Opinion

Life after the multilateral trading system

Considering a world absent a multilateral trading system is not to promote such an outcome, but to encourage all to prepare for the worst and instil greater clarity in the mind of policymakers as to what happens if compromise fails.

By: , and Date: April 25, 2019 Topic: Global economy and trade

This article was published by Nikkei Veritas, Caixin, Handelsblatt, and Le Monde.

Caixin logo

Le Monde logo

The China-US trade talks, crucial as they are, divert attention from the main event: the World Trade Organization, the essential institution underpinning the post-war liberal economic order, is under threat of extinction. The community of nations must defend the institution as if there were no alternative, but must also think through the possibility that the WTO will sooner or later cease to exist as a functioning entity.

What then? To economists like us, and to most trade officials we know, a contemplation of this question is beyond the pale, a sure way to cut short a serious conversation. But world trade is the lifeline of the modern globalised economy and it would be irresponsible not to consider it.  For Europe especially, reliance on trade is complete. Germany, for example, relies on exports of over $21,000 per capita each year.

The danger to the WTO is clear and present, and it is on four fronts. First is the inability of trade negotiators to move forward on the most important issues facing the institution’s 164 members. These issues range from the time-worn, such as freeing trade in services and containing agricultural subsidies, to the new, such as digital trade, which have become critical to the 21st-century economy.

The second front – and the one where the threat is the most immediate – is the Trump administration’s decision to flout the WTO’s rules, even as it pays lip service to the institution’s importance and engages in legal hair-splitting to justify its unilateral actions. A blatant example is the invocation of national security to tax steel and aluminium imports from its allies, and the threat to do the same on cars.

Third, just as ominous is the United States’ challenge to the legitimacy of the WTO’s dispute settlement system, exercised in direct fashion by refusing to renew the mandate of members of its Appellate Body. The damage that the recent US policies have already wrought on the WTO is immense. Indeed, veteran trade officials will say – though only in private – that the US has already left the WTO. Even if a future administration reverses course, the system of international trade laws the US has promoted will have lost credibility, perhaps irreversibly.

Fourth, China – together with the EU, now the world’s largest exporter – must contain its many forms of obscure subsidisation and forced intellectual property transfer. But at least, unlike the present United States administration, China recognises that it is a major beneficiary of the multilateral rules-based trading system and officially supports it.

Imagining world trade without the World Trade Organization – that is, without clear rules – leads us to formulate four predictions.

First, the system will be based on a combination of power, bilateral deals, and (unenforceable) norms or practices from the days of the WTO. Without WTO disciplines, the balance of power within nations will shift from export interests to import-competing interests, spurring an escalation of protectionist measures across the world.

Second, power will be equally distributed among three major actors, namely the US, the European Union, and China. To contain the uncertainty, this ‘big three’ will try to strike bilateral deals with each other. But such deals will not have the high ambitions of, say, the now discarded Trans-Atlantic Trade and Investment Partnership. Instead, they will aim to preserve as much as possible of the rules and disciplines presently enshrined in the WTO, while recreating a bilateral mechanism for dispute settlement. In practice, striking even a minimal US-EU, US-China or EU-China trade deal may prove impossible. In that case, there will be a sequence of continuous and unmanageable disputes that will make the business and trade environment of even the largest players far less predictable.

Third, faced with the choice of chaos or a trade deal, many smaller nations will be forced into vastly asymmetric deals with China, the EU and the US. The trading system will naturally tend to splinter into three blocks around these giants. The likelihood of developing a common set of global rules to govern e-commerce, intellectual property protection, subsidies, carbon taxes, and investment will be close to zero.

Fourth, the new non-system of unilateral actions and bilateral deals is more than likely to generate a big increase in discrimination against third parties – examples of which can be seen in the more restrictive rules-of-origin, export restraints, managed trade, and geopolitically motivated exclusions sought most recently in bilateral deals by US negotiators. In short, world trade without the WTO would be a very bad outcome for the world economy, including for the larger nations.

The purpose of thinking about a world absent a multilateral trading system is not to promote such an outcome – on the contrary. It is to encourage all to prepare for the worst. It is also to instil greater clarity in the mind of policymakers as to what happens if compromise fails. By thinking about the dangers of the current trade war and a world without the WTO, we hope that policymakers will be able to chart a course towards retaining the rules-based trading system.  As the age-old expression goes, “forewarned is forearmed”.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event More on this topic
 

Past Event

Past Event

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 18, 2022
Read about event
 

Upcoming Event

May
19
15:00

Three data realms: Managing the divergence between the EU, the US and China in the digital sphere

Major economies are addressing the challenges brought by digital trade in different ways, resulting in diverging regulatory regimes. How should we view these divergences and best deal with them?

Speakers: Susan Ariel Aaronson, Henry Gao, Esa Kaunistola and Niclas Poitiers Topic: Digital economy and innovation, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Podcast

Podcast

The cost of China's dynamic zero-COVID policy

What does zero-COVID mean for both China and the global economy?

By: The Sound of Economics Topic: Global economy and trade Date: May 11, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

Global trade Down Under

A conversation on the global trading landscape.

By: The Sound of Economics Topic: Global economy and trade Date: May 4, 2022
Read about event More on this topic
 

Past Event

Past Event

From viruses to wars: recent disruptions to global trade and value chains

How have events in recent years impacted global trade and value chains and how can we strengthen these against future disruptions?

Speakers: Dalia Marin, Adil Mohommad and André Sapir Topic: Global economy and trade Date: April 27, 2022
Read article More on this topic More by this author
 

Opinion

China’s Covid policy to be year’s largest economic shock

Beijing’s ‘dynamic zero-Covid’ policy could devastate the domestic economy, but the effects will also be felt globally.

By: Alicia García-Herrero Topic: Global economy and trade Date: April 26, 2022
Read article More on this topic
 

Blog Post

The decoupling of Russia: European vulnerabilities in the high-tech sector

Although Russia bears the brunt of Western high-tech sanctions, the European Union will face challenges in sectors where it relies on Russian and Ukrainian commodities and technologies.

By: Monika Grzegorczyk, J. Scott Marcus, Niclas Poitiers and Pauline Weil Topic: Global economy and trade Date: April 12, 2022
Read article More by this author
 

Podcast

Podcast

What to expect from China's innovation drive?

How much has China progressed technologically?

By: The Sound of Economics Topic: Digital economy and innovation, Global economy and trade Date: April 6, 2022
Read article More on this topic
 

Blog Post

Is the private sector retreating in China? Not among its largest companies

Though private ownership does not free companies from the pervasive influence of the Communist Party, China’s private and state sectors are not equivalent; China’s largest firms are growing faster than their state-owned counterparts.

By: Tianlei Huang and Nicolas Véron Topic: Global economy and trade Date: April 5, 2022
Read article Download PDF More on this topic
 

Working Paper

The private sector advances in China: The evolving ownership structures of the largest companies in the Xi Jinping era

This paper documents recent structural changes in China’s corporate landscape, based on company level data, providing a complementary perspective to that of official Chinese statistics.

By: Tianlei Huang and Nicolas Véron Topic: Global economy and trade Date: April 5, 2022
Read article More on this topic More by this author
 

Opinion

Early Warning Brief: China’s contorted response to Russia sanctions

The spectre of a democratic Russia aligned with the West is probably a more serious concern for Beijing than what it risks losing by supporting Russia, which is exactly why China has arrived at its contorted position on the current military conflict in Ukraine.

By: Alicia García-Herrero Topic: Global economy and trade Date: April 1, 2022
Read article More on this topic More by this author
 

Opinion

Rallying Chinese markets will not be a quick fix for Beijing

Top official makes rare intervention to reassure investors but progress to resolve problems will be difficult.

By: Alicia García-Herrero Topic: Global economy and trade Date: March 25, 2022
Load more posts