The World Trade Organization is in Crisis and Must Be Reformed

Diplomaatia: What are the key priorities of the incoming European Commission in trade policy, both multilaterally and in the EU’s bilateral trade negotiations? Is the WTO and the multilateral trading system still important for the EU in achieving its goals?      

Redonnet: In the past, trade policy was the realm of policy experts and niche reporters, not the subject of public debate. These days, that has all changed. Trade is now front and centre. There are a number of reasons for this shift—not least a transforming global environment, in which trade has become a tool in a larger competition.

As a result, trade has entered the public discourse like never before, and at a time when we face many new challenges, most notably rising trade tensions between China and the US, as well as a crisis at the WTO. It is these challenges that president-elect Ursula von der Leyen has charged Commissioner-designate Phil Hogan with facing up to. In his hearing at the European Parliament, the Commissioner-designate has already indicated some of the ways he plans to tackle them.

• Priority number one is to preserve stability for trade on the world stage. The WTO, and before it the General Agreement on Tariffs and Trade, has been the set of rules that insulated trade from the pressures of other international affairs for more than 70 years. Without it, trade would be at the mercy of other diplomatic, security and political priorities—raising barriers and blocking trade that businesses and consumers need to thrive. We have recently had a taste of what it means to not follow the rules—to prefer unilateral action instead of cooperation. Now the WTO is in crisis and the EU is on the front line of the fight to save it.
• Second, continuing to create opportunities for EU companies and workers. We already do this by opening up new markets through negotiations. This will continue to be important, but our next focus will be on making sure those agreements work as was agreed. The Commission will create a Chief Trade Enforcement Officer charged with overseeing this.
• Third, making trade a force for good. Sustainable development, fighting climate change, upholding human rights and social standards—these are at the centre of trade. We already have provisions to support these in every new trade agreement. Now we are looking at additional tools, like a Carbon Border Tax.
• Fourth, ensuring the fairest possible environment for our businesses, to level the playing field. Whenever unfair practices emerge, we need to defend ourselves, where necessary through our trade-defence instruments. Where we are open and others are not, we need to stand up for ourselves—like fighting for openness in public contracts.
• Finally, recognising that trade has a role to play in security and geopolitics. We need to ensure trade does not make us vulnerable, using measures such as our new system for screening foreign direct investment in cases where it threatens security or public order. We will continue work on other security issues too, like controlling the trade in items that can be used in surveillance or other dual-use items, such as those that can also be used for military purposes.

What role does the EU play in the WTO? Can we influence its deliberations and outcomes? 

The EU is a leader in the WTO, for several reasons. We are a major global economy, we rely heavily on the open rules-based system, and as a group of nations we are used to finding agreement and compromise. But the primary reason we have this role is that we embraced it from the very beginning. From negotiations to day-to-day work and dispute settlement, the EU is a major player.

This means that, facing pressure on the system from trade wars, countries making decisions outside the system and deadlock in rule-making, the EU has a responsibility to step up. We are doing so by putting forward proposals for updating the system to deal with 21st-century issues, for example in e-commerce. Coming to a deal on e-commerce would not only be economically significant—unlocking gains in a global services industry worth over 27 trillion euros—but it would also prove that the system still works. We now have a diverse group of about 80 members on board, including the US, China, Japan, Brazil, Laos and Kenya. Together we aim to eliminate barriers to electronic transactions like diverging standards on electronic contracts and signatures, to protect consumers in online transactions, to facilitate cross-border data flows and to make it easier for businesses to access global markets.

We are building coalitions to pursue this and other reforms too—it is important to include larger partners like the US and China, as well as smaller countries. For the reform to have legitimacy, it must have broad buy-in.

Is the WTO in crisis? Why is there talk about modernising and reforming the organisation?

In short, yes, and for several reasons.

When China joined the WTO in 2001, it brought growth and dynamism, but also new challenges. For example, its model of state-led capitalism violates the principles of the WTO in ways that are hard for the rules to tackle. Another example is that China is now the fastest-growing economy in the world and fully industrialised, yet its government still claims the rights of a developing country. On top of this, add in the difficulties in updating the rules due to the need to reach a consensus among 164 countries and you have a pressure cooker of growing frustration and an undermining of the system.

The US, which usually drives consensus in the system, has reacted to this by turning away from the WTO. Its unilateral actions against China are weakening the system, as is its blocking of appointments to the dispute-settlement panel.

Most members agree that the WTO needs to change—the disagreement is on how. The EU has put forward a proposal suggesting several updates, including to the way it negotiates its dispute settlement and transparency. This is a proposal to open the conversation—it is up to the next Commission to drive this work forward. One thing is clear: it can only be legitimate and relevant if it provides solutions to address the market distortions that upset the level playing field and are the root cause of the crisis.

How is work in the WTO related to sustainable development and climate change, which are increasingly at the centre of public debate?

The challenges of climate change and sustainable development are not European or Nigerian, Chinese or American, Australian or Argentinian—they are global challenges, and global challenges require global solutions. The WTO has the potential to play a pivotal role in working together on the Sustainable Development Goals and mitigating climate change. We have already seen the role that trade can play as the EU and its partners have increasingly integrated sustainability issues over the past years.

However, we need to be cautious. While development and environmental questions have a well-established place in the WTO’s work, for many members labour issues are still sensitive. Gender issues are increasingly considered, but still relatively new. We must not forget that the WTO is on the verge of collapse. We should not overload the system with new ideas while it is threatening to crumble—our first priority should be to ensure that the system survives. Nevertheless, addressing sustainability issues is part of the equation.

Commission president-elect Ursula von der Leyen has promised to propose a European Green Deal in her first 100 days in office. What effect will this have on EU trade policy?

The European Green Deal contains about 20 different policy proposals, spanning from the adoption of a new industrial policy and disciplines on fisheries subsidies to banning single-use plastics and making food production more sustainable. There are policies that more directly affect trade, like the Carbon Border Tax and holding maritime transport to high standards on emissions, but the scope is so broad that it is hard to analyse the full impact. What is clear is that achieving a climate-neutral economy by 2050 entails a fundamental transformation of our economy and will certainly affect trade.

Trade policy can pull its weight to contribute to the Green Deal through our trade agreement chapters on sustainable development and climate, integrating climate objectives into our other chapters and using agreements as a platform for further cooperation with partners.

In the Mission Letter to Commissioner-designate for Trade Phil Hogan, the president-elect stresses the need to strengthen Europe’s ability to protect itself from unfair trade practices. What will this mean in practice? Will there be any new initiatives by the Commission?  

What this means is standing up for ourselves and standing up for open trade—but we need to make sure that reasonable protection does not turn into protectionism! Our first priority is always to actively promote the use of fair-trade practices through bilateral, plurilateral and multilateral negotiations. However, if this does not work, we need the tools to protect the hundreds of thousands of jobs and companies that are threatened by unfair competition every day.

We recently updated our trade-defence instruments to deal with unfair trade more effectively, and we believe this is working. Another priority is in respect of the International Procurement Instrument. The need for such an instrument is pressing. The EU opens up its government procurement because it’s good for competition, good for choice and good for public spending—we expect our partners to do the same.

How can the WTO play a role in reducing trade tensions between China and the US as well as the EU?  

The US-China confrontation is affecting the global community. It increases uncertainty, puts pressure on markets and threatens to trigger an economic downturn. A solution worked out between them may fix things in the short term, but it would be inherently unstable and may risk negative spillovers on other members.

Only a solution anchored in the multilateral system is sustainable. By updating the system to deal with China’s distortions, restoring a functional dispute-settlement system and modernising the rulebook for the 21st century, we will not only restore peace and stability to international trade, but we will guarantee it for another generation.

This interview was conducted via e-mail in cooperation with the Estonian Ministry of Foreign Affairs.

This article was published in ICDS Diplomaatia magazine.