Trump, China, and the Future of the Global Trading System

The United States under President Donald Trump has found a favored target of criticism in the World Trade Organization. While there is no doubt that the WTO needs urgent reform, the framework it provides—offering the certainty and predictability inherent in a rules-based system—should not be abandoned.

It has become conventional today to deride the WTO -- with its patchy record of occasionally successful, but more usually interminable, negotiations – as the lowest common denominator of international trade. In the Brexit debate in the United Kingdom, a possible fallback on “WTO terms” is seen by many as the worst possible outcome.

Yet the WTO still provides the foundation of the global trading system through its general principles such as non-discrimination, specific agreements in areas ranging from intellectual property to food safety, and basic market access commitments. This is the unseen “plumbing” which is all too easy to take for granted.

Those outside the system can be easy prey to discrimination, which is why membership has grown from the 23 original signatories of the General Agreement on Tariffs and Trade in 1947, to 128 when the WTO came into existence in 1995, to 164 today with a further 22 countries in the process of joining.

China provides an outstanding example of the benefits of WTO membership. Many in China, with justification at the time, feel that the terms of its accession at the end of 2001 were harsh. Yet between 2000 and 2007 China’s exports more than quadrupled, while its total trade in goods rose from about US$400 billion in 2000 to nearly US$4 trillion in 2017. There could be no better illustration of the value of the certainty and predictability inherent in the WTO’s rules-based international trading system.

So What Went Wrong?

We now have a situation in which the US has unilaterally imposed, on grounds of national security, additional tariffs on US$250 billion worth of imports from China. China views these as flouting both the US’s tariff commitments in the WTO and the principle of non-discrimination.

In a sense, the WTO appears to have become a victim of its own success. But this is not how the Trump administration sees it. Its charges against the WTO are several and serious. They have been crystallized by the rise of China but, in fact, the origins of this disillusion are wider, more deep-seated, and pre-date the current US administration.

First, according to Trump, the terms of China’s accession to the WTO were too generous. This overlooks the extremely delicate nature of the 15 years of negotiations, the serious heart-searching on the issue both in the US and China, and the enormous effort China had to make to adjust to WTO norms.

Secondly, the WTO has failed to update its rulebook. Under-regulated practices such as forced technology transfer, data localization, and intellectual property theft distort markets. In particular, the rules are inadequate to discipline China’s model of state-driven, state-subsidized economic development.

Thirdly, inertia and lethargy have superseded the initial energy and action evident in the early years of the institution. The membership of the WTO now engages in endlessly circular, politically motivated debates, while some committees are moribund.

Fourthly, the WTO’s approach to trade and development is outdated. Monolithic characterization of countries as “developed” or “developing” no longer fits the multipolar, highly differentiated modern economic landscape.

Finally, and perhaps crucially, the WTO’s dispute settlement system has gone off the rails. Its Appellate Body, in the view of the US, has overreached its mandate and become too intrusive into domestic regulation. In its defense, members of the WTO bring issues for adjudication and expect the Body to make rulings. Furthermore, the inability of countries to clarify ambiguities in agreements forces it to make difficult decisions.

The Threat

The Obama administration shared –and strongly articulated – many of these misgivings about the WTO. What is new is that the current administration is now directly threatening to leave the organization unless, as US Trade Representative Robert Lighthizer has said, it “shapes up.” While many in the US Congress might share the administration’s list of grievances, a substantial body of opinion understands the importance of having a unified, enforceable global trading system.

The US itself would be among those that would suffer. To take just one example: theft of intellectual property, one of the US’ main charges against China. Implementation of the WTO’s Agreement on the Trade-related Aspects of Intellectual Property (TRIPS) has tracked a remarkable increase in US earnings from licensing its intellectual property. According to IMF data, US inventors and creators received US$128 billion from intellectual property licenses and franchises from foreign partners in 2017. Departure from the WTO would remove any enforceable rights of protection in all but the few countries with parallel bilateral agreements with the US.

A WTO without the US would lose credibility. Many important countries have compelling, overarching bilateral relationships with the US, in trade as well as in other areas of international cooperation. They would be in a quandary but might feel that they need to follow suit. A world with two opposing trade clubs would have highly detrimental consequences for growth and employment.

Preferential trade agreements between groups of countries do not offer a viable alternative. Instead, they create vastly differing market access and trade rules. Without the umbrella of the WTO, the system would become even more labyrinthine, asymmetrical, and business-unfriendly.

WTO Reform Agenda

The good news is that many countries understand the threat and the high stakes at play. The issue of WTO reform, long discussed in the corridors, has now surfaced in a meaningful and more realistic way. World leaders have long talked about the WTO as if it were a sick institution but there was never any follow-through because their abstract pronouncements were based on the false premise that the WTO had an independent existence separate from its membership.

Progress in reforming the global trading system is likely to be slow, and quick results cannot be expected.

Now, for the first time, groups of members have recognized that they have to take responsibility. The European Union has published a set of reform proposals. Canada is convening a group of countries with broadly similar aims. The ideas being floated respond to many of the US complaints, but also reflect wider disillusionment. Suggestions include modernizing the trade rules; improving efficiency and effectiveness; safeguarding and strengthening dispute settlement; a new approach to flexibilities for developing countries; nimbler decision-making; and strengthening the WTO Secretariat.

New Consensus Needed

Underlying many of the problems in the global trading system is the current lack of a consensus on its purpose. WTO members might agree on the need to promote growth and employment, but there are radically different ideas on how this is best achieved. For some, it is about progressive international trade liberalization, rule-making, and economic integration. For others, it is more about national economic independence, self-sufficiency, preservation of markets, and the ability to develop relatively free from the constraints of international rules. Many, if not most, would be somewhere in between.

Progress in reforming the global trading system is likely to be slow, and quick results cannot be expected. But at least the debate—too long delayed—has started. For that, we may even be grateful in the long term to Trump and to China. Supporters of a truly global trading system must hope for an all-round spirit of creative pragmatism because the price of failure would be extremely high.

Stuart Harbinson is an independent trade policy consultant based in Geneva. He was formerly Hong Kong’s representative to the World Trade Organization. He is a fellow at the Asia Global Institute, which requested that this be reprinted