The global institutional architecture designed in the aftermath of World War II to ensure that disaster was never repeated is showing its age.
The United Nations, the International Monetary Fund and the World Bank are all struggling to contain geopolitical tensions amid challenges to the long-assumed primacy of a US-led West.
Trade is the most contested area of all, with frictions expected to dominate next week’s meeting of trade ministers from the 164 members of the World Trade Organisation (WTO). The ministerial, which is held every two years, will take place in the United Arab Emirates capital Abu Dhabi, from 26 to 29 February.
The WTO was only established in 1995 with impetus from US President Bill Clinton. It was a time when the process of globalisation appeared to be gathering irreversible momentum and was thought to be to the benefit of the US, as the home to the great majority of the world’s top multinationals.
Australia’s Hawke and Keating administrations were instrumental in getting agriculture added to the WTO remit, with curbs on subsidies, quotas and other policies suppressing world trade in food products.
Before the WTO, trade in manufactured goods had been governed by the General Agreement on Tariffs and Trade, which was an international pact struck in 1947, agreeing to limit the use of quotas, tariffs and other trade barriers. It enshrined a principal of non-discrimination: a member state had to extend to all states the most favourable treatment it offered to any single state.
The economic argument for trade liberalisation was that citizens will prosper most if nations focus their efforts on the things they do best while importing goods that are more competitively produced by others.
The political and strategic argument was drawn from the Great Depression of the 1930s which was made worse by tit-for-tat tariff wars. Trade fell from 11% of global GDP in the late 1920s to 5% by the mid-1930s and did not recover its pre-depression level until the 1970s.
For its first 15 years, the WTO was seen as a great success, although there were always critics on both the left and the right. Trade reached a historic high of 26% of global GDP on the eve of the 2008 global financial crisis. The share of the world’s population living in extreme poverty fell from 35% in 1995 to 9% by 2018, according to the World Bank, with gains from trade largely responsible.
However, the US has had a profound change of heart. US National Security Adviser Jake Sullivan commented last year: ‘In the name of oversimplified market efficiency, entire supply chains of strategic goods—along with the industries and jobs that made them—moved overseas.’ And ‘the postulate that deep trade liberalisation would help America export goods, not jobs and capacity, was a promise made but not kept.’
At the heart of US disillusionment with trade liberalisation and the WTO is its belief that China, which joined the WTO in 2001, has been unfairly favoured because the organisation does not account for the subsidies inherent in an economy dominated by state-owned corporations and banks.
Moreover, the US resents the ability of countries, particularly China, to self-declare themselves to be developing nations, which entitles them to various concessions in applying world trade rules, such as longer transition periods, softer tariff cuts and permission to continue some export subsidies.
Although China’s per capita annual income has a purchasing power of only US$23,000—about the same as Thailand or Libya—it has been the world’s biggest exporter of goods since 2009 and outstrips the US in exports of high technology goods.
The hardening of US attitudes to trade is not confined to the WTO: there was bipartisan opposition to the US joining the Trans-Pacific Partnership trade deal, which had been an initiative of the Obama administration.
US disenchantment with the WTO began well before the Trump presidency, with the Obama administration chafing at adverse WTO findings over US steel tariffs.
The US has been particularly upset by the WTO’s rejection of US claims, under the Trump administration, that it was imposing tariffs on steel to defend its national security. The US argues that countries have an absolute right to take whatever action they deem necessary, including tariffs, to defend national security.
The Obama administration started refusing to endorse the nomination of new members to the appeals panel which provided the final adjudication of international trade disputes.
This continued under Trump until the appeals panel was left without a quorum, undermining the WTO’s ability to referee trade disputes. Whenever the WTO finds against the US, as it has on both steel tariffs and tariffs imposed on Chinese goods, the US lodges an appeal knowing there is no functioning body to hear it.
Next week’s meeting is supposed to discuss a new framework for adjudicating trade disputes, with the WTO members having set a deadline of December this year to have a new dispute settlement process in operation.
With both US Democrats and Republicans now believing the WTO does not benefit the United States, no reform to the WTO ability to resolve trade disputes is likely to be agreed in a US presidential election year.
Should Donald Trump be elected, the US may withdraw from the WTO altogether. As president, Trump had legislation drafted to achieve this but was persuaded to keep it in reserve.
As the biggest beneficiary of the WTO trading system, China has become an enthusiastic multilateralist. It engages in all the WTO committees, supports reinstating the appeals panel and has signed up to an interim voluntary dispute settlement system that is also supported by the EU, Japan and Australia.
China brazenly flouts international trade law when it wishes, as was shown by its discriminatory bans on Australian exports, but generally abides by WTO judgements against it.
The most notable case of the latter was when it dismantled export controls on rare earths after the WTO found in favour of complaints made by the US, the EU and Japan in 2014. China made moves to resolve Australia’s complaints on barley and wine only after the WTO disputes panel made initial adverse findings.
The European Union, Canada and Japan remain committed to the WTO and have called for reinstatement of the appeals panel, as have over 100 developing nations.
The US change of heart on the benefits of trade liberalisation is the biggest, but far from the only, problem confronting the WTO.
Demands for special treatment by developing nations, particularly India, threaten to derail important agenda items at next week’s meeting, including a ban on subsidies for fishing fleets that contribute to over-fishing or excess capacity. A moratorium on new taxes on e-commerce that has been in place since 1998, is likely to lapse, with India opposed to its further extension.
A former WTO director and current fellow of the Hinrich Foundation, Keith Rockwell, comments that ‘the divisions run so deep that no serious negotiations will be conducted in Abu Dhabi and no outcomes will emerge’.
Rather than using the WTO, the US preference is to resolve trade disputes bilaterally, without reference to WTO rules. It has done this several times over the last few years with India.
The problem with this approach is that it favours the powerful. Australia’s experience with China over the last few years shows how that works to the disadvantage of smaller economies.
