745The WTO at Crossroads[*]

Petros C. Mavroidis

Edwin B. Parker Professor of Foreign & Comparative Law, Columbia Law School

Executive Summary

For both self-inflicted, as well as exogenous factors, the WTO has not managed to keep its policy relevance, and is a far cry from the aspirational institution that its framers imagined in the early nineties. Its judiciary has been undermined, and its legislative function is moribund. Recently, geoeconomics have been shaking the foundations of its institutions as the wider US-China crisis looms large. The economics of trade integration have not changed, and the need for an agreement to combat uncertainty and reduce transaction costs associated with trading, is still a valid argument to sign trade agreements. But the political will is missing.

1. Glory Days

The advent of the WTO (World Trade Organization) was hailed as the confirmation that the liberal world order established in the post-WWII era amidst the emerging Cold War, had won universal acceptance. The commonplace conclusion of stakeholders and analysts alike, is that the GATT (General Agreement on Tariffs and Trade), the predecessor of the WTO, had honored its mandate. It was then only normal that the WTO would pick up from where the GATT had left, and deepen and widen the trade integration process. Add to that the deep persuasion of the GATT framers that trade dovetails with peace, and that in the mid-nineties when the WTO was formed there was a quasi-consensus on what needs to be done to develop, and one can easily understand why there were practically no opponents to the grandiose design that was about to become the symbol of globalization.

Successive official publications by the WTO (the annual World Trade Report)[1] have established that trade integration has been progressing at steady pace since the inception of the GATT. A common measure to understand trade integration is the World Bank trade openness index: it adds imports and exports in goods and services and divides this sum by the global GDP (gross domestic product). The larger the ratio, the larger the exposure of any given country to international trade. The data provided by both the World Bank, as well as the reputed Peterson Institute of 746International Economics (PIIE) suggests that between 1860-1914 (the era of industrialization), trade openness was measured at 17.6; in the interwar period, at 18. And then, came the GATT, and between 1947 and the end of the twentieth century, the index moved from 10.1 to 39.5. It continued climbing up to 60, but recently, it has fallen to 51[2]. Of course, the pandemic is responsible for the observed setback. But it is also the case that the WTO has not managed to update its legislative arsenal.

The GATT’s well-thought disciplining of government policies affecting trade, the GATT-Think, the product of genial men like James Meade, and able negotiators like Bill Clayton influenced the integration process in various parts of the world. The GATT further instigated a cooperative culture across nations and (almost) always persuaded them to resolve their disputes peacefully before an independent judge, in contrast to the prevailing mode of dispute resolution in international relations.

The GATT was the end-product of a negotiation between “Western” only countries. Over the years it had opened up its doors to the developing world and a few, smaller Eastern countries. But it never managed to bridge the gap between East and West. Its advent coincided, more or less, with “the beginning of the American century.” The pax Americana succeeded to pax Britannica, and the British passed on peacefully the hegemony of the world to the Americans[3].

The GATT was supposed to be part and parcel of a wider structure, the ITO (International Trade Organization). The ITO never saw the light of day, and the GATT had to re-invent itself: it would not simply be an agreement liberalizing trade, but a multilateral organization as well. The absence of organizational foresight (the notorious GATT “birth defects”) and the hostile Zeitgeist (the Cold War) notwithstanding, the GATT managed to evolve into a genuine international institution and increased trade openness by a factor of four. The GATT success was the best argument to establish the WTO: this time, buoyed by global support and the official end of the Cold War, how much more could/would the WTO, with its comprehensive institutional apparatus, achieve?

The negotiation and the advent of the WTO coincided with the apex of economic liberalism, a time when Fukuyama (1992) was announcing the end of history with the definitive end of the Cold War, and (because of) the prevalence/dominance of liberal economics. This was the time when economist John Williamson coined the term “Washington consensus” to denote an increasing persuasion across governmental actors that they should be pursuing macroeconomic discipline, market economy, and openness to the world through the liberalization of trade, as well as foreign direct investment (FDI)[4]. The ensuing policy changes at national level, the agreed monumental trade liberalization during the Uruguay round and the technological evolution 747(especially in bringing transport costs down) helped create global value chains (GVCs), and reduced distance across nations, to their lowest in world history. WTO membership was even perceived as the pathway to transform centrally planned economies into market economies and could even lead to the espousal of democratic values by countries like China[5]. Optimism was unfettered. To borrow an oft-heard aphorism, the world started to look increasingly flat, maybe even lopsided as the large economic-liberalism snowball was making its way towards those at the other end.

The WTO was agreed by 123 trading nations, a heterogenous group of countries comprising the developed, but also the developing and least-developed countries (LDCs), and some former communist countries which, following the fall of the Berlin Wall, were negotiating their accession to the European Union (EU). And there was more. China had started its accession negotiation to the WTO during the Uruguay round, while Russia did the same before the ink on the Final Act of the Uruguay round was even dry. In retrospect though, and at the risk of being accused of being Monday morning quarterbacks, the year 1995 marked the apex of liberalism worldwide, the culmination point of the “Washington consensus” indeed. History returned, as Kagan (2009) quipped, and dreams ended. The advent of slowbalization[6] was a harsh wake-up call.

2. Today it is a Different Story

Fast forward to today, less than thirty years since the apex of globalization, and it all had changed. The WTO was hot by exogenous crises for which it had no answer:

• The financial crisis of 2008 had a major impact on international trade. The WTO was certainly not prepared for this, as its legislative arsenal had not made any provision for similar occurrences, even though financial crises do occur and they do impact trade. The Keynesian logic, that the government should supply the resources to stimulate growth has been gaining pace worldwide. But similar actions, in the WTO vernacular are termed “subsidies” and subsidies can be counteracted. The WTO, its institutional deficiencies in this respect notwithstanding, managed to resist the financial crisis without major hiccups, largely thanks to the restraint that its members have shown to avoid litigation;

• Then, came COVID-19, which found the world community totally unprepared. The origins of the pandemic are, of course, not germane to the workings of the world trading system: trade contributed to its spread all over the world, but it did not cause the pandemic. The volume of trade was yet again heavily reduced[7], as established 748supply chains were disrupted because of the proliferation of export restrictions on medical equipment. The membership did have recourse to the forbidden apple (subsidies) to speed up production of vaccines, and stimulate production of PPE (personal protective equipment), and once again counted on the collective understanding that this was no ordinary industrial policy.

And then, there was self-inflicted damage:

• The WTO judiciary function was dealt a severe blow, when the Trump Administration undermined its monopoly to adjudicate multilateral trade disputes. The Appellate Body of the WTO, the much revered second instance court of the world trading regime, has been de facto non-operational for any dispute submitted to it since December 2019, when the term for two of its last three remaining members expired. And there were ripple effects, as the threat of “appeal into the void” disincentivized submissions of disputes altogether[8];

• The WTO has been exhibiting a moribund legislative function, and has not managed to add much to its arsenal since 1995. It is no exaggeration to state that it has found itself in “legislative torpor”, as it managed to add only one agreement to its arsenal since 1995, the Agreement on Trade Facilitation (ATF)[9]. Consensus is practiced more and more like a veto;

• There is a forum diversion, as FTAs (free-trade areas) have emerged as the trade legislator par excellence. This was to be expected. While anyone can negotiate the dismantlement of trade protection (tariffs, quotas), homogeneity is the key ingredient for a successful negotiation of behind-the-border policies. Why would environmental protection be a priority for LDCs that have bigger fish to fry? FTAs offer the luxury to choose the partners. The WTO does not;

• China proved to be more than what the WTO membership had bargained for, when opening the door to the Asian behemoth in 2001, and complaints about its behavior, justified and unjustified, have multiplied;

• Recently, we observe the return of industrial policy, with the Biden Administration flirting with a new version of Roosevelt’s New Deal, and EU, China and a few others emulating the example. GVCs are reshored amidst fears for example, that China might attack Taiwan and disrupt the GVC on semiconductors. The proverbial excuse is national security. But WTO is ill-equipped to deal with similar concerns, and disintegration deepens as a result;

749• Worse, US, still the leading nation, seems to disengage, as it pivots towards extra-WTO initiatives. The EU cannot lead for various reasons, and China is viewed with skepticism. Bremners’ (2013) quip a few years ago, that we were entering a G-0 world, seems more and more in tune with today’s reality. A rudderless WTO has been operating in an increasingly rudderless world.

While the WTO managed to withstand exogenous pressures, it is finding it difficult to address the self-inflicted damage. Has the simmering come to boil, one is tempted to ask?

3. Living Daylights

The WTO is under threat but it always has a role to play: trade integration is welfare enhancing and agreements are necessary to address uncertainty resulting (usually) from opportunistic behavior[10]. The WTO might have to redimension, but some form of multilateral organization is warranted, as FTAs are by construction a poor substitute since they cannot coordinate behavior at world-level. The question is how can the WTO inspire again? In our view, echoing Humpty Dumpty, it will take a village, or better, all of the King’s horses and all of the King’s men to do so.

The nature of integration at the WTO-level, which, in light of the heterogeneity of membership and the type of questions the world trading community is facing, needs to be rethought. Second, the rise of populism at home, which largely explains why the US is non-committal at this stage, is an impediment to any further integration. And third, there is an observable return of geoeconomics. Addressing the remaining trade barriers (largely behind-the-border) is hampered by all three factors.

Negative integration (non-discrimination) is ill-equipped to deal with behind-the-border barriers, and the European common market experience is the best proof to this effect. Going beyond negative integration, though, requires some rapprochement. The EU of today is a far cry (in terms of cohesion) from the original six or the nine. But still, it is a more coherent whole than the WTO. The distance between Bulgaria, Greece, and Slovakia (the three poorest in terms of per capita income members of the EU) from Luxembourg and Ireland (the wealthiest member states)[11] is a fraction only of the distance between the poorest and wealthiest WTO members. As social preferences are largely influenced by the possibility to finance them, one would expect a move away from negative integration in the EU (as we do, in the form of harmonization, minimum harmonization, and recognition), and not in the WTO (where we do not observe anything like this). As a result, trade barriers remain barriers and are addressed only within the realm of FTAs (free-trade areas)[12].

750Populism is rampant these days. From Brexit to President Trump’s unprecedented assault to all international institutions, it has been gaining pace. Typically, it is expressed through “worker-centered” trade policies, a new term in the trade vernacular to express protectionism. Trade of course creates winners and losers. But we routinely win more than we lose, and this is the reason that hardly ever an economist will say no to trade liberalization. Responsible states will, of course, take care of the “losers”. But as Nobel laureate Spence (2011) astutely observed, governments should focus on saving people not jobs. Jobs will come and go in line with comparative advantage (a dynamic, not a static concept). President Trump did the opposite. Others, alas, followed.

The US-China stand-off is responsible for a lot of what we now observe. Allison (2017) has warned against falling into a new Thucydides trap. Maybe this is an exaggeration. But what is not an exaggeration is that we are facing, as a result of the stand-off, a Kindleberger trap. Nye (2017) used this term to denote the state when none of the major stakeholders is either willing to invest in the failing international order, or simply not in a position to do so. The US is unwilling, and China lacks the “soft” power (the intellectual legitimacy) to do so. The EU cannot speak with one voice even when it has a statutory one voice, as in matters of trade. For how else can we understand the 16+1 or 17+1 initiatives with China (from which it has been retracting)?

4. Here Today, Gone Tomorrow?

Dijkstra and Debre (2022) have provided the first comprehensive study reporting the number of international organizations that have disappeared. Their overall empirical conclusion provides some relief for the WTO, but only some relief: major international organizations “died” at a considerably lower rate compared to their minor counterparts, as around 10 percent of the former, compared to 33 percent of the latter have disappeared[13]. The overall “death” rate nevertheless is scary both in absolute numbers, as well as in percentage terms: 140/534, that is around 26% of all international organizations have disappeared. Some of them, like the League of Nations, were genuinely global.

Longevity of international organizations is a function of basically two factors:

• Its capacity to adjust to changing circumstances (both exogenous shocks like technology) and endogenous (like mismanagement of a crisis or poor handling of the portfolio confided to them, etc.);

• Continuing political support by the principals (the sovereign states). Yalem (1966) reminds us in this respect, that those who studied international organizations after WWI and WWII were very optimistic about their future, because they were focusing into technical elements (like the structure of the organizations), 751and neglected the surrounding political forces. We now know what happened next.

The WTO certainly reflects the Zeitgeist of the time when it was agreed. It was negotiated at the apex of liberalism when the Berlin Wall was falling, and many believed that liberalism had won the battle and had emerged as the consensus view how to run the economy. That Zeitgeist proved to be a mayfly. Fukuyama (1992) exaggerated when proclaiming the end of history too soon, but his writings go a long way explaining how the then prevailing view about governance shaped international organizations like the WTO.

With the hindsight of a Monday morning quarterback, we held the view in Mavroidis and Sapir (2021), that the assumptions in the nineties regarding the definitive victory of the liberal model (and the ensuing contracting of rights and obligations under the WTO) proved wrong. Rachman (2022) put it astutely when stating that “the liberal ascendancy lasted less than twenty years” (p. 16).

There is a paradox that is inherent in multilateralism: on the one hand, it invites the widest possible participation, but, on the other, it carries the germ of its own dissolution. For as we add members to any organization, we almost by definition increase heterogeneity of the membership. Heterogeneity comes in degrees. Heterogenous players can still agree in some areas, while disagreeing in others. Heterogeneity does not necessarily entail discord, even though discord is likelier across heterogenous (rather than homogenous) players. International organizations like the WTO can play the role of the mitigating factor. This is its intrinsic value, and the reason why responsible stakeholders should return to the multilateral table to resolve the crisis that has been plaguing the institution and weakening international cooperation at large. The same actors will be asked to address global commons, like climate change. Unless existing cooperative mechanisms continue to be policy-relevant, the argument for a joint effort to address global concerns will be severely weakened.

References

Allison, Graham, (2017) Destined for War, Can America and China Escape Thucydides’s Trap?, Houghton Mifflin Harcourt: New York City, New York

Bremner, Ian, (2013) Every Nation for Itself, What Happens When No One Leads the World, Portfolio/Penguin Press: New York City, New York

Dijkstra, Hylke/Debre, Maria J., (2022) The Death of Major International Organizations: When Institutional Stickiness is not Enough, Global Studies Quarterly, 2: 1-13

Fukuyama, Francis, (1992) The End of History and the Last Man, Free Press: New York City, New York

Global Trade Alert, (2020) Tackling Coronavirus, University of St. Gallen: St. Gallen, Switzerland, available at: <file:///Users/Downloads/TacklingCoronavirus.pdf>

Handley, Kyle/Limão, Nuno, (2015) Trade and Investment Under Policy Uncertainty: Theory and Firm Evidence, American Economic Journal: Economic Policy, 7: 189-222

752Handley, Kyle/Limão, Nuno, (2017) Policy Uncertainty, Trade, and Welfare: Theory and Evidence for China and the United States, American Economic Review, 107: 2731-2783

Hoekman, Bernard M./Mavroidis, Petros C./Saluste, Maarja, (2021) Informing WTO Reform: Dispute Settlement Performance, 1995-2020, Journal of World Trade, 55: 1-50

Kagan, Robert, (2009) The Return of History, and the End of Dreams, Vintage Books, New York City, New York

Mattoo, Aaditya/Rocha, Nadia/Ruta, Michele (eds.), (2020) Handbook of Deep Trade Agreements, The World Bank Group: Washington DC

Mavroidis, Petros C./Sapir, André, (2021) China and the WTO, Why Multilateralism Still Matters, Princeton University Press: Princeton, New Jersey

Nye, Joseph P., (2017) The Kindleberger Trap, The Project Syndicate, January 9, 2017, available at: [https://www.project-syndicate.org/commentary/trump-china-kindleberger-trap-by-joseph-s--nye-2017-01]

Rachman, Gideon, (2022) The Age of the Strongman, How the Cult of the Leader Threatens Democracy Around the World, Other Press: New York City, New York

Spence, Michael, (2011) The Next Convergence, New York: Farrar, Straus, and Giroux

Toynbee, Arnold J., (1939) A Turning Point in History, Foreign Affairs, 17: 305-320.

Williamson, John, (2002) Did the Washington Consensus Fail?, Peterson Institute of International Economics: Washington DC, available at: [https://www.piie.com/commentary/speeches-papers/did-washington-consensus-fail]

Yalem, Ronald J., (1966) The Study of International Organization, 1920-1965: A Survey of the Literature, Background, 10: 1-65

[*] For helpful comments on previous drafts, I am indebted to Henrik Horn, Paul Tucker, André Sapir and Alan Sykes.

[1] [https://www.wto.org/english/res_e/reser_e/wtr_e.htm].

[2] [https://data.worldbank.org/indicator/NE.TRD.GNFS.ZS].

[3] The advent of GATT, thus, coincides with the passage from pax britannica to pax americana, see Toynbee (1939).

[4] Williamson (2002).

[5] We provided a lot of evidence to this effect in Mavroidis/Sapir (2021).

[6] [https://www.economist.com/leaders/2019/01/24/the-steam-has-gone-out-of-globalisation].

[7] The WTO webpage (<www.wto.org>) has been reporting in short intervals information on this score from March 2020 onwards, see, for example, [https://www.wto.org/english/news_e/news20_e/wtoi_19aug20_e.htm] Global Trade Alert (2020) contains precious information on the impact of COVID-19 to world trade, and world trade institutions as well, see [https://www.globaltradealert.org/].

[8] Any panel report can be appealed even to this day. As there is no Appellate Body, appeals will not be adjudicated. Hence, the legal significance of the panel report remains in limbo. Hoekman et al. (2021) have calculated that the number of disputes fell from around 25 per year between 1995-2019, to around 6 per year in the subsequent years.

[9] The Fisheries Subsidies Agreement was concluded in 2023, but has not entered into force yet.

[10] Handley/Limão (2015) and (2017).

[11] [https://ec.europa.eu/eurostat/statistics-explained/index.php?title=GDP_per_capita,_consumption_per_capita_and_price_level_indices].

[12] The excellent World Bank study by Mattoo et al. (2020) is testimony to this.

[13] The authors define “large” to cover international organizations with more than 50 members. By this benchmark, around 12% to their counting of them have “died”.