How the World Trade Organisation has been crippled

The World Trade Organisation (WTO), which has been the final arbiter in trade disputes for decades, has been crippled by the Trump administration. Why, and what happens now? Simon Wilson reports

Robert Lighthizer and Donald Trump © JIM WATSON/AFP via Getty Images

Robert Lighthizer and President Trump have reined in the WTO

Robert Lighthizer and Donald Trump © JIM WATSON/AFP via Getty Images

What is the World Trade Organisation?

It is the Geneva-based organisation of 164 member states encompassing all major economies including China that sets the rule book for trade between nations and acts as a referee when disputes arise. The WTO's forerunner, the General Agreement on Tariffs and Trade (GATT), was founded in 1947 by 23 countries. GATT's key principle of non-discrimination on tariffs (all members have to treat all other members equally as "most favoured nations" unless they have separate free-trade agreements) remains core to the WTO, but its rules reach beyond tariffs to (for example) regulations on food safety and agricultural subsidies. And whereas GATT was a multilateral treaty, the WTO (founded in 1995) is an international organisation with enforcement mechanisms and a quasi-appeal court (the "appellate body") whose decisions, made by judges, are binding.

Has it been a success?

Certainly, the WTO and GATT before it have contributed over the past 70 years to falling tariffs and increased global trade. In 1947, the average tariff charged by GATT signatories was 22%, a big disincentive to trade. By 1999, it was under 5% and today the average weighted tariff charged by the US and EU is about 1.6%. In the 1950s, international trade accounted for about 8% of the world economy; today it makes up about 30% of a vastly bigger pie. So overall, international rules-based co-operation has been a success story for boosting trade.

What do critics say?

It's past its sell-by date. Since 2001, when the unproductive "Doha round" of trade talks began, further progress on the WTO's trade liberalisation agenda has all but stalled; the far more significant advances have been in regional or bilateral free-trade deals. As the world has changed and the WTO has ballooned to 164 members, the WTO has become too bureaucratic, unwieldy and slow; and too weak when it comes to modern forms of protectionism, such as rules governing state subsidies, intellectual property and trade in services. In particular, it has failed to rein in China's protectionist policies. The US, in particular, has long been angry about the latter and about what it sees as the quasi-judicial overreach of WTO's appeal court.

Why is the WTO in the news?

Because this week the workings of the appellate body a panel of (originally) seven judges who are the ultimate arbiters of trade disputes between nations ignominiously ground to a halt. New judges added to the body must be approved by all members, but since July 2017, six months after Donald Trump took office, Washington has been blocking all such appointments. The WTO judges serve fixed terms and, due to the lack of replacements, the number has gradually dwindled to three, the minimum permissible. On Wednesday another two retired (leaving just one, from China) meaning the body can't take on any new cases, and the US has successfully strangled its ability to function.

What's America's problem?

The US has several grievances and many of them pre-date the Trump administration. These include complaints about how long appeals take (many years) and how all-encompassing the legal review has become. But most arguments are "highly technical" and focus on issues such as the "methodologies used to calculate economic harms" that then determine domestic trade remedies, explains Keith Johnson in Foreign Policy. In essence, America's longstanding issue is that "in successive rulings over many years, WTO appellate judges have essentially stripped away in court trade tools that US trade negotiators" believe they never gave up at the negotiating table. That, according to US officials such as Robert Lighthizer, Trump's powerful trade representative, is a violation of the understanding that the WTO wouldn't take away rights or add obligations to any member nations.

So Trump's got a point?

He's certainly not the only one who thinks the WTO has exceeded its brief. But some trade experts are dismissive of their arguments. The fact that the appellate body routinely takes more than the mandated 90 days to issue a ruling is because it's handling far more complex cases than expected, for example. It's also because there are fewer judges to decide cases (thanks to the US not approving new ones) so the cases get dragged out. In practice, the US has won 85% of the cases it has brought to the WTO against trading partners.

So what's really going on?

"America First"; China rising. The US has been dragged before the appellate body repeatedly, especially by countries objecting to its heavy-handed use of "trade remedies" (that is, tariffs defending its producers from supposedly unfair imports). The paralysis at the WTO is thus good news for self-declared "tariff man" President Trump, argues Bryce Baschuk in The Washington Post, as he can now retaliate against America's trade partners without fear of WTO oversight. But for the rest of the world it means that "the global economy is entering a dangerous new era where economic might supersedes international law" and disputes between the big players could escalate rapidly.

What might happen?

In the worst-case scenario, the lack of a trusted referee could mark a return to the "law of the jungle", in the words of WTO boss Roberto Azevedo. Under such a scenario, "investors will pull back, the economy will lose steam and jobs will be lost millions of jobs will be lost", he predicted. So far, the surge in global trade frictions has not caused a recession, but world trade has stopped growing and long-term investment has dropped by 20% in the first half of 2019. If there is a recession, says The Economist, the "temptation of tit-for-tat tariffs will rise across the world. When the referee leaves the pitch, anything goes."

Most Popular

UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022
The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
22 Jun 2022
Gold has been incredibly boring to own – but that’s no bad thing right now

Gold has been incredibly boring to own – but that’s no bad thing right now

Stocks, bonds and cryptocurrencies have all seen big falls this year. But gold remains at its one-year average. It may be dull, but it’s doing what it…
29 Jun 2022