Author: The Honorable Paula Stern
Former Chairwoman of the International Trade Commission and Chair of the Stern Group
Even before the explosion of trade-related news generated by President Donald Trump’s election, there were calls for reform in the World Trade Organization.
Two main issues face the organization: the challenge to market economy principles and practices from an ascendant China, as well as increasing populist, protectionist and isolationist pressures around the world, including in the United States (1). The U.S. must positively engage with other nations and play a leadership role to reform and modernize the WTO in order to address these challenges.
The WTO, and the multilateral, rules-based system world order it represents, provides an essential strategic underpinning that bilateral agreements -- and unilateral demands -- lack. For seven decades, market-oriented, rule-of-law economic principles have been the core of the WTO. This approach, rather than an “America First” strategy which isolates the United States, is key to American interests and values.
According to U.S. Trade Representative Robert Lighthizer: “[The] WTO is obviously an important institution. It does an enormous amount of good and provides a helpful negotiating forum for contracting parties. But, in our opinion, serious challenges exist.” The United States is certainly not alone in its criticism of the WTO. A Canada-sponsored meeting on WTO reform, currently without the U.S. or China, is set for October 24-25 in Ottawa. The main areas of complaint are that state-owned enterprises (SOEs) and illegal subsidies are wreaking havoc with various sectors of the global economy, that the proliferation of bilateral trade deals is undermining the purpose of the WTO, and that the dispute settlement process is badly deteriorated.
Many countries are pushing for the WTO to adopt rules written for the Transpacific Partnership regarding state-owned enterprises. On May 30, 2018, French President Emmanuel Macron called for a trilateral initiative of the EU, United States and Japan to draw up a blueprint for WTO reform in time for the upcoming G20 meeting in November, citing “massive state subsidies creating distortions of global markets, intellectual property, social rights and climate protection.”
One of the major complaints about the WTO is the lack of effective dispute settlement mechanisms. Under the current system, countries can block appointments to the WTO’s dispute settlement body as the United States has done since 2011, leaving three of seven seats on the Appellate Body unfilled. Appointments to the Appellate Body require a consensus, making it easy for a single nation to paralyze the entire mechanism.
While the United States has signaled its displeasure with the process, it has not put forward an acceptable solution (2). Compromise is needed from all parties as an additional blocked appointment will reduce the panel below the minimum to hear cases and cripple the entire dispute settlement apparatus.
Past U.S. administrations have argued for a more limited WTO mandate that focuses on resolving specific disputes rather than sweeping interpretations. Other WTO members, however, consider the Appellate Body empowered to make broad rulings. The U.S. position stems from the fact that it has been the most frequent complainant and respondent and prefers to address issues on a case-by-case basis where it has a better-than-average record. Despite issues with the process and scope of dispute settlement, the U.S. continues to be an active participant, particularly with regard to China, which has been the respondent in 23 of the 114 WTO complaints brought by the United States (3).
The Trump administration has filed two WTO complaints against China concerning state-owned enterprises and subsidies respectively. China has routinely submitted its required subsidy notifications late and without complete information, which has effectively prevented other countries from being able to bring cases. The United States has backed provisions for increasing penalties for transparency violations, such as suspensions from WTO trade negotiations, and it continues to prioritize this area of reform. The United States has also put forward proposals for differentiation among countries such as China now grouped as “developing”.
Nations – big and small – that constitute the 164 economies of the WTO have been taking steps to ensure their economic security in the wake of recent U.S. unilateral pronouncements, which raised worldwide fears that America is retreating into isolationism. In April 2018, the EU and Mexico had signed a comprehensive free trade agreement. German Chancellor Angela Merkel expressed concern that the proliferation of bilateral deals shows “that something has faltered.”
A plurilateral statement issued September 25 by the U.S., the EU and Japan addressed the need to focus on trade distorting practices used by China. The group pledged to cooperate on crafting tougher subsidy rules to be negotiated with China that would limit government assistance to SOEs, require the disclosure of the specifics of assistance of all SOEs on a public website, and mandate that commercial sales and purchases be made on the basis of commercial considerations.
Trade rules have also not kept pace with economic and technological changes over the few past decades. A WTO reform agenda should involve negotiating new rules to address these challenges.
The WTO, and its predecessor the General Agreement on Tariffs & Trade have historically relied on U.S. leadership, but progress was always tied to the engaged cooperation of the so-called “quad”: Canada, the European Union, Japan and the United States.
Reform is needed, but the WTO continues to play an essential role at the center of the rules-based trading system. By focusing on bilateral trade deficits during its first twenty months, the Trump administration has failed to take advantage of decades of U.S. leadership in the WTO. This leadership has allowed the U.S. to shape global trade rules over the past 75 years.
Only by actively engaging within a multilateral framework can the United States hope to maintain this important and constructive role. Alienating allies and trading partners by operating outside the system it helped create, forces the world to adapt to a self-isolating America. Unilateral action is counterproductive, especially in the face of growing Chinese economic power, and undermines American economic and security interests. Partnering with our allies to reform and strengthen the WTO is the only way the U.S. can maintain its leadership shaping the world trading system in the coming decades.
While the call for reform of the WTO remains pressing, the meeting between the EU and 12 other trade ministers in Ottawa on October 25, without the United States and China, didn't yield immediate results. Click on these links from CSIS and the Peterson Institute for additional readings on the WTO reform: