The global trade order is under unprecedented strain. Its flaws have been evident for some time — the inability to conclude the Doha Round, launched in 2001, is the most obvious failure — but its inability to keep pace with changing business conditions is the real danger to its survival. The battleground for this struggle is the World Trade Organization, which has been unable to promote free and open trade in which all competitors are treated fairly. While the WTO is one piece of a larger system, it plays a critical role: It resolves disputes and arbitrates conflicts. If the WTO is not “fixed,” the consequences will extend well beyond its offices in Geneva.
Three problems bedevil the world’s economy. The first is the structural imbalances that mark global trade. The United States runs persistent deficits, a function of the size and maturity of its economy. Yet while that is consistent with economic logic, the outcome is politically unsustainable.
That leads to the second problem: U.S. unilateralism to remedy those imbalances. Believing that the perennial U.S. trade deficit reflects unfair trade practices, President Donald Trump has imposed tariffs on an array of goods to force trading partners to get them to reform their trade policies and practices. Almost every trading partner has denounced the U.S. actions and most (but not all) have retaliated with tariffs of their own. Trump has responded with threats of further escalation.
There is a third problem, however: Chinese policies that have helped domestic companies at the expense of foreign competitors. Most notably, there are complaints that Beijing has forced foreign companies to hand over intellectual property as a condition of doing business in China. Trump has made that claim the cornerstone of his trade policy toward China, and European businesses concur: In a recent survey by the EU Chamber of Commerce in China, 20 percent of companies said that they felt compelled to hand over technology in exchange for market access.
The WTO is supposed to address such issues and, by doing so, vent pressure for unilateral action (and sanction countries that are prepared to do so). Unfortunately, the organization has failed to do its part and there is a mounting fear that Washington would ignore any WTO sanctions imposed upon it, compounding the institution’s failures and potentially fatally undermine it. For the Trump administration, WTO inaction confirms its belief that the institution is incapable of doing its job and protecting U.S. interests.
To head off the prospect of either WTO irrelevance or collapse, China and the European Union last week agreed to launch a group within the WTO that will try to fix those shortcomings by updating global trade rules. While the two sides have many disputes between them — Europeans believe that China is exporting its excess capacity and engages in anti-competitive practices, while Chinese insist that Europe denies their country its rightful status as a market economy — they recognize that WTO failure and U.S. unilateralism are greater threats. Jyrki Katainen, EU vice president on jobs and economic growth, explained that “we have to reform WTO in order to make multilateralism better functioning in the future. This unites the EU and China and the moment.” Failure to act, he warned, could mean that “the environment for multilateral trade will vanish.”
If that effort is to succeed, it must do two things. First, it must address hard issues. China’s competition policy, forced technology transfer and government subsidies that protect industries around the world must be on the table. Second, the project must be open to other governments and Japan should join. At a Cabinet-level meeting of WTO members held in Paris in May, Minister of Economy, Trade and Industry Hiroshige Seko agreed on the need for WTO reform, underscoring the argument that unilateral actions that ignore WTO rules will damage, perhaps, fatally, the trade order.
It is an extraordinary moment in global economic history when the largest trading countries embark on institutional reform efforts and do not include the U.S. Only last December, senior representatives from Japan, the EU and the U.S. announced that they were going to “enhance trilateral cooperation in the WTO and in other forums” to eliminate “unfair market distorting and protectionist practices by third countries.” Since then, however, the U.S. appears to have chosen confrontation over cooperation, and has picked fights with all its major trade partners. When those countries respond with tariffs of their own, U.S. officials have reacted as if they are the aggrieved party, calling retaliation “hypocritical” and dismissing it as lacking legal foundation. To denounce such statements as self-serving — which they are — is not enough. Concerned governments must fix problems that all agree exist and which give Trump the basis for poorly conceived and executed policies.