Seven months into President Donald Trump’s chaotic tariff policies, commentators including Ambassador Jamieson Greer and Council on Foreign Relations President Michael Froman have begun to address how those policies will change the global trading system. The dust can settle in any number of ways—new arrangements could supplement or even replace the World Trade Organization (WTO). Regardless of the direction, it is worth considering several lessons from the WTO experience.
The WTO, already hamstrung by its need for consensus to negotiate new rules, has been sidelined in responding to U.S. tariffs, as members have instead entered into bilateral talks with the United States. The resulting deals have cast aside WTO commitments on tariff caps and rules against discrimination among WTO members.
Although the willingness of trading partners to make deals with the United States has shocked some observers, that willingness merely reflects the same impulse to create stability for traders that underlay the creation of the WTO itself. Should the WTO or some other international arrangement again serve as an effective means of achieving that stability, countries will most assuredly flock to it—even if the goal is to achieve stability in trade relations among themselves, without the United States. Indeed, some have floated the idea of such arrangements, including between the European Union and the Comprehensive and Progressive Trans-Pacific Partnership.
This underscores a central lesson in any new arrangement or effort at WTO reform: trade agreements need to be pragmatic and mutually beneficial if they are to succeed. That point may seem obvious, but it was lost over the years as WTO members and outside observers lauded the organization’s contributions to global welfare with almost religious fervor and treated the pronouncements of its dispute settlement reviewing mechanism, the Appellate Body, as sacrosanct. That deference led the Appellate Body to stray into rule-making and forget that WTO compliance, as a practical matter, involves a choice, despite the ostensibly “binding” nature of the rules. That element of voluntariness has been clearly demonstrated in the current wave of bilateral deals. Awareness of that voluntariness could have added urgency to efforts to update WTO rules to address modern concerns, as well as a greater appreciation that dispute-settlement outcomes need to be viewed as credible, and not simply the pronouncements of a body convinced that parties had no choice but to comply.
This relates to a second set of lessons: the WTO’s current rules are inadequate to deal with state intervention on a large scale, and consensus decision-making has made developing new rules extraordinarily challenging. As a result, the organization has been unable to deal with China’s economic model of heavy state intervention, predatory targeting of key sectors, and intellectual property theft. Even where current WTO rules can theoretically address some of those Chinese practices, the dispute settlement system often falls short because of China’s lack of transparency and its ability to achieve the same goals through other practices.
It was therefore inevitable that WTO members would eventually act outside of the system, through WTO-inconsistent means such as high tariffs and quotas, to minimize the impact on their producers and markets of the massive overcapacity China created in sectors such as steel and aluminum. China has indicated that it does not intend to change its system. Consequently, any parties negotiating new global trading arrangements, whether at the WTO or otherwise, will be faced with the choice to either expect members to act outside the arrangement, as at the WTO; exclude China from the arrangement; or build rules into the arrangement to accommodate and authorize new and more effective countermeasures against state intervention and targeting.
Granted, discussions now are focused on whether the United States can be included in any given arrangement. Whatever conclusions are drawn on that score, it would be naïve to ignore the long-standing and ongoing concerns over Chinese practices; it is not a case of either/or.
A third set of lessons from the WTO’s experience relates to trade measures taken in the name of national security. This area, in particular, illustrates the voluntariness in the WTO system. Regardless of whether current WTO rules allow each member to judge for itself whether to act in the name of national security, members can simply do so. This reality points to the need to manage the situation through a rebalancing mechanism such as that proposed by the United States last December.
Beyond this, however, the debate on national security often overlooks a key consideration: the WTO membership includes geopolitical rivals, and some of those rivals are openly invading their neighbors or seeking to enforce expansive territorial claims through increasingly aggressive means. Unsurprisingly, the number of national security measures taken by WTO members has increased. Even if WTO members reestablish norms of when it is appropriate to take national security measures, the number of such measures is unlikely to fall to the levels of the pre-WTO General Agreement on Tariffs and Trade (GATT), which excluded China and Russia. Other trade arrangements outside the WTO will need to contend with the same challenge, depending on their membership.
Two final observations: for all its flaws, the WTO’s comprehensive rulebook still provides an essential baseline of stability for the global trading system, however much it needs to be updated or supplemented. And it is too soon to conclude where the United States will ultimately land in its approach to global trade. The costs of the current lack of certainty and stability could at some point come home to roost, court cases could reshape the tariff landscape, and the need for stability achieved through global trading arrangements could become better appreciated.
However it shakes out, the impetus for stability and economic certainty will drive the outcome and be at the core of the new equilibrium.
To read the article as it was originally published by the Council on Foreign Relations, click here.