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 Economics & Governance

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 article More by this author
 

Opinion

Why China should fear the EU's carbon border tax

Expect Beijing to soon start lobbying against the proposal.

By: Alicia García-Herrero Topic: Energy & Climate, Global Economics & Governance Date: July 26, 2021
Read article More on this topic
 

Blog Post

A world divided: global vaccine trade and production

COVID-19 has reinforced traditional vaccine production patterns, but the global vaccine trade has changed considerably.

By: Lionel Guetta-Jeanrenaud, Niclas Poitiers and Reinhilde Veugelers Topic: Global Economics & Governance Date: July 20, 2021
Read article More by this author
 

Blog Post

The European Union’s carbon border mechanism and the WTO

To avoid any backlash, the European Union should work with other World Trade Organisation members to define basic principles of carbon border adjustment mechanisms.

By: André Sapir Topic: Energy & Climate, Global Economics & Governance Date: July 19, 2021
Read about event More on this topic
 

Upcoming Event

Sep
2
11:15

Towards a new global trade regime: reform of the WTO

Bruegel Annual Meetings, Day 2 - the World Trade Organisation has been going through trying times, a phenomenon amplified by the pandemic. Why are we headed towards a new global trade regime? And what lies ahead for the WTO?

Speakers: Ngozi Okonjo-Iweala and Guntram B. Wolff Topic: Global Economics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read article More on this topic More by this author
 

Opinion

Could the RMB dislodge the dollar as a reserve currency?

The dollar remains the world’s largest reserve currency, but it is facing both domestic and external risks.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: July 14, 2021
Read about event More on this topic
 

Past Event

Past Event

Strengthening the weak links: future of supply chains

What new supply chains trends will we see in the post-pandemic era?

Speakers: Ebru Özdemir, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Date: July 7, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

CCP's 100th Anniversary: Reflecting and looking forward

As the Chinese Communist Party celebrates its 100th anniversary, we looked into the past, future and present of the country's economic development.

By: The Sound of Economics Topic: Global Economics & Governance Date: July 7, 2021
Read article Download PDF More on this topic
 

Policy Contribution

Commercialisation contracts: European support for low-carbon technology deployment

To cut the cost of decarbonisation significantly, the best solution would be to provide investors with a predictable carbon price that corresponds to the envisaged decarbonisation pathway.

By: Ben McWilliams and Georg Zachmann Topic: Energy & Climate Date: July 1, 2021
Read about event More on this topic
 

Past Event

Past Event

Multilateralism in banking regulation and supervision

This members-only event welcomes Carolyn Rogers Secretary General of the Basel Committee on Banking Supervision.

Speakers: Carolyn Rogers and Nicolas Véron Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 24, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Avoiding a requiem for the WTO

The WTO has been 'missing in action': how can we restore the organisation's role as a global forum for cooperation on trade?

By: The Sound of Economics Topic: Global Economics & Governance Date: June 16, 2021
Read article
 

Opinion

Relaunching transatlantic cooperation with a carbon border adjustment mechanism

The best way for the EU and the US to jointly introduce carbon border adjustment would be to form a ‘climate club’.

By: Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, Global Economics & Governance Date: June 11, 2021
Load more posts