functioning dispute settlement system – thanks to the US – no one can compel China to disclose its hidden subsidies.

WTO rules, like all international treaties, are only as strong as the willingness of members to comply with them. China flouts some of them but at some point in the next decade may understand that its industrial policies are unsustainable and that it has a broader geo-economic interest in complying with the WTO.

Third up, India, which has always had a love-hate relationship with the WTO. In the last 25 years India’s priority, rather like the US, was to ensure that WTO treaties and the international order they embody do not hinder its freedom of action.

Modi’s government has overseen an unprecedented decade of economic growth, which India points to as justification for side-stepping multilateral constraints. But with that growth has come a new self-confidence – India may be the world’s third-biggest economy by 2040 – that will allow it to take on more WTO commitments and stop hiding behind poor developing country status. Some initial signs of this may be emerging.

Lastly, the EU, that professed champion of the multilateral trading system. In the last decade the bloc has established a vast network of bilateral free trade agreements, covering 83 countries and over half its total trade. FTAs remove incentives for multilateral trade liberalisation as countries do not want to share with others their preferential access to the bloc.

The EU has also spent most of its negotiating coin on the FTAs, rather than in the WTO – especially in agriculture. So it has unwittingly hobbled progress in the WTO and solved the famous riddle: are FTAs building blocks or stumbling blocks to WTO trade?

More recently, the EU signed the blatantly WTO-illegal Turnberry agreement with the USA, and in a recent paper proposed to revisit – possibly eliminate – the non-discrimination rule of the WTO, its most vital instrument. The EU’s multilateral credentials are therefore looking threadbare. And as its economic clout wanes it will be unable in future to exercise the leadership it professes to in the WTO.

Unless, therefore, the four major powers engage in serious introspection and realise their long-term interest is in reforming their own conduct, the WTO is a goner. Members will stagger between ministerial meetings like drunkards from lamppost to lamppost, railing against the iniquity of the system, trying to mould it to their failures or, like Dickens’ Mr Micawber, simply hoping “something will turn up”.

A depressing prospect for an organisation that has ensured open, predictable trade, and growing prosperity for seventy years. And a massive failure of leadership.