Trade Cases

World Trading System in Crisis: Is the WTO Broken?

Written by Sandy Williams

Will the World Trade Organization survive the current tumultuous trade environment where protectionism is supplanting cooperation? Some ambassadors to the WTO say that reform must happen soon or the multilateral system will collapse.

“The world trading system is broken. The WTO is broken. There’s no reciprocity left,” said White House chief economic advisor Larry Kudlow during an interview by CNBC. “China’s the worst offender, but not the only one around the world. Mr. Trump is trying to fix trading malpractice that goes back several decades.”

Trump has often disparaged the WTO and its “bad” treatment of the United States. “WTO’s treated the United States very badly and I hope they change their ways. They have been treating us very badly for many, many years and that’s why we were at the big disadvantage with the WTO,” the president said in July. “And we’re not planning anything now, but if they don’t treat us properly, we will be doing something.”

WTO Director General Roberto Azevêdo defended the organization. “The WTO is not broken. The WTO is functioning actually quite well.”

The WTO has seen an increase in members presenting cases for dispute resolution, a sign that members “still have faith in the dispute system as a tool to address their concerns, even if there is room for improvement,” said Azevêdo.

Azevêdo said if it were not for the WTO, protectionism measures would have been much more prevalent after the 2009 financial crisis, slowing the recovery of the global economy.

“The system has been under pressure before, and each time it has emerged stronger,” he said in an address to members during Geneva Week. “In 2008, faced with an economic crisis, the system proved its value, avoiding a proliferation of protectionist measures. In 2013, after years of deadlock, we proved we could deliver negotiated results.

Said Azevêdo, “Tensions are running high. We are seeing the proliferation of trade-restrictive measures between members, with the announcement of new tariffs potentially covering many billions of dollars of trade. The risk of further escalation poses a significant challenge to the system. We are already seeing the impact of this.

“Recently, the WTO has reported a spike in new trade restrictive measures among G20 economies, as the number of new measures per month has doubled, with the estimated coverage increasing by over 50 percent. This is very concerning. If the trading system were to falter, the consequences could be dramatic. Everybody loses from a trade war. And smaller economies stand to lose the most, as they don’t have the resources to cope with the chaos that would result.”

WTO ambassadors quoted by Inside U.S. Trade are concerned about the changes in attitude wrought by recent trade actions. “We have entered a new period. We cannot do business as usual,” one ambassador said. “Some members at least understand that there is a real danger that everything collapses. This is something that is felt by a significant number of countries. A large number of developing countries are not yet on that page.”

A new “frankness and finger-pointing” has infiltrated the usually very formal WTO General Council meetings, said one ambassador. Others remarked that members lacked consensus on what issues should be prioritized by the WTO.

In a July 26 op-ed in the Financial Times, EU Trade Commissioner Cecilia Malmström praised the WTO for “enabling open, rules-based trade” that “spurs growth and the free exchange of ideas between nations and cements peace.” She also warned that “international trading order is confronting its deepest crisis to date.”

The looming global trade war has prompted some to believe it is time to “pull the plug on 70 years of trade diplomacy and pursue trade goals by other means,” said Malmström. The result, she said, would result in trade controlled by governments rather than companies and consumers.

Problems within the WTO include outdated rules for economic and technological changes, the blocking of the appellate nominations by the U.S. over dispute settlement rules, and the lack of transparent trade policies.

China has been an ongoing problem for the WTO with state-owned enterprises that do not fit within the open global trading system that is expected to provide a level playing field for WTO members, said Malmström. Tools need to be developed to deal with “uncompetitive and unfair behavior” by member nations.

Concluded Malmström, “The U.S., its allies in Europe and partners around the world built the international trading system out of the ruins of the Second World War. The benefits of open and dependable trade must not be taken for granted. It is time to stand up for the global order and rules-based trade. Turning back the clock would be a recipe for economic disaster.”

Latest in Trade Cases