Policymakers and businesses are increasingly wary about the risks of economic interdependence. Securing supply chains, avoiding over-dependence on too few (or “unfriendly”) suppliers, and ensuring continued access to goods in critical sectors have become top-of-mind, as have strategies to accelerate the transition to net zero carbon emissions.
In this increasingly complex landscape, the world needs a system to tackle challenges of the global commons, diffuse trade conflicts, and tap into new growth opportunities. Only a revitalized World Trade Organization (WTO) can serve this purpose. Contrary to misguided views of the WTO as an irrelevant outfit or a strait jacket that obstructs the pursuit of legitimate national goals, the WTO matters. Now, more than ever.
Of course, reforming the WTO will not be easy, but it can be done. The global trading system has confronted challenges before, and governments have found ways to reinvent it. We owe this in no small measure to the trading system’s flexibility.
Trade frictions: Déjà vu all over again
Neither tensions in the trading system nor their underlying causes are new. Already in the late 1970s, the eminent scholar John H. Jackson was concerned that the sluggishness of the world economy at the time, a growing scepticism about free trade, the downsides of economic interdependence, and divergent economic structures across major participants would corrode the system. Governments did not allow that to happen, even if they took some time to sort things out.
After complex and drawn-out negotiations, the WTO was established in 1995 with an expanded rulebook, a strengthened monitoring role and an effective mechanism to resolve trade conflicts. The reformed system underpinned a rapid expansion of global commerce which in turn unleashed an era of unprecedented prosperity and poverty reduction, even if not all people or places shared equally in the benefits.
Can the WTO help this time around and if so, how?
As the global economy recovers from massive global shocks, the world needs the WTO as much as ever.
First, the WTO can assist countries tap into new sources of trade growth. Digital technologies, for example, have boosted trade in services, offering new possibilities for trade diversification, jobs and innovation. Global exports of digitally delivered services, which totalled US$3.7 trillion in 2021, have been growing much faster than goods exports since 2005 and the prospects are bright (see Figure 2). For countries like Costa Rica, the Philippines, Ghana and India, digitally-enabled services already represent 20 percent of their total exports. Negotiations by groups of WTO members to cut red tape and facilitate services trade, improve the investment climate and foster digital trade are all valuable in unleashing much needed trade-led growth and development opportunities, including for people and countries that have remained on the margins of the global economy.
Second, the WTO is needed to help resolve problems of the global commons. Climate change is a case in point. A successful response to climate change can be achieved only if all countries act in a coordinated and decisive way, including on trade issues. The key here is to leverage the full power of the global market to exploit countries’ green comparative advantage. Trade cost reduction can also accelerate the diffusion of relevant technologies, spur innovation and create deeper and less concentrated markets that are better able to withstand global shocks, whether from extreme weather events, pandemics or disruptions of agricultural supply chains.
Third, the WTO can help manage and de-escalate trade tensions. One growing source of stress that requires urgent attention is subsidies. Subsidies were the most frequent form of intervention after the financial crisis of 2008, surpassing tariffs and other non-tariff measures, and representing nearly half of recorded interventions during 2009-2021 (Figure 3). While subsidies can help achieve important policy goals, as the experience with the development of COVID-19 vaccines shows, they can also lead to trade conflict, including among governments pursuing the same goals and operating within similar economic systems. The steady rise of official handouts over the past decade or so also feeds into perceptions that the playing field is tilted in favour of those holding the largest purse, adding to a sense of unfairness in global trade. The way in which different systems use subsidies to support policy goals, and the transparency or lack thereof of specific programs, adds fuel to the fire.
A dedicated dialogue involving all key players, supported by enhanced information, solid evidence, and objective analytics, is needed to look into the implications of subsidies for the global trading system.
More broadly, the restoration of a fully effective dispute settlement mechanism, perhaps comprising a basket of tools for resolving controversies, is indispensable. Absent such a mechanism, norms become good guidance at best; at worst, bad behaviour risks becoming contagious and eroding the system.
Don’t take the status quo for granted
The WTO rests on strong fundamentals, which have served the world well for over 70 years. The system requires adjustment, urgently. Without reform of the WTO, unleashing new sources of trade growth, using trade to resolve global common problems and managing trade tensions will become elusive. A fragmented trading system will become more likely.
The costs should not be underestimated (see Figure 4). They could well surpass those of the global financial crisis of 2008-2009, leading to increased concentration of risks, reduced resilience and distorted value chains. It would be inflationary just at a time when governments are deploying all tools to bring inflation under control. And it would stifle competition, innovation and technological collaboration, the main drivers of human progress. All countries would be affected but trade fragmentation would disproportionately impact the poorest countries. In today’s world, however, all things are connected. If goods cannot flow freely, people will find a way to look for better opportunities.
In the current geopolitical context, some rearrangement of production networks appears inevitable. In fact, while highly efficient, certain supply chains are also too highly concentrated geographically. In a world with stronger and more frequent shocks, investing in backup supply chains, while expensive, may be a solution.
The risk of course is that measures to pursue supply chain resilience or other strategic considerations turn into a free-for-all that ends up subverting the global trading system. A focused multilateral dialogue to develop a shared understanding is needed about possible parameters of concentrated supply chains and the guardrails that would be needed to minimize negative spillovers from policy measures.
Building on WTO pragmatism to make reform happen
WTO reform must be guided by the basic principles that have propelled the global trading system forward for over seven decades – confidence building through transparency; non-discrimination; fairness; trade cost reduction; and pragmatism. Pragmatism allows for exceptions, waivers and other tools to manage adjustment within the system and achieve coherence between trade and other policy goals.
WTO rules are not set by a supranational body. Governments agree to them in what are naturally difficult negotiating processes. Precisely because officials understand the benefits and challenges associated with increased trade cooperation, escape valves are built into the system to allow sovereign nations to pursue legitimate national security or other objectives while reducing spillover effects on third countries. Put differently, while it provides flexibility, the system aims to prevent protectionism spiralling out of control, making sure that transitional measures do not drive permanent wedges into global trade integration.
WTO reform is likely to be a slow burn, rather than a big bang. Bits and pieces of this reform are already crystallizing in small group conversations or broad-based committee discussions. But more is required. Negotiations need focused, high-level acceleration to ensure that the WTO can be better equipped to serve its members in a more complex and rapidly changing trade policy environment.
Just like they did in the past, governments must rekindle a spirit of self-interest and do the hard work of revitalizing the WTO to match the size of the challenges facing global trade. This is the time to make it happen.
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