Im­pact Se­ries: 02–21

A New Hope for the WTO?
Past achievements, current
challenges, and planned reforms

Michael Blanga-Gubbay
Senior Research Fellow at the Kühne Center for Sustainable Trade and Logistics at the University of Zurich

Ralph Ossa
Kühne Foundation Professor of International Trade

Outline

The World Trade Organization (WTO) has a new Director General, and we take her appointment as an opportunity to brief the reader on this important international organization. In particular, we (i) explain its past achievements, (ii) discuss its current challenges, and (iii) summarize its planned reforms.

Full Article

Pol­i­cy­mak­ers now have a his­toric op­por­tu­ni­ty to re­form the World Trade Or­ga­ni­za­tion (WTO). The WTO has a new Di­rec­tor Gen­er­al, the US has a new Pres­i­dent, and the re­cent ex­pe­ri­ence of the Chi­na-US trade war and the COVID-19 cri­sis have il­lus­trat­ed the ur­gent need for re­form. In this Kühne Im­pact Se­ries, we brief the read­er on this im­por­tant pub­lic pol­i­cy is­sue by ex­plain­ing the WTO’s past achieve­ments, its cur­rent chal­lenges, and its planned re­forms.

The WTO and its successes over the past 25 years

The WTO is the most im­por­tant in­sti­tu­tion of the world trad­ing sys­tem. It is an in­ter­na­tion­al or­ga­ni­za­tion gov­ern­ing the trade re­la­tion­ships be­tween 164 mem­ber coun­tries, which joint­ly ac­count for 96% of glob­al trade and 97% of glob­al GDP. The WTO is built around three main agree­ments, the Gen­er­al Agree­ment on Tar­iffs and Trade (GATT) reg­u­lat­ing goods trade, the Gen­er­al Agree­ment on Trade in Ser­vices (GATS) reg­u­lat­ing ser­vices trade, and the Agree­ment on Trade-Re­lat­ed As­pects of In­tel­lec­tu­al Prop­er­ty Rights (TRIPS) reg­u­lat­ing in­tel­lec­tu­al prop­er­ty rights.

The WTO was es­tab­lished in 1995 in re­sponse to the grow­ing com­plex­i­ty of the glob­al econ­o­my. It built on the GATT, which had been gov­ern­ing world trade since 1947. While the ob­jec­tive of the GATT was es­sen­tial­ly lim­it­ed to re­duc­ing tar­iffs and re­lat­ed trade bar­ri­ers, the WTO has a much broad­er man­date, en­com­pass­ing is­sues like ser­vices trade, in­tel­lec­tu­al prop­er­ty rights, dis­pute set­tle­ment, sub­si­dies, reg­u­la­tion, and in­vest­ment. In trade econ­o­mist lin­go, the WTO there­fore pur­sues a “deep in­te­gra­tion” agen­da, in con­trast to the GATT’s ear­li­er “shal­low in­te­gra­tion” ap­proach.

De­spite its much more am­bi­tious agen­da, the WTO’s suc­cess was so far large­ly lim­it­ed to fur­ther ad­vanc­ing the shal­low in­te­gra­tion process ini­ti­at­ed un­der the GATT. Un­der its aus­pices, av­er­age tar­iffs more than halved (from 12% in 1995 to 5% in 2017) and world trade near­ly quadru­pled in dol­lar val­ue terms.¹ More­over, trade pol­i­cy co­op­er­a­tion re­mained strong even dur­ing se­vere crises like the Great Re­ces­sion of 2008-09, at least un­til the out­break of the Chi­na-US trade war. The most im­por­tant mile­stone in this re­gard was clear­ly Chi­na’s ac­ces­sion to the WTO in 2001.

The WTO’s major challenges

While the WTO de­serves cred­it for these achieve­ments, they still fall far short of its ini­tial goals. One chal­lenge is that WTO mem­bers are bit­ter­ly di­vid­ed over es­sen­tial­ly all deep in­te­gra­tion is­sues so that it has proven im­pos­si­ble to make any progress on that front. An ex­am­ple of this di­vide is the nev­er-end­ing con­flict be­tween rich and poor coun­tries about stronger in­tel­lec­tu­al prop­er­ty rights pro­tec­tion, which rich coun­tries sup­port and poor coun­tries op­pose. An­oth­er chal­lenge is that the WTO has been un­able to keep up with some im­por­tant new trade pol­i­cy is­sues such as e-com­merce or data gov­er­nance.

There are two close­ly re­lat­ed symp­toms of this im­passe: First, the WTO has been un­able to make any sig­nif­i­cant progress through mul­ti­lat­er­al trade ne­go­ti­a­tions, a hall­mark of the world trad­ing sys­tem un­der the GATT. What stands out is the fail­ure of the Doha De­vel­op­ment Round, which start­ed in 2001 and end­ed 7 years lat­er with­out reach­ing any agree­ment, and with rec­i­p­ro­cal ac­cu­sa­tions from the largest economies in the world (US, EU, In­dia and Chi­na) for its fail­ure. In 2013, the WTO reached the first, and only, mul­ti­lat­er­al agree­ment ap­proved by all its mem­bers since its cre­ation – the Bali Pack­age – ap­prov­ing only a very small por­tion of the Doha De­vel­op­ment Agen­da.

The WTO has been unable to make any significant progress through multilateral trade negotiations.

Sec­ond, most trade ne­go­ti­a­tions now oc­cur in the con­text of re­gion­al trade agree­ments (RTAs), which have pro­lif­er­at­ed since the cre­ation of the WTO. While RTAs as such are of­ten worth­while ini­tia­tives, their pro­lif­er­a­tion is a clear tes­ta­ment to the wan­ing im­por­tance of the WTO as the main fo­rum for in­ter­na­tion­al trade pol­i­cy co­op­er­a­tion. Since the es­tab­lish­ment of the WTO, RTAs have risen in num­ber, reach­ing 338 agree­ments no­ti­fied as of De­cem­ber 2020. All 164 WTO Mem­bers are par­ty to at least one RTA.

RTA proliferation is a clear testament to the WTO’s waning importance as the main forum for international trade policy cooperation

Be­sides un­der­min­ing the WTO as a ne­go­ti­a­tion fo­rum, there are ad­di­tion­al con­cerns about the pro­lif­er­a­tion of RTAs. One con­cern is that they are in­her­ent­ly dis­crim­i­na­to­ry and might even be pur­pose­ful­ly de­signed to ex­clude or iso­late spe­cif­ic coun­tries. An­oth­er con­cern is that their cho­sen ap­proach to deep in­te­gra­tion is some­times viewed as bi­ased to­wards the in­ter­ests of multi­na­tion­al cor­po­ra­tions, par­tic­u­lar­ly in the ar­eas of reg­u­la­tion, in­vest­ment, and in­tel­lec­tu­al prop­er­ty rights. The lat­ter con­cern was also at the heart of the strong pub­lic op­po­si­tion to re­cent­ly ne­go­ti­at­ed mega-RTAs like the Com­pre­hen­sive Eco­nom­ic and Trade Agree­ment (CETA) be­tween the EU and Cana­da or the Transat­lantic Trade and In­vest­ment Part­ner­ship (TTIP) be­tween the EU and the US.

On the oth­er hand, RTAs can clear­ly also be a ma­jor force for good in the world trad­ing sys­tem. Most ob­vi­ous­ly, they con­tribute sub­stan­tial­ly to fur­ther shal­low in­te­gra­tion by elim­i­nat­ing tar­iffs be­tween mem­ber coun­tries. More­over, they are of­ten the only re­al­is­tic av­enue to pur­sue sig­nif­i­cant deep in­te­gra­tion, which re­quires the co­or­di­na­tion of sen­si­tive be­hind-the-bor­der poli­cies like health and safe­ty stan­dards.

Ill-timed crises

On top of these ma­jor chal­lenges, the WTO has faced mul­ti­ple ad­di­tion­al crises over the course of the last few years. What comes to mind im­me­di­ate­ly are the break­down of trade pol­i­cy co­op­er­a­tion dur­ing the Chi­na-US trade war and the COVID-19 pan­dem­ic, which se­vere­ly dam­aged the cred­i­bil­i­ty of the WTO as a guar­an­tor of sta­ble trade re­la­tions. We have ex­ten­sive­ly dis­cussed the trade-im­pli­ca­tions of the Covid-19 pan­dem­ic in our pre­vi­ous two Kühne Im­pact Se­ries and will there­fore not fur­ther be­la­bor this point here.²

The WTO has faced multiple additional crises over the course of the last few years.

An­oth­er cri­sis per­tains to the WTO’s Dis­pute Set­tle­ment Mech­a­nism (DSM), and more pre­cise­ly to its Ap­pel­late Body (AB). The DSM was of­ten re­ferred to as the “crown jew­el” of the or­ga­ni­za­tion. Over the past two decades, it has been re­mark­ably ac­tive: since its in­cep­tion, 600 dis­putes have been ini­ti­at­ed by WTO mem­bers. And the high rate of com­pli­ance with the de­ci­sions tes­ti­fied to the sys­tem’s suc­cess. With time, while the dy­nam­ics of trade re­la­tion­ships evolved and deep­ened sig­nif­i­cant­ly, the rules and pro­ce­dures of the sys­tem have not fol­lowed these de­vel­op­ments, due to the in­ac­tiv­i­ty on the leg­isla­tive front. This ef­fec­tive­ly forced the DSM and the AB to make law by their rul­ings. As a con­se­quence, the dis­pute set­tle­ment mech­a­nism en­tered a deep cri­sis of le­git­i­ma­cy due to its ju­di­cial over­reach. The sys­tem col­lapsed in De­cem­ber of 2019, when the Unit­ed States re­fused to ap­point new mem­bers to the AB.

A new hope

In the midst of the pan­dem­ic, on May 14, 2020, the WTO Di­rec­tor-Gen­er­al (DG) Rober­to Azevê­do an­nounced that he would step down, cut­ting his sec­ond term short by one year and leav­ing the dam­aged or­ga­ni­za­tion lead­er­less. The ap­point­ment of the new DG re­quired a con­sen­sus of the 164 mem­ber coun­tries; that was not reached un­til Biden be­came US Pres­i­dent, and Yoo Myung-hee – the can­di­date backed by the US – an­nounced her with­draw­al from the race. Ngozi Okon­jo-Iweala was then ap­point­ed DG, mak­ing his­to­ry as first woman and first African at the head of the WTO.

DG Okon­jo-Iweala faces a mon­u­men­tal task. In her first pub­lic state­ment, she out­lined her po­lit­i­cal agen­da and vi­sion for the WTO for the months and years to come, in or­der to “re­store and re­brand the WTO as a key pil­lar of glob­al eco­nom­ic gov­er­nance, a force for a strong, trans­par­ent, and fair mul­ti­lat­er­al trad­ing sys­tem, and an in­stru­ment for in­clu­sive eco­nom­ic growth and sus­tain­able de­vel­op­ment”.³

WTO Director-General Okonjo-Iweala faces a monumental task.

Her first point is to tack­le the pan­dem­ic by in­ten­si­fy­ing in­ter­na­tion­al co­op­er­a­tion to fight COVID-19. The WTO should play a more force­ful role in ex­er­cis­ing its mon­i­tor­ing func­tion and en­cour­ag­ing mem­bers to min­i­mize and re­move ex­port re­stric­tions and pro­hi­bi­tions that hin­der sup­ply chains for med­ical goods and equip­ment (ac­cord­ing to the In­ter­na­tion­al Trade Cen­tre, 100 coun­tries still main­tain ex­port re­stric­tions and pro­hi­bi­tions on this front).

Her sec­ond ob­jec­tive is to dis­cuss the struc­tur­al re­forms that the WTO needs. In or­der to re­store cred­i­bil­i­ty in the or­ga­ni­za­tion, the new­ly ap­point­ed DG wants to de­liv­er ear­ly suc­cess­es and re­sults. DG Okon­jo-Iweala hopes to fi­nal­ize the fish­eries sub­si­dies ne­go­ti­a­tions ahead of the 12th Min­is­te­r­i­al Con­fer­ence. She could cap­i­tal­ize on an “easy” win and get mo­men­tum for the more chal­leng­ing re­forms that the WTO needs. In her state­ment, she high­light­ed the need of re­in­stat­ing and re­form­ing the dis­pute set­tle­ment mech­a­nism, cre­at­ing a sys­tem that “can gar­ner the con­fi­dence of all, in­clud­ing small de­vel­op­ing and least de­vel­oped coun­tries who have found it chal­leng­ing to uti­lize”.⁴

An­oth­er point of her agen­da is to up­date the WTO rule­book. The rules lag be­hind those of sev­er­al RTAs, which con­tributes to coun­tries’ pref­er­ence for RTAs in the first place. The start­ing point will be to take ac­count of 21st cen­tu­ry re­al­i­ties such as e-com­merce and the dig­i­tal econ­o­my.

A fi­nal im­por­tant point high­light­ed in her speech re­lates to the en­vi­ron­ment. DG Ngozi Okon­jo-Iweala plans to di­rect the WTO in sup­port­ing the green and cir­cu­lar econ­o­my, in re­ac­ti­vat­ing the ne­go­ti­a­tions on en­vi­ron­men­tal goods and ser­vices, and ad­dress­ing more broad­ly the nexus be­tween trade and cli­mate change. The fo­cus on cli­mate change is quite new with­in the WTO, but it is less sur­pris­ing that she men­tioned it in her first re­marks as DG. Among all the can­di­dates for the po­si­tion, Dr. Okon­jo-Iweala was the most out­spo­ken about the en­vi­ron­ment, even though it is not a promi­nent area of on­go­ing WTO ne­go­ti­a­tions.⁵ One might ex­pect that she will be fa­vor­able to the EU’s pro­posed car­bon tax as well as tar­iffs re­moval on re­new­able en­er­gy tech­nol­o­gy and ser­vices, also in light of the fact that the EU was a strong sup­port­er of her can­di­da­cy.

Concluding remarks

While life has nev­er been easy for the WTO, its cri­sis took on ex­is­ten­tial pro­por­tions dur­ing the past few years. It hit rock bot­tom when Pres­i­dent Trump pub­licly en­ter­tained the idea of with­draw­ing from the or­ga­ni­za­tion, a blow it would most like­ly not have sur­vived.

Rel­a­tive to this dire sit­u­a­tion, things have al­ready much im­proved. Most im­por­tant­ly, the WTO was able to ap­point a dis­tin­guished new leader with an am­bi­tious re­form agen­da with the sup­port of the new US ad­min­is­tra­tion.

Hav­ing said this, WTO re­form is a mon­u­men­tal chal­lenge and one might un­der­stand­ably ar­gue that Ngozi Okon­jo-Iweala’s agen­da is high­ly in­com­plete. But, as is known, pol­i­tics is the art of the pos­si­ble and we view her agen­da as a promis­ing start­ing point.