Will the world see a WTO 2.0 post-COVID?

Without a strong impetus from its Members, WTO may remain ineffective in its core mandate of managing international trade relations. The costs of this (economic or otherwise) may be too much to bear in the post-COVID world.

• At a time when global economy and trade face unprecedented downturn, significant risks and heightened uncertainty, the prognosis favours a new level of international collaboration.
• OECD’s report related to the loss in global trade due to protectionist measures implemented by G20 countries between October 2019 to May 2020 show that new import-restrictive measures unrelated to the pandemic covered an estimated US$ 417.5 billion worth of merchandise trade, the third-highest since May 2012.
• The intensifying US-China rivalry, the current dysfunctional status of the Appellate Body and the increasing tendency towards protectionism and unilateralism (led by the US itself) are headline challenges facing the multilateral trading system. 
• Without a strong impetus from its Members, WTO in its present character may remain ineffective, and the costs of this (economic or otherwise) may be too much to bear in the post-COVID world.

At a time when global economy and trade face unprecedented downturn, significant risks and heightened uncertainty, the situation calls for a whole new level of international collaboration. Instead, unilateral measures by nations are on the rise, as is the tendency of governments to fuel nationalism and protectionism. This is affirmed by Gary Hufbauer, a fellow at the Washington-based Peterson Institute for International Economics, who predicts a decline in global trade by 24% YoY in 2020.

“Over the longer term – the next two to three years – we will probably see a rise in protectionist responses, which in turn will limit the rebound in trade once COVID-19 is arrested.”

An instance of this is the temporary ban implemented by the US on H-1B visas. This measure affects India in particular as it accounts for around 2/3rd of H-1B visa applications to the US.

Pralok Gupta, Associate Professor (Services and Investment) at the Centre for WTO Studies, Indian Institute of Foreign Trade, laments that considering the present state of the WTO and the dysfunctional Appellate Body, this kind of one-sided action is tough to contest:

India may not be able to use the WTO that much to fight for its cause because currently, the WTO has become more like an organization without teeth. This is due to the Appellate Body crisis led by blocking of the appointment of new judges to this body by the US. Unless there is a proper dispute settlement mechanism in place, which is accepted by all members, nothing much can be done to check US unilateralism.

On similar lines, the US has pulled out of negotiations over an international digital tax with the EU and threatened the latter with retaliation if it continued with the legislation on its own. A number of European countries were looking forward to tax digital giants over a certain threshold. This would predominantly impact US companies. But the US sent a letter in June stating that international talks had reached an impasse and there wasn’t even room for an interim deal.

A key threat to the WTO’s existence has been US unilateralism itself. Under the Trump administration, it has been clear that the US is not happy with the way the WTO functions, and the world’s largest economy has been looking to handle all its trade disputes bilaterally. Last month, United States Trade Representative (USTR) Ambassador Robert Lighthizer has signaled Washington’s intention to fundamentally change the World Trade Organization on grounds that it is a “mess” that needs a “broad reset”. The USTR has critically pointed out how the Appellate Body (for which it deliberately blocked judicial appointments) has treated the US “as the world’s greatest trade abuser.”

He also stated that US would be looking at a broader reset of its tariff commitments at the WTO over the coming year. Further signalling US approach going forward, Lightiser stated that he would like to see a new WTO Director-General (as Roberto Azevêdo announced he would resign a year early), “who supports fundamental reform of the WTO and who is willing to take on China.”

The US-China friction is indeed at the centre of any debate on the post-COVID global order. A report by Observer Research Foundation emphasises that “much of the predominant narrative focuses on binaries of either arriving at a China-led global order or going back to a US-led one.”

In this context of unprecedented challenges highlighted by this intense US-China rivalry, serious questions are emerging as to the value of the World Trade Organization at present and for the future. The crisis heightens the need for an examination of the underlying principles and values of the WTO and addressing the degree to which it is of sufficient continuing relevance. The institution is and has been under obvious stress due to trade wars, a failure to demonstrate that it could produce negotiated results, as well as a failure to maintain its much-touted dispute settlement structure.

After the COVID outbreak, the clash of interest between developing nations and developed nations has further augmented. Secondly, a majority of the nations are becoming protectionist in the name of pandemic. For instance, countries like Vietnam, Thailand, EU and LAC have banned exports of essential commodities relevant to them.

OECD Corroborates Two to Tango Approach

Recently, OECD released a report related to the loss in global trade due to protectionist measure implemented by G20 countries between October 2019 to May 2020. New import-restrictive measures unrelated to the pandemic covered an estimated US$ 417.5 billion worth of merchandise trade, the third-highest figure recorded since May 2012. These include tariff increase, import bans, stricter customs procedures, export duties and other such measures introduced during the review period affecting 2.8% of G20 trade. Historically high levels of trade-restrictive measures remain a source of concern, that too at the time when international trade and investment seems critical to assuage economies, businesses and livelihoods around the world.

The said OECD report also highlights that between October 2019 to May 2020, initiations of anti-dumping investigations accounted for around 80% of all trade remedy initiations, which also includes safeguards and countervailing actions. Definitely it is a deliberate approach and not coincidence. Countries have progressively embraced lesser openness in trade over the past decade, as indicated by parameters like shrinking value chains and declining trade-to-GDP ratios.

This raises qualms relating to the role of WTO and its niche agenda of liberal trade. In services trade, most of the new measures introduced by G20 economies between the said time period were trade facilitating, but a number of new policies appeared to be trade restrictive, including in areas related to foreign investment and in areas considered strategic or linked to national security.

Individually, all WTO Members profess that they are fully committed to multilateralism and thus to the maintenance of the multilateral trading system. Although the degree of commitment varies, it is necessary to at least identify and assess the extent to which consensus exists on the fundamental precepts underlying the organization as a first step toward understanding what a WTO 2.0 can and should consist of.  The WTO would be a hollow shell only representing an iota of countries, if mutual consensus agreements could not be negotiated and reached.

All is not necessarily lost, we may add, as there has been some show of positive intent among WTO members, even though it gets overshadowed by the headlines. For instance, major agricultural nations including China, European Union, Brazil, the US and Canada, agreed to maintain open and predictable agricultural trade during the COVID-19 pandemic on April 22. India also began its exports of major farm items in April itself during the initial stages of the lockdown including rice, dairy, meat and processed food items. The same spirit was evident when India shipped 50 million tablets of Hydroxychloroquine to the US on the specific request of the latter.

There is a need for such instantaneous action and cooperation across nations to prevent the harm that can be caused by trade restrictions in response to the current global health and economic crises and to aid recovery. This is also a time when it is essential to consider the future of the multilateral trading system. A fresh assessment is required despite the fact that the system has been highly successful by most measures during its 70-plus year history (including the GATT period). Without a strong impetus from its Members, WTO in its present character may remain ineffective, and the costs of this (economic or otherwise) may be too much to bear in the post-COVID world.