Trading Places: The Future of the World Trade Organization

In August 2020, the World Trade Organization (WTO) began the election process of its new Director General. The process started after the resignation of the Brazilian Roberto Azevedo, one year before the expected end of his term, and ended in February 2021 with the election of Dr. Ngozi Okonjo-Iweala, from Nigeria.

Now that the search for the WTO’s new head has come to an end, it is a great opportunity for the organization to rethink its strategy for the several challenges that it is facing. Decisions on critical issues remain pending, including reform for fisheries and agricultural subsidies, data ownership, and intellectual property. And if new members are not appointed soon, the Appellate Body of the Settlement Dispute Body is heading towards an operational blockade that could lead to a paralysis in the solution of dispute settlements. In particular, the U.S.-China dispute over discriminative tariffs may be the clearest example of the trade frictions that the WTO had to mediate over the past years.

The issues that the WTO is facing, and the proliferation of new Regional Trade Agreements (RTAs), are manifestations of new bounded orders in a new multipolar international system. In 2019, John Mearsheimer explained why the liberal order was bound to fail: in his eyes, the international institutions created by the liberal order to maintain and promote liberalism are now facing inevitable pressure of the change to a realist order in a multipolar world. In this sense, A realist framework can help us understand the future of the WTO and international trade in terms of international relations and global power from a different perspective.

Multipolarity and great power competition is leading to a new configuration of the power equilibrium. This is most explicit in international trade, where recent events like the signing of the Regional Comprehensive Economic Partnership (RCEP) with the presence of China, two years after the U.S. withdrew from the Trans-Pacific Partnership, show that national interests are playing a significant role in the configuration of the new power poles. Because economic power is a necessary condition for political power, these changes in trade patterns are leading the world towards new political configurations.

Much has been written about the relocation of global value chains and a resurgence of protectionism. However, numbers show a decrease in trade restrictions amidst the pandemic, particularly among essential goods such as medical/sanitary goods and food and agricultural products. This is consistent with a national interest of survival. Even so, how will states behave after the pandemic is solved? States look after what is best for their economies, but prioritize what is best for their interests. And sometimes both objectives are not related. While free trade and multilateral trade systems may be good for the economy, they may leave space to other factors in terms of power structures.

Regional negotiations are also a manifestation of how foreign policy is designed amidst interdependence. Despite an incredible increase over the start of the decade, the number of RTAs has stalled in the last years. Nevertheless, those that have been sanctioned lately encompass greater trade blocs and trade terms. In recent years, both China and the U.S. have negotiated or renegotiated the terms of their trade relations in their more direct spheres of geographical influence. China has signed the RCEP, the most recent RTA, along with 14 Asian nations. Similarly, the U.S. successfully renegotiated NAFTA into the USMCA. Of all the international actors, the European Union has been the most active in this period, signing significant RTAs in terms of trade volume and market size with Japan (2019), Singapore (2019), Vietnam (2020), and the Southern Common Market – Mercosur (2019, although it is still not enacted). Of course, no one wants to be the odd one out, but what will a country accept just to be part of the “in group?” The so long expected agreement between the EU and Great Britain after Brexit is a clear example of the tradeoff between free trade and national interests that many countries are now thinking of.

Major RTAs offer ad-hoc dispute settlement procedures that may be used instead of the Dispute Settlement Understanding (DSU) of the WTO. This is one of the most important features that the WTO has to worry about. The main challenge for the WTO is to maintain its role as international referee while great powers engage in unilateral negotiations to establish frameworks more suited to their interests through RTAs.

As public goods are deemed more necessary than ever given the new power configuration of the international system, states are pushed to move forward in their own agendas of interest. Negative externalities and collective action problems such as environmental issues, fisheries overexploitation and agricultural subsidies, financial controls, and intellectual property protection are at the top of the list of where countries must act. Is the WTO prepared to provide effective solutions to these issues, or for new issues that may emerge in the future? How will the WTO strengthen its institutional position to provide the public goods needed for international trade to converge in its bounds? If the WTO cannot act in this manner, the great economic powers will opt to specifically control any future problems with more comprehensive RTAs.

One of the most important institutional barriers to reach significant agreements for the WTO is its voting system, where each country has an equal voting right, and unanimous consensus is needed to reach binding decisions in the Ministerial Conference. Unanimity jeopardizes the fate of the institution in a multipolar world, imposing slow bureaucracy on matters that should be decided quickly. This means that great powers can dispense with the WTO, but small states, particularly developing countries, can’t. China and the U.S. can also leverage their position with minor, deeply dependent trade partners to block any modification of the existing rules that would affect them negatively. Specific task forces and working groups may be more effective when addressing particular issues and negotiations, but they lack the muscle necessary to turn recommendations into agreements.

Over the past years the WTO has contributed marginally to solve the disagreements between the U.S. and China following the terms and rules of the institution. Even though a dispute settlement panel acknowledged U.S. measures as inconsistent with General Agreement on Tariffs and Trade (GATT) rules, it is unlikely that the U.S. will comply. In fact, one reason the U.S. asked for a revision of the case was the paralysis of the appellate body instructed to review the case. Knowing that even the best-laid plans can fail, how can countries be prepared for an uncertain future using only the tools of the WTO? The pandemic showed that when countries are under imminent threat, cooperation may arise in the form of fast-track trade facilitation agreements and ease of regulations. However, those mechanisms may not work the same way under positive competition.

What can the WTO do to maintain its role as the international institution to regulate trade and differences between countries? Realist theory does not suggest that institutions are indispensable, but in some cases, they are preferable to no institution. The powers jockeying for economic supremacy have incentives to foster open dialogue where they can resolve their differences. Most importantly, they are incentivized to support institutions they trust to maintain an order for other countries in the system. This added value would considerably reduce costs for each power to exert their dominance over minor issues that may arise under their sphere of influence.

Even realist orders under multipolar systems need instances of cooperation between great powers. International orders such as the WTO are preferred, but the fact that both China and the United States are working out their differences beyond the institutional framework suited for that end says a lot about the challenges that the WTO faces. Interdependence is the most important feature of this new global power struggle. It is the variable that defines the way major issues can be resolved. In this sense, upcoming years are going to be critical for the WTO to adapt to this scenario of multipolarity, interdependence, and uncertainty.