WTO at a crossroads

The World Trade Organisation faces a series of challenges, from vaccine nationalism to carbon tariffs and rising US-China trade tensions. Can it adapt to the post-pandemic era?

Liz Truss, UK International Trade Minister

When Katherine Tai, the new US trade representative, announced last May that the US would support a patent waiver for COVID-19 vaccines as part of the World Trade Organisation (WTO) TRIPS agreement on intellectual property, she sent a signal that the pandemic has shaken long-established norms of global trade. Historically, the US, the world’s leading producer of pharmaceutical and technology patents, has resisted calls for intellectual property liberalisation.

The debate on patent-free vaccines started last October when India and South Africa requested a patent waiver for vaccines and several Covid-related drugs, a call supported by most developing countries. Opposition came immediately from the EU, Switzerland and the UK, all major drug producers, with Brussels pushing an alternative plan for flexible compulsory licensing across different countries. For their part, pharmaceutical companies have warned that a waiver would risk transferring state-of-the-art technology to China and Russia. The ball is now in the WTO’s court, with a decision expected to be made this summer. In early June, a WTO panel agreed to start a “text-based process” to resolve the issue.

WTO headquarters in Geneva, Switzerland
WTO headquarters in Geneva, Switzerland

Reform or die
The dispute is emblematic of broader challenges facing the WTO. The pandemic has sparked concerns over the entrenchment of global protectionism with the emergence of insular trade blocs, a trend already prevalent before COVID-19 disrupted global supply chains. In 2019, the dollar value of world merchandise exports dropped by three percent, reflecting a rise in ‘onshoring,’ as an increasing number of multinationals bring production closer to home. The pandemic has exacerbated this trend, pitting corporations against governments and developing countries against developed ones. In this context, the rise of ‘vaccine nationalism’ is seen as a symptom, rather than the cause of the WTO’s troubles.

Although most WTO members agree that reform is needed for the organisation to stay relevant in the 21st century, few concur on the form this should take. Some fear that the rise of bilateral and regional trade agreements threatens to render the WTO’s arcane rules, lengthy procedures and overstuffed panels obsolete; by late 2020, 300 such agreements were in force, compared with fewer than 60 in 1995 when the WTO was founded. Pessimists warn that it may not even survive the end of the decade. The organisation’s rules mainly govern trade in goods, whereas the global economy is increasingly dominated by services, while rules on e-commerce are either antiquated or practically non-existent. Critics of the organisation also cite its lack of transparency, notably the failure of many members to notify the WTO about government subsidies.

The rise of ‘vaccine nationalism’ is seen as a symptom, rather than the cause of the WTO’s troubles

In a way, the Geneva-based international organisation is a victim of its own success, with rigid decision-making mechanisms from an era when there was consensus on the rules of the game being unsuitable for its expanding membership of 164 countries, argues Craig VanGrasstek, a trade consultant and author of the official history of the organisation. By mid-2021, almost every country in the world had joined the WTO or had applied to join.

Even smaller countries can veto crucial decisions through the organisation’s ‘one country, one vote’ rule and the ‘single undertaking’ principle, according to which nothing is agreed until everything is agreed. Many members have retained their original status as developing countries, which offers them a series of privileges through the so-called ‘special and differential treatment’ provision, although they have long joined the club of advanced economies. Unlike other international or supranational organisations, the WTO is a member-driven behemoth, with little leeway for taking initiatives.

Joe Biden, US President
Joe Biden, US President

US and China at loggerheads
Despite its problems, the WTO’s position as an arbitrator of global trade would be safer without an increasingly important obstacle: escalating tension between the US and China. Under the Trump administration, the US slapped tariffs of up to 25 percent on several Chinese products, citing concerns over US trade deficit, currency manipulation and intellectual property theft. Although the new US administration is seen as less protectionist compared to the previous one, some of its policies, such as the ‘Buy American’ initiative, which aims to use government spending to boost US manufacturing, are perceived as tacit continuation of Donald Trump’s insular policies. In a report summarising its trade priorities, published last March, the Biden administration has said that it will use “all available tools” to fight China’s trade practices.

The new government’s attitude towards the WTO has also been ambiguous, although less hostile in rhetoric compared to the previous administration, which even threatened to leave the organisation. In February, the US delegation to the WTO said that US authorities will keep labelling exports coming from Hong Kong as Chinese, due to China’s intervention in the affairs of the Cantonese city. The policy effectively follows the previous administration’s unorthodox practice of imposing tariffs on imports over alleged national security concerns, pushing many countries, including US allies such as Canada, to dispute its legality at the WTO. It has also encouraged other WTO members to cite their own national security concerns in various trade disputes, sparking fears that the international organisation may soon have to wade into areas beyond trade.

Some fear that the temptation of unilateralism may be too strong for the Biden administration to resist, now that its contribution to electoral success has been tested. Over the last decade, the US has signed a series of foreign trade agreements (FTAs) that will increase the share of US imports covered by FTAs from 36.2 percent to 62.5 percent. Some analysts believe that the shift may push the US government to put negotiations over WTO reform on the back burner. “Biden and those under him are internationalists, but not necessarily multilateralists, when it comes to trade,” VanGrasstek says. “They take the WTO into account, but it’s no longer the first thing they think about when they think about trade.”

With China and the US at loggerheads, it’s up to third countries to support the WTO as a neutral arbitrator of the global trade system, says Stephen Woolcock, head of the LSE’s International Trade Policy Unit and former consultant to the European Commission: “What is needed is a strong coalition of other WTO members to support multilateralism, as it is they rather than the US or China that will suffer from a demise of multilateralism.” One such initiative is the Canada-led ‘Ottawa Group,’ which entails a group of WTO members, including the EU, pursuing rules-based reforms that seek to reinvigorate the organisation. Some think that the best way forward is undertaking ‘plurilateral’ negotiations on issues such as e-commerce, which involve smaller numbers of WTO members and focus on specific sectors, making consensus easier.

A dispute over dispute settlement
At the centre of the US-China rivalry is the future of the WTO’s appellate body, a seven-member panel serving as the organisation’s dispute settlement mechanism. In a rare case of bipartisan consensus, Democrats and Republicans view the body as a threat to US sovereignty (see Fig 1), in line with traditional US aversion to international tribunals, such as the Hague-based International Criminal Court. Starting with the Obama administration, a series of US governments have argued that the body’s judges take too long to issue rulings on important trade disputes.

More crucially, US officials have argued that the body often overreaches its mandate and in some cases comes up with its own rules. “In essence, that’s propaganda. The appellate body has made some mistakes, but not the kind of mistakes the US accuses the judges of,” says a source familiar with the operation of the body and the dispute over its future, adding: “It has issued about 600 decisions on complex issues over 25 years. They could not make everybody happy, but by and large, the system was functioning reasonably well.”

The WTO is a member-driven behemoth, with little leeway for taking initiatives

Another reason for US scepticism is increasing concern that the appellate body is failing to tackle China’s unorthodox trade policies. Washington has repeatedly complained that its judges have adopted a narrow definition of what constitutes a ‘public body,’ effectively allowing several Chinese companies to receive government subsidies against WTO rules. “The US ‘destroyed’ the appellate body because it doesn’t like the system as a whole anymore,” said the anonymous source. “They think that WTO rules are outdated, because they don’t allow them to deal effectively with China.”

In a dramatic move that escalated the crisis, the Trump administration did not appoint any nominees to fill up vacancies created by outgoing members, effectively paralysing the body. So far the Biden administration has refused to appoint new members, arguing that the US “continues to have systemic concerns” over the operation of the body.

Some hope that the dispute may be solved as a part of a larger bargain that would entail broader reforms in the structure of the organisation, including the definition of ‘developing countries’ and their right to veto crucial decisions. Bob Lighthizer, US Trade Representative under Trump, has admitted in a testimony in Congress that US objections are a bargaining chip. For its part, the EU Commission published this February a paper supporting WTO reform and recognising the validity of some US concerns, a major U-turn compared to its previous position.

One reason for this shift, according to the anonymous source, is that EU officials may want to lure the Biden administration into a negotiation: “Many people in the EU Commission’s Directorate General for Trade think that the dispute settlement system was just fine, but they let the US score some brownie points to get them to the negotiating table.” In May, the US and the EU agreed to avoid an escalation of their dispute over US steel and aluminium tariffs. In a joint statement, they pledged to work together to “hold countries like China that support trade-distorting policies to account.”

Ngozi Okonjo-Iweala, Director-General of the WTO
Ngozi Okonjo-Iweala, Director-General of the WTO

A new head for a new era
If there is hope that the WTO will adapt to the needs of the 21st-century economy, it comes from the recent appointment of Nigerian-American economist Ngozi Okonjo-Iweala as Director-General. As the first woman, and the first African citizen, to head the WTO, Okonjo-Iweala rattled the status quo even before she took office this March. With her colourful dressing choices and photogenic smile, she cuts a different figure from her predecessors. “Her appointment represents a recognition that the WTO must belong to all its members and not just to a few dominant countries,” says Professor Woolcock from LSE.

However, her appointment was not free of controversy. Although Okonjo-Iweala’s candidacy was backed by China, the EU and most developing countries, the Trump administration supported the South Korean trade minister Yoo Myung-hee. When the latter withdrew her candidacy in February, the Biden administration rushed to support Okonjo-Iweala. During her campaign to garner support from WTO members, she came under fire for her tenure as finance minister of Nigeria, a country whose economy is plagued by corruption. Her trade credentials have also been questioned, with Robert Lighthizer warning that she has no relevant experience, given that she worked at the World Bank for 25 years.

For her supporters, Okonjo-Iweala is a survivor who thrives in the face of adversity. A member of a local noble family, she survived the bloody Nigerian civil war from 1967 to 1970 and moved to the US to study at Harvard and MIT, becoming one of Africa’s most prominent economists. During her stint as Nigeria’s finance minister, criminals kidnapped her 83-year-old mother, requesting her resignation from the government. She refused to negotiate and her mother soon returned home safe.

Many hope that her negotiating skills and stamina will come in handy for her new role at the WTO. Finding common ground among countries with disparate interests is the main task of the Director-General, but often an uphill battle in an organisation where the ‘one member, one vote’ rule reigns supreme. Some also point to Okonjo-Iweala’s knowledge of the healthcare sector as an advantage in the post-pandemic era, as she has served as board chair at GAVI, a public-private organisation supporting vaccination in the developing world. Since her appointment, she has pledged to seek a compromise over vaccine patents that would allow poorer countries access to modern drugs without undermining R&D investment.

Britain’s vision
If there is one country that fully backs the WTO, warts and all, it is the UK. Crammed between three trade powerhouses, the US, the EU and China, the UK government hopes that the organisation can preside over a rules-based trade regime that would suit its post-Brexit vision for ‘Global Britain.’ The country’s international trade minister, Liz Truss, has urged other developed countries to support the organisation as part of a broader reform of global trade, which she claims is “stuck in the 1990s.”

As the world gradually leaves the pandemic behind, the WTO is confronted with a crisis of larger proportions: climate change

However, the UK has to tread a fine line between building a trade relationship with China and backing the US and other allies in their crusade against China. Australia recently appealed to the WTO against Chinese tariffs on Australian commodities, following a public request of the Australian government for an investigation into the origins of COVID-19. Truss has condemned as “absolutely appalling” China’s persecution of Muslim Uighurs in Xinjiang and has called other G7 countries to “get tough with China,” while the UK aims to join the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP), an 11-country free trade deal China is also considering joining. “The UK should be part of a wider coalition in support of a rules-based multilateral order rather than choose the US or China.

The WTO provides the forum for this,” says Woolcock. Some think that the country’s greatest weapon is its soft power, notably its position as first among equals in the Commonwealth. “Outside the EU, the UK is in a better position to maximise its role as ‘hegemon emeritus,’ mediating relations between the US and the rest of the world,” says VanGrasstek, who teaches a course on trade policy at Harvard Kennedy School and has advised several governments on trade policies.

New challenges ahead
As the world gradually leaves the pandemic behind, the WTO is confronted with a crisis of larger proportions: climate change. The topic has recently come into the spotlight due to regulatory activity on both sides of the Atlantic. In Europe, the European Parliament has called for the European Commission to introduce a ‘carbon border adjustment mechanism’ (CBAM) by 2023. The levy is expected to target polluting industries such as steel and aluminium, which have recently sparked tension between the US and the EU. The tax may be linked to the EU’s emissions trading scheme to make it compatible with WTO rules. The Commission is expected to present a proposal for the final form of the levy in July. On the other side of the Atlantic, the US government is considering its own version of carbon tariffs, while it is expected to pursue stronger enforcement of environmental standards in FTAs.

The definition of what constitutes ‘trade’ has dramatically expanded over the last few decades

Like vaccine patents, carbon taxes underline the need for the WTO to adapt its rules and cooperate with other international organisations, as the definition of what constitutes ‘trade’ has dramatically expanded over the last few decades. “To remain relevant, the WTO needs to tackle the impact of climate change on trade. This means that the negotiations on environmental goods need to be picked up again, and possibly be expanded to environmental services,” says Claudia Schmucker, a trade expert at the German Council on Foreign Relations.

Although the EU has promised that its carbon tariffs will comply with WTO rules, experts expect them to face fierce opposition from the US, India and China. “The WTO could play a mediating role by getting the players at the table, discussing WTO-compatible ways for CBAMs,” Schmucker says. “The last thing you want to do is to invest a lot of time, effort and political capital into creating and implementing a new regime, only to have it challenged in the WTO,” says VanGrasstek. “Then you’ve got a mess.”