An obituary for the WTO?

Photo credit: Glyn Lowe PhotoWorks

Tomorrow, 10th of December of 2019, two of the remaining three judges of the Appellate Body of the WTO will retire, and the body will cease to be operational. Considered the ‘crown jewel’ of the organisation, many see this as the blow that will make the WTO terminal. The implications for the international system (and multilateralism more broadly) are evident. The European Union will have hard choices to make; as of yet it has focused on defending the WTO while simultaneously establishing numerous bilateral deals to protect commercial relations. Beyond the politics, the WTO (and GATT before it) allowed trade to thrive in recent decades, resulting in wide-ranging welfare gains which deserve to be highlighted. After all, trade remains a positive sum game.

Nobel Laurate Paul Samuelson was once asked by mathematician Stanislaw Ulam for one single proposition in the social sciences that was simultaneously true and non-trivial. Years later, he realised comparative advantage was the correct, perhaps the only, solution. Comparative advantage provides simple mathematical proof that trade will be beneficial to the most and least efficient countries: as long as there exist more goods than countries, all countries will gain from specialising in and exporting that where they enjoy a relative advantage and importing all else; the distribution of said gains can then be handled accordingly. Without delving into the mathematics, this is one of the few fundamental truths of economics: trade is a positive sum game that causes growth for all participating countries.

Well aware of this fact, John M. Keynes, perhaps the most famous economist of our time, sought to create an ‘International Trade Organisation’ as British representative to the infamous Bretton Woods conference that established the multilateral economic world order. Keynes was the intellectual superior, a fact he was aware of and which possibly weakened him in negotiations with American representative Harry Dexter White. He ultimately failed, the looser General Agreement on Tariffs and Trade (GATT) was instead signed in 1947, yet it still provided a platform and infrastructure instrumental to the gradual reduction of obstacles to trade since its inception. The GATT lacked a credible way to deal with conflict, one of the many reasons the WTO with its dispute settlement mechanism and Appellate Body was created in 1995. America benefited from the pressure it put on closed markets to open-up; the world considered it a way to end an American unilateralism, prevalent in the 1980s.

Unlike other methods of reducing obstacles to trade, multilateral reductions ensure a net gain. While, bilateral methods will increase trade (and welfare) between counterparties involved, they could result in a net loss if trade diversion effects with others outweigh these gains (a possibility rarely shown unequivocally in practice). That said, WTO achievements are hard to quantify and include both immediate welfare gains from eliminated distortions and broader effects of integrated global markets (eg. transfer of ideas). A thorough study published in 2015 (by Caliendo, Feenstra, Romalis and Taylor), which examines 189 countries, finds the large majority of gains from trade resulted from multilateral reductions under the umbrella of the WTO (and GATT), not regional integration. In fact, only the immediate welfare effects of reductions under the Uruguay round amount to 5.6% of world GDP.

That said, the WTO has long been dying a slow death. The latest round of negotiations (Doha round) failed, given conflict between emerging and developed economies. The accession of China in 2001, then hailed as a great success, has caused great tension. For all its promise, the Chinese economy did not ‘Westernise’, working instead around established WTO frameworks. The US has also long exhibited a hostile attitude towards the Appellate Body, opposing many decisions on procedural grounds. It considers insufficient deference is shown to national safeguards. This is partially the result of vague text agreed on at Uruguay that signified a workable compromise.

Some of these concerns were based on solid arguments. Western naiveté vis-à-vis China’s economic evolution in the early 2000s is now widely accepted, yet many have proposed reforms that could partially accommodate China’s economic model and simultaneously strictly enforce rules. American procedural concerns could also be addressed. While reviving negotiations seems unrealistic currently, the gains from these may largely have been realised. This is argued by the previously cited 2015 paper, which believes that a majority of trade obstacles have already been removed. Similarly, Anderson and Martin published a study in 2005 that estimated that, at its most ambitious, percentage average income gains from Doha if it had succeeded would have only amounted to 0.18% of world GDP. The WTO’s primary role may no longer be as a platform for tariff reduction, but as the imperfect infrastructure behind global trade, regulating how it is conducted between most economies daily. With the demise of the Appellate Body, this will gradually end.

This brings us to the present, the penultimate day of the Appellate Bod’s functional existence. Beyond long-standing procedural disagreements, Trump’s election resulted in two major changes (enumerated by Obama advisor Chad Bown). Trump neglects that the Appellate Body is systemically important to American interests, while disagreements over decisions only affect 2-5% of American imports. He has also been open about his intent to undermine the multilateral rules-based system, believing America’s interests will be best served with a unilateral approach. Having blocked all new appointments to the Appellate Body, now down from seven to three judges (the minimum required to try an appeal), tomorrow he will partially succeed.

This leaves the European Union in a complicated position. Despite its vast market, it cannot fully play Trump’s game, nor perhaps should it want to. Trade is not well-suited to a zero-sum world; it requires no winners and losers. Even as the EU defends the rules-based system, it cannot save the WTO single-handedly. As a result, the last few years have seen a flurry of bilateral deals. These safeguard relations with countries with which trade was previously conducted under the WTO’s most favoured nation concept (even as some deals employ the WTO dispute settlement mechanism). The EU has bilateral agreements in force (some provisionally so) with 64 countries, while negotiations have concluded successfully with many others. However, no deal has been reached with either the US or China, its two premier trading partners (although norms that govern trade with them should hopefully tacitly remain as they are). At the same time, while the EU has agreed on alternative dispute settlement arrangements with Canada and Norway, the WTO mechanism applied to 164 members. Therefore, while the EU has remained pragmatic, these solutions are imperfect at best. A stronger EU with a greater degree of economic sovereignty would undoubtedly be best suited if we continue down the current path.

Trade has been one of many victims of modern populist movements; it can hardly come as a surprise that the WTO has been a casualty of Trump’s campaign against the multilateral order. Whatever its fate, the (imperfect) WTO, and the GATT before it, facilitated widespread welfare gains and enormous prosperity globally, driven by the positive sum nature of trade. This is a fact we would do well to remember, even as the EU evolves to best play the game others have chosen.