WTO might regress to ‘maintenance mode’, says Bruegel analyst

The WTO might lose much of its significance in a more polarised trade order. [Enrique Mendizabal (flickr)]

The World Trade Organisation (WTO) is likely to regress to a maintenance mode with weak and largely unenforceable rules, while regional hegemons move to secure their trade interests unilaterally, according to a new policy paper by the influential economic think tank Bruegel.

The multilateral trade order has suffered a long stagnation and, more recently, decline. Since 1995, no multilateral deal entailing major trade liberalisation has been concluded under the auspices of the WTO.

For a long time, at least the WTO’s dispute settlement system was functional, defending the principles of non-discrimination in global trade.

The changed role of the US

Then, however, US President Donald Trump disabled the WTO Appellate Body, without which the dispute settlement system became largely dysfunctional.

Along with this came a trade war between China and Washington, with a mutual ramping up of tariffs. According to the Bruegel policy contribution, this led to additional tariffs of 20% on about $500 billion in bilateral trade.

According to Uri Dadush, a Bruegel scholar, lecturer on international trade policy, and author of the policy contribution, the WTO is unlikely to recover to its past standing.

One of the reasons for this might be that global power is more diffused and the role of the United States has changed.

“A powerful country like the US guiding the system made things easier,” Dadush told EURACTIV, referring to past times of multilateral trade expansion.

“By the same token, while the fact that the US is distancing itself from the WTO hurts the organisation enormously, the importance of the US has declined,” he added.

For example, without the US, many WTO members, including China and the EU, agreed on a separate dispute settlement mechanism that works for trade disputes among themselves.

Three regional hegemons

According to the policy paper, the most likely scenario for the future is a trading system built around China in Asia, Germany and France in Europe, and the US in the Americas. “Within the blocs, trade will be largely open and predictable,” the paper states.

“None of the three trading blocs are cohesive. But within each bloc there are major regional trading agreements,” Dadush told EURACTIV.

Moreover, he argued, the US-Mexico-Canada agreement and the EU made the trading blocs in North America and in Europe more cohesive than the Asian trading bloc, which suffers from more severe internal tensions.

“The WTO will languish in some kind of maintenance mode,” the policy paper stated, arguing that it might remain a reference framework and a forum for discussion with weak powers of enforcement.

Big trade disputes, however, are more likely to be resolved bilaterally, the paper said. An example of how this might look is the steel dispute between the EU and the US that was recently resolved, at least partially, in a deal between the two trading powers.

Although the European Commission is officially holding up the torch of the free multilateral trading order, it has itself begun preparing for a world in which trade conflicts cannot be resolved at the WTO.

In December 2021, the Commission proposed an anti-coercion instrument that would allow it to take coercive economic countermeasures against foreign companies in case a EU member state was economically coerced by a third country.

With geopolitics in mind, EU Commission presents new tool to deter trade wars

The European Commission proposed a powerful new trade instrument on Wednesday (8 December) that would give it more power to impose sanctions on third countries.

A case in point: The Chinese government is currently putting pressure on the Lithuanian economy because the Lithuanian government agreed to open a Taiwanese representative office in its capital Vilnius, a major red flag for Bejing, which insists on the so-called “One China policy”.

For the moment, the EU cannot do much else than bring the case to the WTO, which can then take many months and even years to resolve.

Hard times for peripheral countries

In the scenario laid out by the policy paper, small and medium powers like Morocco, Brazil, India, or the United Kingdom are left with few defences in the event of trade disputes.

“In a system where rules are not enforced, powerful countries will be better placed,” Dadush told EURACTIV.

The policy paper argues that such smaller countries “will be either forced into asymmetric deals with regional hegemons or will try to play the hegemons off against each other, adding to the politicisation of the trading system.”

According to Dadush, the EU cannot on its own stop the decline of the WTO and the multilateral trading order attached to it.

“But the EU can play a constructive role to bring the other players to the table,” he said.

[Edited by Zoran Radosavljevic]

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