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 Economics & Governance

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

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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”.

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