The Value of the WTO
What It Is, What It Can Be
November 13, 2017A few important disclaimers up front: My views are formed over a number of decades of involvement of trade policy, and informed by my most recent experience at the World Trade Organization [WTO]. However, I have been with the WTO for just over two months. I do not speak for the Secretariat, much less for the WTO members.
Nor am I here this morning to predict the outcome of the Buenos Aires Ministerial Meeting next month. You have just heard an informed view from the representative of Argentina, the host country which is working hard to maximize results at the 11th Ministerial Conference [MC 11]. There is every reason to expect progress in Buenos Aires next month. There are real possibilities for broad decisions that will constitute agreements on some issues as well as ministerial decisions that can illuminate the path forward on issues of interest to all. There is frenetic activity in Geneva at present and that will likely continue until the conclusion in Buenos Aires.
From experience, I can tell you that patience is needed with respect to major path-breaking outcomes. I know. I was acting head of the U.S. Delegation in 1975 during the Tokyo Round of Multilateral Trade negotiations, a period of at best, quiet preparation and the results were not final until 1979. Carla Hills hoped for a conclusion of the Uruguay Round in 1990, and the results of her efforts and those of her successors were only harvested by the next U.S. administration, again four years later. This experience is not predictive of the timing of dramatic progress going forward in the WTO, it is just a statement of fact. Making improvements in the world trading system takes time.
The purpose of my remarks today is different than providing an assessment of the possible outcomes of this Ministerial Conference. Not surprisingly it is motivated by an action by President Donald Trump. I want to cover four key points today with respect to a broader set of issues.
- The WTO needs your attention. It has President Trump’s attention and is scheduled to get more of his attention as early as later this week. For these reasons, it is particularly timely to those interested in the international trading system to assess the value of the WTO as it stands today.
- Going forward, the WTO, as with all institutions and sets of rules, needs to change in a number of respects, particularly but not solely, to keep pace with the evolution of world trade. Without change the Organization is at risk of not remaining fully relevant.
- The institution needs renewed leadership on the part of its member countries—a challenge that must be met for progress to be made. Countries other than the United States may be able to fill this role, but that is far from certain. The United States should return to a leadership role, working with others for common objectives. And lastly,
- Bilateral negotiations have their place in constructing an international framework for trade. What is key is integrating bilateral results into a broader international framework.
What I want to do today is engage in a stocktaking, not on current MC11 issues, but more broadly—to set out some basics as to what it is that world trade and the world economy benefit from due to the current World Trade Organization and its processes and agreements and to share with you the beginnings of my own process of thinking about what is it that we should consider for the WTO of the future.
Evaluating the WTO is not a wholly academic exercise. On April 29, President Trump ordered a performance review of all U.S. trade agreements including the WTO. A report has been delivered to him from the U.S. trade representative [USTR] and the U.S. secretary of commerce, which is not yet public, but presumably soon will be. The report is to include their assessments on the following:
- violations or abuses of any…WTO rule governing any trade relation under the WTO harming American workers or domestic manufacturers, farmers, or ranchers; harming our intellectual property rights; reducing our rate of innovation; or impairing domestic research and development;
- unfair treatment by trade and investment partners that is causing those harms; and
- shortfalls in predicted new jobs created, unfavorable effects on the trade balance, and not obtaining expanded market access, lowered trade barriers, or increased United States exports.
- lawful and appropriate actions to remedy or correct deficiencies identified.
I believe that it is also worth reflecting on the current value of the WTO trading system, and where it should potentially be improved.
As a new resident in Geneva, in preparing these remarks, I consulted with a number of WTO ambassadors to the WTO as well as senior secretariat members. A WTO member country representative from one of the smaller country members put it to me this way: the fundamental role of the WTO is to function as a safety net. This is true for larger members as well. Bilateral and regional arrangements can collapse, which is potentially the case with respect to NAFTA and BREXIT, but with the WTO-based world trading system in place there is a fallback.
Several secretariat members stated gave a bottom line value to the WTO in slightly different but consistent terms: that the chief value of the WTO system is providing essential stability without which business would have far less certainty. Without the WTO system in place, economic activity—both cross border and domestic—would be sharply reduced. Anyone who cares about either the level of economic activity for a country or for a company should pause and consider that truth.
Viewed through a lens focussed on structure, the WTO provides a unique system of governance found in no other international arrangement. No regional or bilateral agreement can replace it. It is the foundation upon which all regional and bilateral agreements build. Without the WTO, the world economy would be fragmented, as it was before the Second World War and which in the view of some historians was a factor that made that war more likely. In today’s world, trading relationships could degenerate into an unhealthy regionalism. In addition, without the WTO, there would be no adequate counter to domestic demands for protection, particularly in agriculture, where food security as well as interest politics plays a role.
As one major country’s trade minister, a critic of the WTO, is reliably reported to have said, “If the WTO did not exist, it would have to be created.”
The WTO consists of many rules, but in my view four are absolutely central:
- The fact that tariffs are contractually bound and the use of quotas is generally banned is of paramount importance to the world economy.
- Equally, the two cornerstones of the multilateral trading system—national treatment and the most favoured nation obligation—are indispensable.
The trading system is tested daily not just at times of a global economic stress. Governments the world over are daily creating new requirements, many of which can affect trade. In doing so, I believe that WTO members generally live up to the WTO rules, at least where the rules are unambiguous. They do not cross clear black lines often. It is impossible to determine whether this is because there is certain retribution under binding dispute settlement, but it certainly may be a factor.
Beyond these fundamentals, there are three main functions of the WTO: (1) seeing to the implementation of the existing rules; (2) providing for the settlement of trade disputes; and (3) negotiating new rules.
The perennial work the WTO does not get news coverage but it is vitally important. High on the list of areas of the WTO rules and processes that work well are product standards (technical barriers to trade) and sanitary and phytosanitary standards (SPS). Member countries are generally very good about notifying standards, including proposed standards, and they are willing to take questions and to supply answers. While a tariff in most instances can only slow trade, a standard can stop it, and over 90 percent of world trade is governed by standards. This is a technical area that to the public as well as to senior national policy makers is likely to be mind-numbing, but without this work on technical barriers, world trade flows could seize up, with dramatically adverse consequences.
In the SPS area, the WTO’s rules strike a careful balance between the rights of members to adopt measures to promote human, animal and plant life or health while not creating unnecessary barriers to trade. By ensuring a common understanding and uniform application of the rules, the SPS Committee promotes the free flow of goods.
The Committee has also worked assiduously over the years to enhance transparency and predictability of SPS measures through ensuring that members not only notify their draft SPS regulations for comments by other members before they are finalized. By affording trading partners this opportunity, it increases predictability that members’ measures will not be arbitrary and that they will conform to international standards where they exist. It reduces trade disruptions and prevents conflict and disputes. Misunderstandings can be resolved before the finalization and implementation of the measures.
An area of value of the WTO that stands out for me is the process for new countries acceding to the organization.
It may be that the governments of long-time WTO members take the system for granted and therefore perhaps undervalue it. I am very fortunate to oversee the Accessions Division, and I can assure you that the countries that wish to join the WTO have made clear-eyed evaluations of the costs and benefits of WTO membership, and have concluded that the benefits far outweigh the costs. Indeed, these countries must be secure in that calculus, as the accessions process is both long and arduous.
Those seeking membership in the WTO as well as those gaining membership most recently regard joining the WTO as crucial to their economic well-being. In many cases, they are countries that have recently suffered very severe economic dislocations:
- Liberia was recovering from civil war when Ebola hit in 2014. It completed its accession negotiations in 2015 and is an ardent supporter of WTO accession as a means to drive economic and legal reforms and rebrand itself as a destination for foreign investment.
- Afghanistan is the 164th member, so the most recent to accede. It sees WTO membership as creating a basis for restoring its war-torn economy as a transit hub between South Asia and Central Asia, and between South Asia and Middle East.
- Timor-Leste and perhaps soon South Sudan will embark on the WTO accession journey as part of statehood building after long struggles and a bitterly gained independence 2012.
- Somalia seeks membership to assist in its recovery from serious dislocations. It seeks to realize the potential of its geographic assets—with the longest coastline in Africa and Middle East and its strategic location between the Gulf Aden and the Indian Ocean.
It would be very good if, just as immigration has contributed to keeping the economies of countries with aging populations vibrant, the newly acceding countries might have the same effect on the WTO. Since 1995, when the WTO came into being, 36 countries have completed their accessions to the WTO. Twenty-one countries are in the process of acceding to the WTO. They are of different size and economic conditions, but all have the ability to use WTO membership and accession to pursue their domestic reforms and their integration into the global economy. They all share a common vision—to be part of the WTO whose rules govern the conduct of over 98 percent of global trade.
Besides an arrangement providing substantive rules, also to be weighed in the balance is the value of WTO dispute settlement. This is often referred to as a jewel of the WTO system, but if it is, one major member has identified several flaws in this diamond, and there is a serious question at this point about its future. The United States takes the position that systemic reform is needed before consideration can be given to filling the vacancies on the WTO`s Appellate Body. At present two seats out of seven are empty. Next month, there will be three vacancies. Clearly a solution must be found. This has to be a matter of major concern. At some point next year, the dispute settlement process could become paralyzed. If and when that occurs, unilateral action and reaction could take place with high risks for the world trading system. This could occur if a complainant wins at a WTO panel and the respondent country rather than removing the offending measure, appeals, but it is an appeal that cannot be heard because the Appellate Body is not fully functional. The complainant decides to take matters into its own hands and retaliate, and the respondent decides to respond in kind. Without enormous self-restraint that kind of situation can pose serious systemic risks.
Why the current impasse? The United States points to the Appellate Body’s exceeding its authority. It cites as a prominent example, the Appellate Body making a rule that its members would be allowed to serve on cases after their terms had expired if they had served on the case during their term of office and a decision had not yet been issued. The United States states that this is a matter for members to decide and not a matter to be determined by the Appellate Body itself. There appears to be a fair amount of agreement among WTO members with whom I have spoken that it would be best for the members, acting through the Dispute Settlement Body to make the required decision, but there is no support for the blocking of appointments by the United States.
Fortunately, thought is being given by concerned WTO members as to how to resolve the current impasse. It is a near-term test of the ability of trading countries to cooperate to find mutually acceptable solutions.
The agenda going forward
There are other areas in the WTO in which members would like to see improvement. One of these is implementation of the current WTO rules. There are wide variations in members’ performance with respect to notifications and responsiveness to requests for information. There are also areas where trade disciplines would be desirable where the WTO has either no or insufficiently effective substantive rules, such as very prominently in the case of domestic subsidies. Many members wish to see these deficiencies to be addressed.
Adaptation of the WTO as an institution and its rules are also constantly needed due to changes in the nature of world trade. To date, this has taken place on occasion with hard-won success. What is traded and how trade takes place is evolving rapidly. Vast super-container vessels move monumentally greater volumes of goods, as have air parcel delivery systems. The Trade Facilitation Agreement, estimated by some to be when fully implemented the equivalent of eliminating more than a 14 percent tariff, is helping to meet that challenge. The expanded Information Technology Agreement is designed to deal with the changing nature of trade in cutting edge information technology [IT] products. As a result, global value chains have sprung up for information technology products which are largely free of customs duties. This is the good for world trade and for enhanced economic growth for all.
Some earlier great steps forward are aging. Two of the valuable innovations of the Uruguay Round were the inclusion in trading system of agreements covering trade in services and trade-related intellectual property disciplines. Now over two decades ago, these agreements were a huge step forward in modernizing the system to cover much more of international business and trade as it exists today.
The General Agreement on Trade in Services (GATS) in particular, started life as an agreement with a much broader scope than the General Agreement on Tariffs and Trade [GATT], with its inclusion of services traded not only across borders (mode 1, akin to GATT), but also when consumers travel abroad (mode 2), delivered by commercial presence of foreign companies (mode 3) and by foreign individuals temporarily in the domestic market (mode 4), whether as intra-corporate transferees or foreign professionals. This coverage, by default, has meant that the GATS has enormous implications for promoting good governance overall and fairness for all, not only foreign suppliers, in domestic regulatory regimes in which the domestic and foreign service suppliers compete.
World commercial services exports were $4.8 trillion in 2016. That’s just over 23 percent of total world trade. Perhaps underappreciated at the time they were concluded, both GATS and the Trade Related Intellectual Property Agreement (TRIPS) could to some extent prove to be increasingly valuable as the digital economy takes hold. Services such as telecommunications, banking, express delivery and computer services form the global infrastructure for the digital economy and intellectual property rights (IPRs) are crucial to software and IT innovations needed to secure effective electronic trade platforms and data systems for global online trade.
However, coverage of services by the WTO’s rules is limited both in terms of both countries making commitments and the sectors covered by those commitments. And it is not clear that new technologies will always be covered by the existing framework of rules (although Internet gambling, for example was an instance where the rules reached forward to new activities.) Freeing up more trade in services is an area of vast potential that could create jobs well into the millions. Enforcement of the rules protecting intellectual property and the rules themselves are in need of review.
It is essential that the WTO adapt to future changes in the world trade. We are witnessing an increase in the rate of change that is astounding and there is no reason to believe that any international system of governance can continue to keep pace or even follow closely on the heels of change in the world around us. The WTO system did meet the first wave of changes as noted above with the Trade Facilitation Agreement and the expansion of the Information Technology Agreement, but the fact is that it is not clear that future modes of delivery of goods and services, and the goods and services themselves, will be recognized by the current rules:
- Where is the cloud really located and how much does that matter to technology companies as compared with national policymakers?
- What treatment for commercial products manufactured or services sourced from space?
- What of an app from one country that provides the medium for delivery of a product or service from another via a cloud contained in servers located anywhere, and where sourcing may shift about from nanosecond to nanosecond?
- Where there is remote diagnosis by over the web by a physician who is specialist located in one country for patients in another, what sort of licensing will be required, will it be feasible?
- When language is taught by a holographic teacher, what is its country of origin if the content is provided from one part of the world but it goes through processing and transformation in a number of others, before delivery in yet another end market?
- One of the primary benefits of the Internet age is the availability of Internet services. Will the rules permit their free flow across borders?
- How will standards and rules of access be applied to 3-D printing?
- Airplane engines are being designed with hundreds of sensors to indicate not to their owner but to their manufacturers what changes in design are needed for greater efficiency and safety. The information may not even be fed back primarily to humans but to robots on the assembly line. This is a forerunner of the future, it is here now.
- Smart bolts are being used in construction of structures that must stand up to stress. The bolt can report when a key element of a bridge or building may fail. Who needs that data, who can interpret it, what service will be based upon it? Will it be able to function cross borders?
The WTO members will collectively have to be very nimble to keep up with changes in the physical world, but that is not the nature of the evolution of the world trading system, which is incremental. Counter-pressures will exist for preserving policy space. Lawlessness characterized the frontiers during earlier centuries, and we will all be at the technological and economic frontier increasingly. “Lawlessness” can be positive if it would otherwise mean the imposition of regulations that strangle innovation, but obviously the state of nature can be very destructive as well. The future WTO will need to mediate opposing values, and seek to achieve the right balance.
A new hurdle—leadership
A question is how to move forward both on the current negotiating agenda and on the areas where the current rules do not apply. Here there is a new problem: it is unclear what role the United States—for the seventy years the country that led and shaped the world trading system—will take going forward. At present the United States has simply stopped playing its leadership role. We only know that its role will be different and that multilateral approaches are deemed by Washington to be deficient in several respects and not a preferred path. The effects of this potentially revolutionary development are unknown. I will not repeat here what I said at American University last week. The bottom line is that other WTO members have not yet adapted to the drastically changed position of a key member.
Will another member or group of members step forward to increase the rate of progress at the WTO? Is collective leadership possible? Or will there instead be an acceleration of the negotiation of bilateral and regional agreements? Will they be WTO plus and a positive factor for world trade or prove divisive and counterproductive in terms of both efficiency and total benefits for WTO members?
One solution to the leadership question
I noted at the outset that President Trump was right about a central aspect of trade. Either from instinct or experience he was right about the importance of bilateral negotiations. In the Trans Pacific Partnership, there was a core bilateral negotiation, that of the United States with Japan, and it was very heavily a bilateral process. Market access questions are often in the first instance addressed on a bilateral basis. This is true whether the item in question is auto parts or pork. The core of the Environmental Goods Agreement last year was also in trade terms, for the United States, two bilateral negotiations, one with the European Union and one with Japan. Other countries had their own bilateral TPP and EGA negotiations, which were no doubt very important to their trade bilateral interests. Right now, the pace of accession process for the new applicants to the WTO is also heavily determined by bilateral negotiations. So, the multilateral trading system, particularly when it comes to market access is very much accustomed to bilateral negotiations.
It is the next step which requires focus—what is done with the results of these bilateral efforts. To have a really large impact in terms of trade coverage, the negotiation must become more like a multiparty real estate development covering many projects and developers. It is more like planning a new city, not a new building. It is the packaging of the deal that is the next step. Switching metaphors, were this a poker game, there needs to be a large enough in the pot to make the game worth the effort, and that requires many contributors and more than two players. It is impossible to reach that next stage, the giant deal, without sweeping in more countries and much more trade. No bilateral agreement can reach this level of importance to the world economy.
Negotiating market access bilaterally, and then assembling larger deals is a process needed to cover most of world trade. It is also impractical to establish global rules for international trade in bilateral agreements. To accomplish that, multilateral deals are needed. And yes, enforcement is a problem. This is true with any agreement, but it is one which must be faced and can be solved.
The bottom line, America needs to find a way to join back in and work with others to make the system work. Failing that, others will have to fill this gap.
I come back to where I started and agree with the trade minister—the strong critic of the current WTO—who concluded “If the WTO did not exist, it would have to be created.”
In the end, once the bilateral hurdles are cleared, the multilateral approach is the best path forward to the extent that it is feasible. Making the case for a working multilateral trading system that evolves to meet the changing needs of international trade is a job for all of America’s institutions—the press (see in particular the Wall Street Journal lead editorial of November 11), think tanks, academia, unions, nongovernmental organizations [NGOs], and not the least companies and their trade associations.
I realize that tax is a dominant issue in this town right now. And in trade, NAFTA and then KORUS get the most attention. It would be a costly error to take the WTO for granted. It is one of the indispensable international institutions that underwrite the functioning of the world economy.
The WTO is our heritage, bequeathed by generations of American leaders and their foreign counterparts, dating back to Cordell Hull, Franklin Roosevelt, and Winston Churchill. It is vitally important that the WTO be valued, maintained and continually improved and updated to meet new challenges. I am optimistic that this generation can do exactly that.
This speech was given at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2017 by the Center for Strategic and International Studies. All rights reserved.