Disputes and Their Solutions

The challenges facing trade multilateralism are several and affect all three pillars of the supposed guarantor of global trade, the World Trade Organization (WTO): negotiation, dispute settlement, and transparency are all up for discussion. The negotiation function of the WTO has been deadlocked for years; the round now survives in an ignoble mode, neither living nor dead. The Dispute Settlement Mechanism (DSM) is also in serious crisis [1]. With the US having blocked all new appointments and reappointments, only one judge remains in the Appellate Body, which is the WTO’s principle body of arbitration. As a result, countries can deliberately refer cases to panels, knowing that there is no appeals process via the Appellate Body, and thereby let disputes lie unresolved in limbo. The third function of the WTO – transparency – operates via the Trade Policy Review Mechanism (TPRM). This function is perhaps the least damaged of the three. But it also has its fair share of problems that include non-notification by members, controversies on the reach of the reviews and monitoring reports, and polarisation within the membership on how these issues should be dealt with. This dysfunction in all three pillars of the WTO is serious enough a problem in its own right, but acquires even greater importance in a context of raging trade wars outside of the WTO. This article will examine these issues and the discussions on solutions around them.

A Changing Geoeconomic World

Now that we are decades past the founding of the WTO there is a rapidly changing context of geoeconomics and economic statecraft. There is some attention within the current reform debate on China’s state-owned enterprises, technology transfer requirements etc, but it seems to miss a bigger point: The WTO belongs to the same cluster of institutions – including the EU – that were built in the post-war years on the assumption that increasing trade liberalization and integration would automatically lead to peace. The WTO was not built for a world where we would see a weaponization of economic gains – the use of the benefits accruing from trade liberalization to acquire a strategic advantage in security matters. If trade liberalization could potentially be used by possible systemic rivals to gain a security edge over us, then we need to be having a bigger and serious conversation about a new set of rules. This new set of rules would cordon off not only certain measures (such as certain subsidies) but also certain areas from trade liberalization – particularly those areas where there are direct security implications (such as digital technology). In these areas, the raising of protectionist barriers would be allowed. This could, for example, result in some decoupling from China (limiting trade and/or cooperation). Decoupling, or economic disengagement, would generate some economic costs, no doubt. But these economic costs could be balanced by security gains.

The Reform Debate

Amidst the reform proposals for the WTO that are already on the table, curious alignments are emerging. For example, a closer look at the substance of the critique offered by the US in 2018 as well as its detailed proposals presented to member states at the WTO head office in Geneva point to constructive engagement. In advancing its reform agenda, the US has insisted on a sharpened differentiation within the group of countries that self-identify as developing countries to prevent misuse of Special and Differential Treatment (SDT); a reform of the Dispute Settlement Mechanism, and especially the “approach” of the Appellate Body including issues of “overreach”; new rules to address the unfair advantage accruing to countries due to the abuse of current rules on subsidies, definitions of state-owned enterprises and so forth; and improvements of the transparency function that would require better incentives to ensure compliance of notification obligations. In addition to the US, the European Union, Canada, Japan and others have come up with comprehensive proposals for reform. Amidst all the problems the organisation is encountering, the shared concerns and joint/ overlapping proposals offer some fertile ground for an agenda of sustainable reform.

Nonetheless, the differences among the members are just as important as the overlaps in some positions. Not all disagreements can be easily reconciled, at least not in the short-run. But this makes the politics of reform all the more interesting. On the issue of the Appellate Body, although all members seem to agree on the principle of reform, there is a major division between the US and the rest. The US insists that the fundamental issue of the “approach” of the Appellate Body must be addressed first, whereas multiple other players have been hard at work trying to find interim solutions. On SDT, the fault-lines are drawn across a group of developing countries versus the US (backed by the EU, and other developed as well as some developing countries).

New Alliances

A group of like-minded countries – for instance via the Alliance for Multilateralism (as advanced by former German Foreign Minister Heiko Maas) – could take a lead in addressing the concern that many countries share. But to do this effectively, the alliance would have to develop more of an ideational spine. It would need to identify the first-order values that members could collectively stand for (e.g. pluralism, liberalism, rule of law), and relate these to trade issues – for instance on the matter of state-owned enterprises. This will not be an easy task, not least because Europe itself is deeply divided on these issues.

Failure to address this issue head on could have devastating consequences for the WTO: if there fails to be a limited set of areas where protectionism is allowed and legitimised, the WTO will likely end up with a scenario of a complete securitization of trade – where countries are able to put up trade barriers on just about everything, all under the pretext of security. If this does happen, the world would see a much bigger disruption of global value chains – in contrast to limited losses caused by a controlled decoupling that the WTO could help regulate (if it acts in a timely way). Under this breakdown scenario the poorest and the weakest would likely suffer the most.