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Trade Troubles: Do We Still Need the WTO?

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Pacific Money | Economy

Trade Troubles: Do We Still Need the WTO?

The WTO injects more tension than trust into the international system.

Trade Troubles: Do We Still Need the WTO?
Credit: Depositphotos

The World Trade Organization (WTO) is functionally impotent. An organization that began with the objective of promoting free trade is ironically the biggest obstacle to achieving its own objective today. Between broken dispute settlement systems, ineffective negotiation mechanisms, and ambiguous policies leading to gross self-interested exploitation, the WTO injects more tension than trust in the international system. Trade wars lead states to circumvent existing WTO processes which only further erodes the organization’s waning legitimacy. The WTO is headed in the wrong direction in its attempts to encourage free trade while mediating conflicting state interests. As trade troubles persist, powerful countries will continue exploiting their comparative and competitive advantages in trade relations, injecting further pressure into the world economic system and increasing security tensions as a result. While the international trading system, no doubt, benefits from the WTO in form, its function continues to facilitate rifts in a tenuous state of global affairs.

Origins and Optimism 

The WTO replaced the Global Agreement on Tariffs and Trade (GATT) following the Uruguay Round negotiations in 1995. Since then, the WTO’s mission has been to promote free global trade among its members by providing the “rules of the road.” The WTO emphasizes reciprocity and consensus decision-making in developing, improving, and implementing its policies. It applies these principles through encouraging nondiscriminatory practices, transparency in decision making, and special treatment of its members relative to their respective needs. In theory, this sounds both productive and globally beneficial. In practice, it is wishful optimism rooted in utopian idealism. The world does not work this way – especially in terms of economic relations.

Free Trade Agreements (FTA), for example, regulate tariffs on imports and exports. FTAs promote market access across borders and “invite investments” from foreign trade partners absent quota requirements or other controls. In short, free trade implies the “free flow of goods between countries.” FTAs incentivize domestic producers to improve their competitive posture relative to foreign producers, thus improving their own efficiencies and reducing reliance on government subsidies. Free trade promotes specialization and resulting comparative advantages to emerge, reducing prices for goods produced cheaper by those who specialize, and increasing demand, thus leading to more robust trade and global economic growth because of mutually beneficial reciprocal agreements. As Adam Smith said:

“… it is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him less to buy… If a foreign country can supply us with a commodity cheaper than we ourselves can make, better buy it of them.”

While the potential benefits of FTAs are significant, so too are the costs. In opening competition to foreign markets, FTAs can negatively affect companies and businesses ill-equipped to compete with foreign producers, resulting in job loss as a deterrent to free trade. Job outsourcing is among the most significant negative impacts of FTAs on domestic markets, as was the case with the North American Free Trade Agreement (NAFTA). The alternative is the imposition of industry protection mechanisms designed to prevent – or at least delay – foreign competitor intrusion into and erosion of domestic markets. However, industry protections come at significant costs to governments in the form of subsidies. Thus, there is a greater incentive to remove industry protections and artificial market distortions in favor of free market practices. This serves to reduce government expenditures on dying or noncompetitive industries. In the end, governments need to determine the right balance between the pursuit and achievement of free trade, and market expansion versus the anticipated consequences of doing so.

This is all good in theory. In reality, what we have is a system of trade rules that complicates the system and injects tensions – which in today’s world, is the last thing we need.

Obstacles to Free Trade

The WTO is a nebulous collection of countries anchored to – and limited by – the day-to-day whims of state leaders and the personalities of its members. Although it serves in form as a legitimate multilateral institution, the WTO is less impressive in its actual function today. There are several reasons why.

Dispute Settlement Mechanism 

The dispute settlement system is nonfunctioning. As Washington continues to reject new appellate body judges, it unilaterally stands in the way of the WTO commitment to consensus decision-making. Since “nothing is binding in the WTO system,” it makes arbitration and dispute resolution elusive in a world system increasingly driven by self-interested opportunism and less by compliance with international laws and norms.

Policy Ambiguity 

GATT Article XXI (b)(ii) stipulates that WTO members can take “any action which it considers necessary for the protection of its essential security interests” in relation to products “directly or indirectly for the purpose of supplying a military establishment.” This provision, known as the “security exception,” provides WTO members the ability to apply tariffs on imports for questionable security reasons. While the WTO has long operated on a normative basis where countries self-restricted such behaviors, the evolving U.S.-China trade war centers on disagreements about security exception interpretations and accusations of disingenuous trade practice. This undermines WTO legitimacy and yet, there is little the WTO can do to prevent such actions. The problem extends beyond international WTO policies and into the depths of domestic policies.

Domestic Law v. WTO

Domestic laws and policies are among the most significant hurdles for the WTO to overcome. Section 301 of the Trade Act of 1974 – as an example – allows the U.S. to impose unilateral tariffs on trade partners deemed to engage in unjust or unreasonable restrictions against U.S. trade. This is a domestic law in the United States that has international implications for free trade and there is nothing WTO can do about it. Similarly, the European Union’s proposed carbon border adjustment mechanism (CBAM) contains several potential WTO policy violations that are made possible, ironically, through the WTO’s own policy provisions. 

The CBAM potentially violates GATT Article I’s commitment to Most Favored Nation (MFN) status by enabling inconsistent trade practices. The CBAM also violates GATT Article III – National Treatment – and the broader WTO fair and consistent treatment principle – through seemingly discriminatory practices antithetical to the WTO ethos. But WTO policy ambiguity prevails, as the CBAM’s justification is found within GATT Article XX’s adoption and enforcement clauses. Other examples like the U.S. citing domestic law in its attempt to block shrimp imports caught with nets that cause harm to sea turtles support the argument.

Lack of Leadership By Example 

China has enjoyed 20 years of WTO membership. However, Beijing continues its “relentless exploitation of WTO loopholes” and shows no indication or intent to abide by a rules-based trading system. As the fastest growing economy set to displace the U.S. by 2028, China is an undeniable world power today. What does China’s refusal to play by WTO rules mean for the future of the WTO? China argues that it “plays by the rules” even if other WTO members disagree. Regardless of the disagreement, because all 164 WTO members need to agree to changes or new provisions of the WTO ordering principles and policies, imposing restrictions on China is a futile effort simply because China needs to agree to restrict itself in a consensus decision process. Similarly, the U.S. refusal to agree to Appellate Body judges undermines the consensus decision-making principle of the WTO. China can point to a lack of leadership by example on part of the U.S. as well. With WTO leaders refusing to set the example, it further impairs the perception of the organization as a functioning multilateral institution and leads to erosion of trust in the WTO’s legitimacy. 

The Future of Free Trade and State Interests

The ongoing WTO tension leads more states to sidestep existing WTO arrangements and broken processes in favor of bilateral transactional arrangements removed from the WTO shackles. The post-World War II model of globalism and cooperation has dominated the international scene effectively for 75 years. However, as Thomas Kuhn suggested, we are exiting this period of romanticized ideology on the basis of market economics and entering a period of competing systems that will come to dominate the global environment. Idealists will of course seek the globalist model of cooperation, but pragmatists will assume a transactional model of self-interested behaviors. Arrangements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will continue to emerge as attractive alternatives to the WTO’s restrictive processes. 

Business regionalization, reshoring, and populism all point to eroding international institutions and an evolving laissez-faire environment where the transactional nature of state behavior may prevail instead of the continued self-constraining model that has dominated the global order since 1945. The dominant model to achieve balance in future free trade relations will be the one built on the backs of the current international situation, and the current situation increasingly looks to be one of self-interested bilateral transactionalism than multilateralism via the WTO. It will be, most certainly, a historic alignment point whichever model prevails. 

Guest Author

Ryan Burke

Ryan Burke, Ph.D., is a professor of Military and Strategic Studies at the U.S. Air Force Academy, co-director of Project 6633 at the Modern War Institute, and an affiliate faculty member at the University of Alaska’s Center for Arctic Security and Resilience. His latest book, “The Polar Pivot,” discusses the polar regions through the lens of strategic competition.

The views expressed here are those of the author and do not reflect the official position of the Department of Defense, Air Force, or the U.S. Air Force Academy.