WTO fundamentals are sound, but the architecture requires reform and modernisation for the 21st century global economy

by Chiedu Osakwe, 
October 2018
  • The World Trade Organization remains an indispensable organisation but it requires urgent modernisation. Members have to face the reality that the organisation requires non-cosmetic, serious root-and-branch reform for a WTO adapted to 21st century economic and political realities.
  • The range of problems facing the WTO spans conflicting economic models, architectural and structural inadequacies, and rules, functions, and procedures that entail radical updates. Nine critical issues are identified in this article.
  • A reformed WTO will have to be constructed on the foundation of liberal multilateralism, resting on open, non-discriminatory plurilateral pillars, an improved Appellate Body, explicit accommodation of regional trade agreements, and appropriate safety valves for rules-based sovereign action.
  • A reaffirmed commitment to the rules-based liberal market order with a development dimension must be the foundational starting point.

The World Trade Organization is an indispensable multilateral institution. In its routine professional work, the organisation, staffed by top-class professionals, continues to deliver, technically and daily, for the operational functioning of the rules-based global economy. Much important work continues to be accomplished. Thirty-six new members have joined since 1995.  Twenty-two are queued up.  Draft standards are notified. Dispute settlement cases continue to be filed for the time being and are being litigated. Reports are produced. A civil dialogue over trade issues persists.

However, looking ahead, technical functioning is now wholly inadequate to meet the major challenges to the strategic relevance of the WTO in the 21st century. In critical areas, the organisation has neither responded, nor adapted, nor delivered. Dimensions of its structures and functions are fragile, creaking, and failing in parts. The WTO is undergoing a crisis.

Although it remains an indispensable organisation, it requires urgent fixing, reform, and modernisation. It is one of the three cornerstones of global economic governance together with the International Monetary Fund and the World Bank. It remains a welfare and prosperity pump for the global economy. If it is wilfully destroyed, as a matter of policy, or diminished through lack of care or robust and courageous stewardship, the global economy will surely take direct hits and suffer damage. We cannot forget that the WTO has no power to make decisions on its own – its fate rests entirely in the hands of its members.

The consequences of an unravelling of the WTO would be considerable and legion. The risk would increase of a negative polarisation of the global economy. Cooperation would be limited and painful. Unilateralism, economic nationalism, and trade wars would be largely unconstrained. In an age increasingly marked by conflict, a weakened or atomised WTO would result in the weaponisation of trade. At a time of complex interdependence, international cooperation – a required function for managing interdependence – would be disabled.

The scales should fall from our eyes to see that if we wreck the WTO, the damage may not be easily reversible. A concert of members must now be assembled – not in partial coalitions – for the urgent reform of the WTO to serve 21st century requirements. If the reform efforts are to be successful, common sense and the rule of reason must prevail on core issues all round. Leadership will be required. Consensus will not be formed without it. An unhelpful systemic silence on glaring anomalies will have to be overcome to redeem and strengthen an indispensable global public good.

A reformed WTO will have to be constructed on the foundation of liberal multilateralism, resting on open, non-discriminatory plurilateral pillars, explicit accommodation of regional trade agreements (RTAs) (not as derogations), and safety valves for rules-based sovereign action, in accordance with national constitutions and public international law. Vows will have to be reaffirmed, accompanied by the practice of a market-based liberal order. A momentum for systemic reform is gathering pace in the WTO, but it requires direction, courage, and a postilion to guide the carriage.

What are the problems facing the WTO? The range spans conflicting economic models, architectural and structural inadequacies, and rules, functions, and procedures that require radical updates.

First, the functioning of state enterprises engaging in commercial activities is interfering with and distorting the operative assumption of the General Agreement on Tariffs and Trade (GATT)/WTO that international trade is to be conducted, principally, by private sector operators in response to conditions of supply and demand through price in a market economy. A vibrant WTO cannot accommodate conflicting economic models of market versus state. All WTO members will have to accept the operative assumption of a rules-based order steered by a market economy, the private sector, and competition. Although the GATT 1994 provided for state enterprises, it did so within the prevailing assumption of market operations. This assumption has been specified and reaffirmed in the vast majority of WTO accession commitments of Article XII members negotiating their WTO membership after 1995.

Second, industrial and agricultural subsidies that distort markets need to be addressed through a dedicated new series of intensive trade negotiations. Many WTO members bear responsibility for the use of trade-distorting domestic subsidies. Agricultural and industrial subsidies have caused blockages in the system and prompted protectionist reactions in a number of WTO members. We need to launch negotiations to address the intertwined issues of agricultural subsidies and market access, while recognising that food security concerns will not disappear.

Third, a credible trading system requires a dispute settlement system that is accepted by all. Blockage and deadlock in the Appellate Body stage of the WTO dispute settlement system triggered the present crisis. After approximately a quarter of a century of practice, it is now clear that although all members accept the rule of law and a robust dispute settlement system, they do not accept judicial activism, supranational interventions, or the judicial branch stepping into the breach of legislative hiatus. Again, unless we have serious negotiations, this problem cannot be solved.  Deadlocked systems fail and disappear, historically.  This cannot be allowed of the WTO.  The conundrum of the AB is solvable.  Already, there are practical ideas on the table.

Fourth, every system is driven by its culture and psychology. The rules-based trading system has always had a dual personality – the equivalent in clinical psychology of a dissociative identity disorder. The WTO lost the critical balance between the organisation as an institution established to support, consolidate, and bind economic reform to counter damaging protectionism, on the one hand, and the organisation as an institution for litigation-based dispute settlement, on the other hand. The balance was lost and the WTO became excessively litigious to the detriment of driving economic reform for growth. We need to launch serious negotiations to restore the balance, and we must do so in an open-ended plurilateral manner that cannot be blocked by those who do not want to move ahead. In doing so, it is to be underscored that international cooperation is necessary in a global economy defined by complex interdependence. At the same time, scope must remain for sovereign action, recognising that there is a structural tension between international cooperation and sovereignty, in a global economy with sovereign players managing domestic stakeholders.

Fifth, GATT/WTO rules in a number of areas are outdated. New rules are required to keep pace with changes in the market and technology. Rules and disciplines on topics ranging from trade-distorting industrial subsidies to digital trade require updates. The Buenos Aires WTO ministerial conference pointed to the future direction of plurilateral progress on the topics of investment facilitation, the digital economy (e-commerce), micro, small and medium-sized enterprises, domestic regulations for trade in services, and the empowerment of women in international trade. Here again, because rules and disciplines cannot always be made unanimously, members would be wise to accept the necessity for negotiations based on open, non-discriminatory plurilateralism, to the extent possible.

Sixth, decision-making by WTO members requires urgent adjustment. Current practices that allow for hostage-taking and blocking coalitions (majorities or minorities) are no longer workable in an age of complex interdependence and the need for cooperation for critical and practical problem-solving. Consensus is best when it is obtainable. However, when we fail and fall short of this ideal, because of unyielding positions, the practices in the European Union (qualified majorities) and international financial institutions provide pragmatic models for moving forward, in addition to decisions to move ahead in open and non-discriminatory plurilateral configurations.

Seventh, the rules-based multilateral trading system still has an undefined modus vivendi with RTAs, but the review and application of the rules are lacking. This is an area for vital and pressing reform: the Committee for Regional Trading Arrangements must go beyond formal analysis to making recommendations for high quality, job-creating growth. The high-quality but excessively controlled secretariat could also be empowered to conduct specific tasks as a research resource for members which would help ensure compliance with RTA rules.

Eight, any serious reform of the WTO, as a contributor to growth and a healthy global economy, requires a changed approach and engagement with Africa, and by Africa. That realisation is dawning on all sides. Recently, Jean-Claude Juncker, President of the European Commission, in his State of the Union speech, stated: “To speak of the future, one must speak of Africa … Africa is the future: By 2050, Africa’s population will number 2.5 billion. One in four people on earth will be African. We need to invest more in our relationship with the nations of this great and noble continent. And we have to stop seeing this relationship through the sole prism of development aid. Such an approach is beyond inadequate, humiliatingly so.” Changes on the African side, based on better policy choices and command of trade and economic facts, compel changes in engagement, shifting from the excessive focus on “threats” and “risk assessments” to “seizing the opportunities.” According to the United Nations, from 2018 to 2035, the 10 fastest growing cities in the world will be African. According to the World Bank, in 2018, six of the fastest growing economies are in Africa. The paradigm for engagement with Africa must change, consistent with actions that flow from the realisation that good policy invites positive engagement.

A reformed approach to engagement with Africa should be in full recognition of the Agreement Establishing the African Continental Free Trade Area (AfCFTA). The AfCFTA is not only about an integrated liberalised single market for trade in goods and services. It is both an economic and a geopolitical turn for Africa. It represents a strategic, economic, and legal order for rules-based engagement with the global economy. Therefore, the legal and policy framework for relations with Africa must and should be based on the new terms governing trade arising from the AfCFTA. In responding to Africa’s economic policy choices, WTO members should reform their approach to Africa, and stop designing “assistance” programmes or providing development aid as a substitute for rules-based trade and investment engagement. Furthermore, Africa as a market will be a centre of gravity in the global economy by 2050. The relevance of a reformed and refitted WTO, with a claim to universality, for the 21st century would depend substantially on its engagement with and acceptance of the AfCFTA. Across the board, Nigeria, in solid partnerships, will continue to provide leadership.

Ninth, there have been tortured debates on the development dimensions of the rules-based trading system. These do not lie in the absence of disciplines. They can be found in WTO accession rules and the associated commitments by the 36 Article XII members, case by case. WTO membership is a contract with a specific balance of rights and obligations. In Article XII members’ obligations, specific contractual commitments to principles and disciplines across the board, in goods, services, and protection of intellectual property rights, are embedded in domestic legislation. Requests for necessary policy space and associated assistance for development reasons must support eventual adherence to the rules, and should be accompanied by calendar-based action plans, where these are required. An Article XII approach to membership, coupled to a radically improved and strengthened WTO Trade Policy Review, in real time frames, would usefully add to the reform and modernisation of the 21st century WTO.

The rules-based trading systemwith is roots in the GATT 1947, has been in a state of virtually permanent reform angst. The calls for WTO reforms are growing. This time they cannot be ignored. Uncertainty and doubt surrounded the rules-based system at its establishment. However, as was pointed out in 1958 by John M. Leddy, of the US State Department, the key drafter of the GATT 1947, GATT’s contracting parties consistently promoted observance of these rules by national governments. They also agreed to change the rules whenever desirable to meet changed conditions or new circumstances. There are ideas of value on the table, from the past to the present, from which the WTO can draw.

The WTO matters. Its GATT origin was conceived and designed by the United States and the United Kingdom in 1946, and developed with patience and practice over time. However, it is now a global public good – a universal patrimony that belongs to all. Members have to face the reality that the organisation requires non-cosmetic, serious root-and-branch reform: positive and additive changes for a WTO adapted to modern economic and political realities. We must act to defend it – as collective guardians of the rules-based multilateral trading system – through broad coalitions for change.

As proposals accumulate and negotiations intensify for reform, it is historically necessary to recall that trade policy has always been more than border tariffs, domestic regulations, and markets. Trade policy has always been interwoven with geostrategic relations and associated struggles. We should be clear that the WTO cannot arbitrate strategic struggles. Strategic struggles between incumbent and emerging economies should be sorted out in other appropriate configurations and venues. WTO reforms should focus, strictly, on a rules-based order for a 21st century trade agenda with equity and fairness, to spur business, welfare, and prosperity.

In conclusion, of all the possible options, the rules-based liberal market order, with a development dimension, is best. The elasticity of such an order should accommodate all who want to remain part of the system. A reaffirmed commitment to the rules-based liberal order with a development dimension must be the foundational starting point. The architects for a reformed and updated trade multilateralism, built on open, non-discriminatory plurilateral pillars as an objective – anchored in the WTO – must resist the siren songs of populism and unilateral conduct and reject resurgent protectionism. The lessons of economic history stand: protectionism is a dead end and does not protect.

Ambassador Chiedu Osakwe is Nigeria’s chief trade negotiator and Director General of the Nigerian Office for Trade Negotiations (NOTN).

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