The WTO Must Reform or Die



Bryce Baschuk | Bloomberg

Donald Trump’s trade salvos have shaken the World Trade Organization at a perilous time for commerce.

America’s longest-serving secretary of state, Cordell Hull, is best known for winning the Nobel Peace Prize for his role in establishing the United Nations at the end of World War II. Today, 75 years later, another important piece of his legacy looks increasingly at risk as President Donald Trump realigns the U.S.’s relationships across the globe.

Hull helped create the modern global trading system that eventually led to the advent of the World Trade Organization in 1995. He viewed tariff battles as a threat to international peace and advocated for unconditional trade liberalization among nations. Indeed, he considered barriers to the exchange of goods and unfair economic competition as synonymous with war.

Hull’s vision is running aground on the shores of Lake Geneva at the WTO’s headquarters in Switzerland. Under Trump, the U.S. is weaponizing tariffs and has effectively neutralized the organization’s dispute-settlement function at the very moment when global trade arbitration is needed most.

Some economic historians fear that the new chapter of rising protectionism has led to an existential moment for the WTO. “Cordell Hull would be fretting over the state of the debate,” says Douglas Irwin, an economist at Dartmouth College whose book, Free Trade Under Fire, is being updated for 2020.

“He would be very concerned about the deterioration of the WTO system, as he worked hard to replace a power-politics, law-of-the-jungle approach to trade in the 1930s with the rule-of-law approach that was capstoned in his time.”

Hull’s beliefs helped pave the way for Western nations to sign the General Agreement on Tariffs and Trade, or GATT, in 1947. The accord sought to lower import duties and was an unparalleled success. Setting the rules for world trade, it reduced average tariff levels among its participants to 5%, from more than 20%, over its lifetime.

Just as the UN replaced the League of Nations after it failed to prevent war, the international trading system has been forced to morph into something else after losing its influence. By the end of the 1980s, GATT was outmoded and slipping into irrelevance.

President Ronald Reagan’s administration fomented a crisis by hammering the U.S.’s trade partners with unilateral tariffs and stonewalling them when they pursued justice via GATT’s dispute-settlement system. In the 1990s the Clinton administration pivoted and agreed to shelve some of the country’s unilateral tools in return for new rules to govern trade in services and intellectual property. The 120-plus GATT member nations also agreed to create a more muscular dispute-settlement system to enforce those rules, and the deal was packaged into a comprehensive agreement called the WTO.

Today the Trump administration is pursuing a Reaganesque playbook that’s disrupting international trade flows and blunting the WTO’s power to arbitrate disputes. The rebirth of American unilateralism has spurred a rise in global trade restrictions, which now cover more than $700 billion worth of imports. That, in turn, has reduced global trade growth projections to the lowest level since the financial crisis a decade ago.

At the World Economic Forum in Davos, Switzerland, last week, Trump told reporters that he and WTO Director-General Roberto Azevêdo had discussed a “very dramatic” change in the WTO’s future. “We’re talking about a whole new structure for the deal or we’ll have to do something,” Trump said, without elaborating on details.

To prevent a return to the last century’s era of power politics, some observers see an opportunity to reform the WTO for the 21st century. Meanwhile, this question remains: Will the U.S.’s maximum­-pressure approach to trade result in the organization’s reinvention or obsolescence?

Over the coming year, governments have a decision to make. Will they try to work with Washington to converge on a new set of trade rules for the 21st century? Or will they, on their own, try to patch together a temporary fix while the U.S. brandishes trade penalties at allies and foes alike rather than pursuing liberalization through the WTO?

“It may be that we are in another moment where the rest of the world says that going down this road threatens economic growth because of the chaos and the uncertainty that result from not having these bedrock rules to rely on,” says Jennifer Hillman, a senior fellow at the Council on Foreign Relations.

The two most important functions of the WTO are negotiations, which must be adopted by a consensus among all members, and dispute settlement, which forces nations to comply with WTO rules or face retaliation. The WTO is like a bicycle whose two wheels are represented by the organization’s negotiating and dispute-settlement functions. The bicycle is able to operate smoothly with minimal effort as long as the two wheels are working properly.

“If we take away one of those wheels, however, and rely solely on the dispute-settlement system, things suddenly get quite wobbly,” Harvard lecturer Craig VanGrasstek wrote in his 2019 book, Trade and American Leadership: The Paradoxes of Power and Wealth From Alexander Hamilton to Donald Trump.

A smoothly functioning WTO provides businesses with the certainty and predictability they need to invest and operate abroad. That, in turn, can foster global economic growth and the political integration of large and small economies. Since the organization was born, the volume of global trade has almost tripled, while its value has almost quadrupled.


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