Dysfunction and division darken the WTO’s 30-year dream of free trade
When trade ministers gathered in the Moroccan city of Marrakech 30 years ago this month to sign the agreement creating the World Trade Organization (WTO), the mood was celebratory. The Berlin Wall had come down only recently, communism had collapsed, and there was optimistic talk of how the body would prise open new markets and act as the arbiter when disputes broke out between countries.
The atmosphere today is much darker than it was in April 1994. Any enthusiasm for groundbreaking trade liberalisation deals disappeared decades ago and has been replaced by covert – and often overt – protectionism.
Relations between the US and China are at a low ebb, and likely to get worse. Late last month, China formally opened a WTO case against the US in which Beijing attempted to safeguard its electric vehicle industry, saying Joe Biden’s subsidies to promote green manufacturing in America broke global trade rules.
The dispute over Biden’s Inflation Reduction Act (IRA) highlights three trends: an ebb tide for globalisation, the increasingly difficult relationship between the world’s two biggest economies, and the dysfunctional state of the WTO itself.
There is scant hope that China’s case against the US will ever be resolved, because the WTO can no longer settle disputes. Any country on the wrong side of a WTO ruling has the right to go to appeal, but the appellate body needs judges to operate and since late 2019 the US has been blocking any new appointments to the panel.
That’s not the only reason Washington will stand firm over the IRA. At root, the problem is being caused by China’s huge trade surplus with the US and the Biden administration’s conviction that America’s deficit is the result of unfair competition.
Responding to China’s formal objection to the financial support provided by the IRA, Katherine Tai, the US trade representative, said it was a case of the pot calling the kettle black, given China’s record of protecting its own manufacturers.
Neil Shearing, chief economist at the consultancy Capital Economics, says there has been a “substantial expansion” of China’s manufacturing capacity since the Covid pandemic. In part, he says, that reflects a response to increased global demand but it also – as in the case of electric vehicles – represents a deliberate policy decision by Beijing to go for market share.
Donald Trump, Biden’s rival in this year’s race for the White House, has promised tough action to prevent the American car market being flooded. Having slapped $300bn of tariffs on Chinese imports when he was president, Trump now says he would impose a 100% tariff on Chinese cars imported from Mexico, a 50% tariff on other Chinese goods and a 10% tariff on goods made elsewhere in the world.
“Those big monster car manufacturing plants you are building in Mexico right now and you think you are going to get that – not hire Americans, and you’re going to sell the car to us, no,” Trump said. “We are going to put a 100% tariff on every car that comes across the lot.”
Trump has made it clear he is not bothered by the possibility that China or other countries might respond with tit-for-tat measures that would penalise US exporters. “You screw us and we’ll screw you,” he said. “It’s very simple, very fair.”
Biden uses less emotive language, but in reality has taken a tough line with China on trade. Keith Rockwell, a fellow at the Hinrich Foundation and a former WTO director, says: “No matter who wins the presidential election, the future of US-China trade relations don’t look that bright. All of Trump’s tariffs are still in place. Biden hasn’t removed a single one.”
Shearing says: “One of the very few bipartisan issues left in Washington is the imbalanced nature of the US trading relationship with China. Investors may be nervous about the potential return of Mr Trump and the threat of a renewed trade war, but that conflict looks ever more likely, whether the next administration is Democrat or Republican.”
The US-China schism is not the only source of trade tension. As the WTO’s director general, Ngozi OkonjoIweala, noted, in addition to the familiar global north-south disputes there had been signs at the recent WTO ministerial meeting in Abu Dhabi of southsouth splits. These reflect the insistence among some of the bigger developing countries – such as India and Brazil – that their voices should be heard.
Okonjo-Iweala declared that it could not be “business as usual” when she took over in Geneva just over three years ago, but has found it hard to forge agreement among the WTO’s 166 members.
Evan Rogerson, a former senior WTO official and now a fellow at the Centre for Multilateralism Studies in Singapore, says the recent WTO ministerial meeting in Abu Dhabi was a disappointment, failing to make any substantive multilateral progress other than the accession of two small countries – Timor-Leste and Comoros.
“Not going backward on a 25-yearold moratorium on e-commerce duties was touted as a success,” he says. “On the critical agenda items – agricultural trade, fisheries subsidies, and reform of the WTO’s dispute-settlement mechanism – ministers simply kicked the can down the road, undertaking to continue work and once more extend deadlines that few expect to be met.”
In a recent article, Okonjo-Iweala said meaningful reform would require developing countries to take a bigger role. “The bottom line is that concerted collective effort is required to deliver WTO agreements and create an organisation capable of tackling this century’s problems. Failure to achieve these aims can no longer be blamed solely on the United States – or any one country, for that matter – for lack of leadership or loss of interest.”
But the US stance will be critical if the WTO is going to fulfil its role policing global trade. Rockwell says if Biden is re-elected it is possible that he would be more open-minded in a second term about some trade issues – including the way disputes are handled. “If Trump wins, there will be no change,” he adds.