/Jaw, jaw not war, war: Prioritising WTO reform options

Jaw, jaw not war, war: Prioritising WTO reform options

The next G20 Leaders’ Summit risks being overshadowed by the Sino-US Trade War. That needn’t happen as last year G20 Leaders called for reports on options to revive the WTO and are expected to discuss them in Osaka. This column introduces the latest Global Trade Alert report, which shows that current global trade rules don’t deliver and proposes a way forward. 

G20 Leaders are due to discuss options to revive the moribund WTO at the upcoming Osaka Summit, a topic that has garnered plenty of recommendations from analysts and official friends of the multilateral trading system (Bertelsmann 2018, European Commission 2018, Ottawa Group 2019). The purpose of the latest Global Trade Alert report (Evenett and Fritz 2019) is to identify WTO reform options that directly address the first-order problems that have built up over the past decade. Our approach ties prescription to diagnosis.  

Since the last WTO Ministerial Conference in December 2017, trade officials have been struggling to take forward a number of unrelated, incremental initiatives. There is no apparent organising logic, nor any systemic perspective. Worse, the Sino-US trade war has absorbed bandwidth that could have been usefully deployed elsewhere.

Our evidence-driven approach identifies initiatives that, if taken forward, would reform substantial amounts of world trade. While these initiatives would not require each WTO member’s participation, a data-driven approach that picks the right sectors to reform delivers benefits to the majority of WTO members, drawn from every continent and across levels of development. 

A meaningful reset for the WTO requires a new work programme that reverses the build-up in discrimination against foreign commercial interests witnessed since the global financial crisis began. With this in mind, the report first diagnoses the current woes of the world trading system and then identifies which initiatives could elicit critical mass among the WTO membership.

Unravelling trade cooperation puts the spotlight on deficiencies of current trade rules 

Going from the more recent to the deeper-seated structural problems facing the WTO, the report shows that:

  • Since G20 Leaders last met in Argentina, their governments have imposed trade distortions affecting over $1 trillion of trade. This is over $200 billion more than in the comparable period last year and double the amount of trade harmed in the three preceding years. Moreover, this finding relates to G20 measures taken between 1 December 2018 and 15 April 2019, before the Sino-US trade war intensified in May 2019. 
  • A total of 288 G20 trade distortions accounted for the trillion dollars-plus in affected trade. Only a sixth of those trade distortions were implemented by China and the US. Subsidies to farmers and local manufacturers accounted for 118 of those trade distortions. The Sino-US trade war may give the impression that free trade is principally under threat from tariff hikes by two behemoths of the trading system. That misses so much of the damage being done to the level commercial playing field worldwide. 
  • Non-G20 governments more than doubled their resort to protectionism over the same period. After the G20 abandoned its pledge to eschew protectionism, whatever restraint there was appears to have weakened. 
  • While headlines of multi-billion tariff hikes on Chinese exports abound, few realise that since November 2008 a total of 348 trade distortions have been carried out by 36 governments that each affect over $10 billion of trade. In fact, 14 governments are responsible for imposing five or more instances of such jumbo protectionism. Only six of these 348 jumbo protectionist measures have been implemented by the Trump administration. The rot started well before the Sino-US trade war.
  • Subsidies to import-competing manufacturers and to farmers and state-provided export incentives are responsible for the biggest distortions to global trade. Over the past decade more than 90% of the trade distortions affecting $100 billion+ of trade involved subsidies of different forms. Reversing tariff hikes should not be the only priority.
  • By 2013, 70% of world goods exports competed against trade distortions not present when the Global Crisis began. That percentage has, if anything, risen in the six years since.
  • Taking a longer-term perspective, G20 trade costs stopped falling at the turn of the century. Fundamentals now account for 20% less of G20 trade growth. Bad policy accounts for more and more. 
  • The gradual build-up of trade distortions has compromised the WTO’s Dispute Settlement System. Many G20 countries have hit each other’s commercial interests so often that they dare not bring many cases against protectionism by other trading powers. People who live in glass houses do not throw stones. In the first five years of the WTO, on average every $85 billion of intra-G20 trade triggered a WTO dispute; now, it takes over half a trillion dollars. This problem won’t go away if a full bench of judges are appointed to the Appellate Body, the focus on which has been a distraction from the deeper-seated challenges to resolving trade disputes at the WTO.

Build a WTO work programme around inclusive multi-sector deals

Following the failure of the Doha Round, there is no appetite for a WTO work programme that requires every nation to liberalise. Right now, there is little desire to liberalise on the part of many governments. For better or for worse, any new work programme for the WTO cannot be based on far-reaching opening of markets. Surprising as this may seem, that still leaves plenty of reform options on the table. Nothing stops coalitions of willing WTO members forging ahead so long as they do not impair the interests of others. In return, those governments that stand aside should not veto progress.

Rather than putting liberalisation at the core of any WTO initiative, the focus should be on rolling back the crisis-era discrimination that remains. Given the scale of such discrimination noted above, restoring the world trade system to its pre-crisis state would deliver real benefits. Now that the emergency is over restoring normal conditions for trade is natural. 

Using detailed data on crisis-era discrimination, including the countries, products, policy instruments, and trade implicated, a systematic examination of each goods sector revealed:

  • Special purpose machinery is the only sector that can support a stand-alone agreement where the net beneficiaries account for a critical mass of WTO members, taken to be 80% of global trade in that sector. This accord would reform $142 billion of trade. 
  • Much more trade could be reformed by the smart bundling of sectors in a reform package. 
  • A deal to remove crisis-era discrimination in the large general-purpose machinery and transport equipment sectors would create 38 winners among the WTO membership that together are responsible for 86% of these sectors’ trade. The winners would include China, the EU, India, the US, South Africa, and Turkey.
  • A three-sector deal that rolled back crisis-era discrimination in the base metals, man-made fibres, and transport equipment sectors would create 76 winners among the WTO membership and reform $1.5 trillion of trade (the net beneficiaries are shown in Figure 1). Winners are well represented in each continent and among every level of development.
  •  There are 67 multiple sector deals where China, the EU, Japan, and the US are winners. Some of these WTO reform options would reform over $2.5 trillion of trade with very little free-riding by non-members.

Figure 1 A three-sector deal would reform $1.5 trillion of trade and benefit 76 WTO members

Note: For details of the approach taken to identify winners, see Chapters 7 and 9 of Evenett and Fritz (2019).

Mustering support for a new subsidies accord won’t be easy

Fearful of the harm they perceive from Chinese subsidies, Japan, the European Commission, and the US formed a trilateral initiative that, among other goals, seeks new global rules on subsidies. According to press reports in May 2019, this trilateral group has made progress in agreeing text on what these new rules could involve. Could a subsidy accord that rolled back crisis-era state support for manufacturers be part of a new WTO work programme?

The pervasiveness of crisis-era subsidies to farmers and manufactures is both a blessing and a curse. The blessing is that a roll back accord would offer benefits for large shares of Chinese, European, Japanese, and US exporters. The curse is that the scale of their own subsidies that would also be reformed is such that a neo-mercantilist policymaker is likely to blanch at the resulting import increase. 

Subsidy reform is a two-way street. The findings in Chapter 10 of the GTA report cast doubt on whether the trilateral initiative to craft new subsidy rules can be both comprehensive in scope and tenable at home let alone in China, the intended target.

Jaw, jaw is the alternative to war, war

This century has not been kind to the WTO. Inaugurated in 1995 with such high hopes, outcomes have routinely disappointed. Failure to systematically consider reform options in an evidence-driven way has been a recurring flaw – all too often the urgent superseded the important. The result has been initiatives that do not command broad-based support among the WTO membership and which founder, sometimes quickly and sometimes when the blindingly obvious can no longer be denied.

While many factors can sink a trade negotiation, evidence-driven work programme design is surely a necessary condition for success. This report has devised a replicable, data-driven approach that looks beyond any one WTO member’s interests, beyond one sector, and beyond any one commercial lobby, enabling initiatives to be systematically compared. The reform options highlighted here demonstrate that governments working together through the WTO can still accomplish a lot more than going it alone. 

The G20’s longstanding goal of promoting economic growth would receive a further boost if Leaders in Osaka kick-start the design of an inclusive WTO work programme that restored the world trading system to its pre-crisis state. Doing so would follow Winston Churchill’s famous dictum: Meeting jaw to jaw is better than war.

References

Bertelsmann Stiftung (2018), Revitalizing Multilateral Governance at the World Trade Organization, Report of the High-Level Board of Experts on the Future of Global Trade Governance, Berlin. 

European Commission (2018), “WTO Modernisation”, Concept Paper, 18 September.

Evenett, S J and J Fritz (2019), Jaw Jaw not War War: Prioritising WTO Reform Options, The 24th Global Trade Alert Report.

Ottawa Group (2019), “Joint Communiqué of the Ottawa Ministerial on WTO Reform group meeting in Davos”, 24 January.