Where is WTO?

Business Standard - - OPINION - T N NINAN

The head­lines shout “Trade war”. Week af­ter week, there are an­nounce­ments of new trade sanc­tions and higher tar­iffs. Re­tal­ia­tory ac­tion fol­lows. Global or­gan­i­sa­tions warn of an eco­nomic slow­down, but the fric­tion only es­ca­lates. Ques­tion: Where is the World Trade Or­ga­ni­za­tion (WTO) in the mid­dle of all this? Isn’t it sup­posed to set the rules for trade and deal with trade dis­putes?

The an­swer is that it is go­ing to get busy quite soon. China, In­dia and oth­ers have filed com­plaints against the US for im­pos­ing high tar­iffs on steel and alu­minium im­ports, cre­atively cit­ing na­tional se­cu­rity as the rea­son. Ad­ju­di­ca­tion starts af­ter a manda­tory 60-day wait­ing pe­riod. The US im­po­si­tion of tar­iffs un­der an­other part of its trade law may too be tested — for the first time. So while Pres­i­dent Don­ald Trump de­scribes the WTO as a “catas­tro­phe” and threat­ens to pull the US out of the or­gan­i­sa­tion, his trade ac­tions are de­signed to test and stretch, but not fall foul of, WTO rules. And to the ex­tent that the ac­tual steps taken so far are quite limited and well short of the blus­ter and rhetoric, WTO rules may yet pre­vent the break-out of a full-fledged trade war.

But the risks re­main, and the WTO’s lim­i­ta­tions are show­ing. Its in­abil­ity to bring suc­cess­ful clo­sure to the Doha Round of mul­ti­lat­eral trade ne­go­ti­a­tions, per­haps an in­di­ca­tion of the suc­cess of ear­lier rounds, points to the vir­tual end of one role: The free­ing of trade. Most of the ac­tion in re­cent years has been out­side the WTO’s mul­ti­lat­eral frame­work, in bi­lat­eral or pluri­lat­eral dis­cus­sions and agree­ments.

A sec­ond vi­tal WTO func­tion, the set­tling of trade dis­putes, is also in danger. Its ap­pel­late body for dis­putes may soon be­come non-op­er­a­tional. It has seven mem­bers, but three seats are va­cant be­cause the US has blocked fresh ap­point­ments. If the ex­ist­ing strength drops an­other notch to three mem­bers, it does not have the quo­rum to meet. That could be the kiss of death for dis­pute set­tle­ment.

In any case, dis­pute set­tle­ment takes years to do, dur­ing which non-com­pli­ant tar­iffs and re­tal­ia­tory ac­tion pre­vail. China has been gam­ing the sys­tem to im­pose tar­iffs that it knows will even­tu­ally be ruled out of court af­ter a cou­ple of years, but it gains from them in the in­terim. Be­sides, a coun­try that files a suc­cess­ful trade com­plaint only earns the right to im­pose pe­nal tar­iffs on the of­fend­ing coun­try. In a fast-mov­ing sce­nario where re­tal­ia­tory tar­iffs have al­ready been im­posed, dis­pute set­tle­ment as the WTO un­der­stands it loses mean­ing.

Mean­while, the US has im­posed uni­lat­eral trade and other sanc­tions on coun­tries like Rus­sia, North Korea and Iran, with knock-on ef­fects on any coun­tries that ig­nore the sanc­tions (hence In­dia’s dif­fi­culty in con­tin­u­ing to buy oil from Iran, or mis­siles from Rus­sia). There is no in­ter­na­tional sanc­tion for such ac­tion, but it is ef­fec­tive none­the­less. In all of this, the US is sim­ply ex­ploit­ing its unique clout.

And yet, as with the skewed fund­ing of the North At­lantic Treaty Or­ga­ni­za­tion (Nato), Mr Trump has a point. The WTO does have lim­i­ta­tions. Chi­nese mer­can­til­ism (apart from cur­rency ma­nip­u­la­tion) has gone on for years, even as un­fair trade prac­tices have flour­ished (in­clud­ing by the US when it comes to agri­cul­tural sub­si­dies). What neu­tralises the WTO in such sit­u­a­tions is that it can­not act on its own; it has to wait for mem­ber-na­tions to take the ini­tia­tive.

The time may have come for a whole­sale re­view, but in­ter­na­tional in­sti­tu­tions in all fields op­er­ate on the as­sump­tion that the big boys are on the same page and will play by the rules. That is no longer the case. Can you leave out the big boys and ev­ery­one else get back to the rules, on the lines of Ja­pan’s push for a Trans-Pa­cific Part­ner­ship with­out the US? It won’t work be­cause deals with­out the two big­gest trad­ing na­tions have lit­tle mean­ing. The eas­ier (or less dif­fi­cult) op­tion would be to re­form the WTO, and take on board some of Mr Trump’s com­plaints.

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