In a stunning move, Roberto Azevedo, head of the World Trade Organization, announced last week that he would resign his post a year early. Azevedo’s decision reflected mounting frustration over an increasingly hobbled organization, constraints that have assumed larger significance as the world battles the worst trade crisis since the Great Depression.
It is also a cri de coeur to rally its members and supporters for one final attempt to restore the WTO’s relevance and capacity. The record of the last two decades does not inspire much hope or confidence, but it is a battle that must be fought.
Azevedo’s second term as WTO director general was to expire in September 2021. But next year the 12th Ministerial Meeting of the WTO will also be held — originally scheduled for next month, it has been postponed a year because of the COVID pandemic — and Azevedo rightly worried that selection of a new director general would overshadow critical discussions about WTO reform. “Instead of focusing all efforts on the search for compromise … we would be spending valuable time on a politically charged process that has proved divisive in the past,” he warned.
Reform is essential. The WTO has done yeoman's work since it emerged in 1994 as the successor to the General Agreement on Tariffs and Trade. In the 25 years since, world trade has quadrupled in value and grown 270 percent in volume; global GDP, in contrast, has expanded “just” 200 percent.
Trade growth has been stimulated in part by a steady decrease in tariffs, which have been cut substantially, going from 10.5 percent to 6.4 percent (on average). Reduced tariff protections have gone hand in hand with domestic reforms that have been instrumental in lifting hundreds of millions of people out of poverty. A recent agreement among WTO members to facilitate border procedures is reckoned to increase trade by an additional $1 trillion annually.
That record is obscured by the WTO’s ever more apparent failures. Protectionism is on the rise; in the last year $747 billion in global imports were subject to new restrictions. The group’s 164 members have struggled for nearly two decades to conclude the Doha Development Round, launched in 2001 with an emphasis, as the name clearly denotes, on promoting growth in less developed economies, which comprise two-thirds of WTO membership.
The talks have for all practical purposes collapsed, victim of a failure to take that aim seriously. Developed nations steadfastly refused to put their agricultural protections on the table while continuing to push for access for their service industries in less developed economies.
A long-standing belief that the WTO process is tilted in favor of developed countries is now augmented by complaints among those same beneficiaries that the WTO has not kept pace with economic change; they argue that it is not prepared to deal with challenges posed by digitalization and the rise of e-commerce, as well as the distinctive form of capitalism practiced by China, which, as the world’s second-largest economy, must be addressed.
In addition, since status (determining whether a member is “developing”) is self-declared, there is ample opportunity for abuse: Economies like those of Taiwan and South Korea have, until recent scrutiny, deemed themselves to be “developing.” China too considers itself a developing economy.
On top of structural problems is the unremitting hostility of the current U.S. government to the WTO. U.S. President Donald Trump insists that the organization is biased against his country as it turns a blind eye to Chinese abuses. He is especially unhappy with the WTO dispute resolution mechanism, the “crown jewels” of the organization, which has provided a much-needed process for resolving trade fights among members. One study estimates that the mechanism adds an estimated $340 billion in value each year to the global economy.
Trump charges that its decisions are unfair to the United States, even though statistical analysis shows the U.S. wins a higher percentage of cases than other governments. U.S. critics are offended by the “over-reach” of the process, which they claim allows countries to impose obligations on the U.S. by judicial fiat that it never accepted in trade talks.
While that complaint predates the Trump administration, he took opposition to new levels by refusing to approve new judges to the Appellate Board, the second step in the review process which finalizes rulings. In so doing, the mechanism has been paralyzed as there has not been, since December, a quorum of judges to hear cases.
The need for an effective WTO has never been more urgent as the world faces the prospect of global trade collapsing by one-third as a result of the COVID-19 pandemic and an intensification of the U.S.-China trade conflict. The only hope for reform is a concerted push by the world’s leading trade economies — Japan, the U.S., China and the European Union, which together account for nearly half of world merchandise trade and still more (54 percent) of world exports of commercial services.
There are piecemeal efforts, but a coordinated strategy is lacking. Last week, Foreign Minister Toshimitsu Motegi and U.S. Trade Representative Robert Lighthizer called for reform of the dispute settlement system and new e-commerce rules. In January, top trade officials from Japan, the U.S. and the EU agreed to strengthen rules on industrial subsidies and condemned forced technology transfers practices.
Also in January, the EU and China, along with a handful of other economies, agreed to an alternate arbitration system among themselves to fill in for the WTO appellate body. Advocates have been pushing Japan to join as well, a move that would give it jurisdiction over nearly 40 percent of global trade.
Japan could play a leading role in this reform effort; it has tried to do so. The Foreign Ministry is clear-eyed about what is going on, noting last December that “the WTO has not been capable of adequately addressing protectionism, unfair trade practices, and emerging challenges caused by technological innovation and other changes.”
It prioritized WTO reform at the Osaka Group of 20 summit last year and got leader-level endorsement in the final declaration from that meeting. Tokyo has pushed for standards on digitalization and e-commerce in the trade agreements it has signed — both the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the U.S.-Japan trade agreement reached last year.
Unfortunately, basic positions on fundamental questions like digital protections are far apart and governments understand the importance of any eventual rules for their future; heels are digging in.
In this world, the WTO needs a leader. Japan has rarely been willing to take the aggressive action that is needed to break a deadlock. Of course, any director general will be hobbled by the structural weakness built into the top position of any international institution: Members never want to delegate real power.
Azevedo, a capable Brazilian trade diplomat who lacked the stature of his predecessors, made clear the limits of a low-key approach to leadership. The WTO has been sidelined throughout the COVID outbreak and has been a bystander as U.S.-China trade tensions intensified. Real leadership is demanded, even as basic differences remain unbridged.
There is a powerful and growing need for an effective world trade body and creating it begins with installing a capable and effective leader as the organization’s director general. There is a basic truth which even the WTO’s most vocal detractors must acknowledge as current trends continue: If they are not part of the solution then they will be rightly seen as part of the problem.
Brad Glosserman is deputy director of and visiting professor at the Center for Rule Making Strategies at Tama University as well as senior adviser (nonresident) at Pacific Forum. He is the author of "Peak Japan: The End of Great Ambitions."