What is the future of the WTO?

That the World Trade Organization (WTO) has been in the grip of a systemic crisis since 2008 is well known. Notwithstanding relatively minor successes at the Bali Ministerial in December 2013, the WTO’s negotiating function remains effectively stalled. The Nairobi Ministerial, set to take place in December 2015, is not likely to yield systemic solutions, notably to break the Doha Round impasse. The longer this negotiating stalemate endures, the more the WTO’s foundations will crumble, particularly the much-prized jewel in its crown: the Dispute Settlement System. Why? Because an institution that is not able to modernize and continuously update its rules will be, and is being, bypassed. In its 20th year, the WTO faces an intensifying existential crisis.

Competing visions

There are many reasons for this. But at the heart of the problem lies a competing vision for the WTO. One vision is content with “WTO 1.0”; an organization that gives priority to the bulk of its developing country membership with focus on restraining negotiating ambition for fear of the consequences of over-stretching the policy and institutional capacities of those members. A different vision offers “WTO 2.0”, in which the rules are continuously updated and expanded to reflect the realities of modern trade and investment, particularly the global value chains (GVCs) that drive them.

Two broad constituencies, inter alia, advocate “WTO 1.0”: least developed countries (LDCs) and other poor or small country groupings such as small island developing states (SIDS) and small, vulnerable economies (SVEs); and large emerging markets such as India, Brazil, and South Africa, plus a range of middle-power developing economies. These countries, for the most part, share a view that the WTO should not impose undue obligations on its members, and that differential obligations, or special and differential treatment (SDT), should permeate the system. Many are also sceptical that GVCs will confer the benefits proffered by WTO 2.0 advocates, arguing instead that the gains from GVCs are unevenly spread, with the benefits concentrated in developed world multinational corporations while the costs are concentrated on their developing country hosts.

Again, two broad constituencies advocate “WTO 2.0”: developed countries represented, inter alia, by the OECD; and developing countries wishing to integrate better into GVCs, such as those comprising the Pacific Alliance. These countries share the view that the WTO rules need to be extended and updated, and reciprocal market access too. Hence they advocate for incorporation of new issues such as competition and investment into the WTO rules architecture.

As usual, this polar spectrum view conceals important realities. Advocates of WTO 2.0 seem unable to deal with the power of agricultural lobbies in some countries. Agricultural lobbies are quintessentially products of the WTO 1.0 world. This chronic failure fuels the sceptics in that WTO 1.0 paradigm who argue, justifiably, that double standards undermine trust and the legitimacy of the WTO. For this reason the agriculture problem has to be fixed, but almost certainly won’t be. Similarly, there are growing lobbies in certain WTO 1.0 countries that want their governments to sign up to WTO 2.0 rules or market access commitments, but their concerns are routinely sacrificed to the dominant WTO 1.0 paradigm. South African services exporters targeting African markets come to mind.

Shift in balance of power

These “low politics” of trade are now merging with the “high politics” of global affairs. The ongoing rise of emerging markets in world trade and investment, particularly represented by China, is slowly but surely tilting the balance of global power away from the North and West, towards the East and South. This poses serious challenges to the western architects of the WTO, and the broader global trade and investment order in which it resides. These tensions are reflected particularly in the US and play out in various internecine political battles, tying the Executive’s hands in its attempts to exercise leadership of the trading system, particularly in the WTO.

Consequently the US is looking elsewhere, to the Trans Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP). These “mega-regional” trade negotiations represent, at once, an attempt to pioneer new rules among like-minded countries consonant with the WTO 2.0 vision, and an attempt to restore US primacy over the global trading system. The overt intention is to extend US, and US-EU, regulatory preferences to the WTO down the line, through a process of competitive liberalization.

This high stakes poker game has unpredictable consequences. Of most importance is that no one can predict whether mega-regionals will ultimately succeed. While the TPP’s conclusion does appear to be in sight, its final adoption is hostage to a complex political cycle incorporating, not least, the 2016 US elections. The TTIP’s future is less certain, since negotiating power is much more diffuse between the parties, and EU regulatory preferences diverge in significant respects from those in the US.

So how might this all end? In the concluding chapter of our World Economic Forum report on the high and low politics of trade, Robert Lawrence and I set out three scenarios:

• Building blocks: The TPP and TTIP conclude smoothly, taking account of “outsider” concerns, and a virtuous cycle of trade and investment liberalization ensues. The regulatory agenda is incorporated into the WTO through inclusive plurilateral arrangements, modelled along the lines of the Trade Facilitation Agreement’s “ladder” of SDT provisions. WTO 2.0 is built incrementally, by providing consensual pathways between it and WTO 1.0. Almost certainly this scenario would require a lasting fix of the agriculture problem.
• Stumbling blocks: In this, more likely, scenario the hurly-burly of trade negotiations gives rise to many compromises in the TPP and TTIP, including on regulations. So US and EU primacy in the global trading system is not decisively restored, leaving behind leadership ambiguity. But enough is done to convince key developing countries, notably China, to converge with mega-regional outcomes, so that the critical mass shifts towards WTO 2.0. But in the absence of decisive leadership, and competing visions for WTO 2.0, progress towards that vision is by no means assured. In short, the outcome is one of continued ambiguity in which Chinese and Indian preferences, with their own domestic reform imperatives in mind, loom ever larger.
• Crumbling blocks: There remains a substantial possibility that the TTIP, especially, could rumble on for years without reaching a decisive conclusion. Therefore, US and EU primacy in the trading system would be hamstrung, hastening the advance of potential Chinese and emerging market leadership. However, since those countries will not be in a position to exercise decisive leadership for years to come, the outcome is likely to be stasis, and continued exercise of influence through regional formations – such as RCEP in the Chinese case. Thus the centrifugal forces unleashed by continued stasis in the WTO would acquire full force and with unpredictable consequences.

Clearly it is not possible to say where the WTO system will end up until we are clear how mega-regionals, especially the TPP and TTIP, shape up. Nonetheless, a world of stumbling blocks seems most likely, with the WTO poised nervously in-between while the great trading powers position themselves for leadership and influence. This scenario may turn out well, especially if China’s regulatory preferences converge towards US and EU norms, but that outcome is far from certain.

The World Economic Forum report, The High and Low Politics of Trade, is available here 

Author: Peter Draper is Senior Research Fellow, Economic Diplomacy Programme, the South African Institute of International Affairs (SAIIA), and a member of the World Economic Forum’s Global Agenda Council on Trade & FDI

Image: Kayakers take in the last of the day’s light as they paddle past a ship anchored off Cape Town, May 1, 2011. REUTERS/Mike Hutching