Address to LEANZ (II)

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“The Future of Global Trade Institutions Part II – The WTO”

Address to the Law and Economics Association of New Zealand

Stephanie Honey, Associate Director, NZ International Business Forum

Auckland, 18 March 2021 & Wellington, 29 April 2021

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What does this all mean for the future of the WTO, our lifeboat, as Stephen has described it, for these turbulent times?

Well, in a nutshell, it has meant some existential soul-searching, not just among the commentariat but also for WTO members themselves, about whether the WTO is fit-for-purpose in the way it takes decisions and what its rules cover.  It’s not an exaggeration to say that the rules-based trading system faces a profound crisis, and there are many ongoing frictions and pressures that work against resolving it.

In part these conversations pre-date the US-China geopolitical tensions that Stephen talked about – but it’s also fair to say that those tensions, with trade, industrial policy and technology at their heart, are an unhelpful context.

I’m going to argue that there is a compelling case for countries to bring in the repair crew rather than the wrecking ball.  But there’s a real risk that disaffection, apathy and distraction with the FTA agenda will act like termites in the basement.

The case for shoring up the WTO

Why does this matter?

Under the WTO system, trade has risen from about 10 percent of the global economy in 1945 to around 60 percent today, and the global economy has expanded hugely.   That process of growth has helped to lift hundreds of millions of people out of extreme poverty.   Without the WTO, can we be sure that we won’t see a rolling back of the economic development of the past years and decades?

The WTO is the foundation of all global trade architecture, including those FTAs Stephen has just talked about.  Without the WTO, our ability to rely on those FTAs also becomes more shaky. 

The WTO is the first-best way to address those big economic collective action problems like the economic dimensions of climate change.  Without global action under the WTO umbrella, can we overcome global challenges?

And the WTO, or rather its predecessor the GATT, emerged from the darkness immediately following the Second World War.  It was very deliberately conceived as a way to achieve global peace and stability through economic growth and integration.  Without wanting to be too melodramatic, I’m not sure we want to abandon the global WTO lifeboat when it comes to those issues, either.

WTO fundamental principles still matter

The fundamental principles of the WTO still matter too.

The most important of those principles is non-discrimination, seeking to create equality of opportunity and fair competition. 

The principle of greater predictability in trade is also critical, as is the principle of progressive liberalization – the journey matters has much as the destination, including when it comes to shifting the mindset for domestic economic reform.   

Those principles are articulated across the suite of WTO agreements, and enforced by the WTO’s dispute settlement mechanism.

It’s hard to imagine a scenario where collectively we would not want those principles to apply.

We are small, open and a long way away from our markets.  We don’t have the option of wheeling out huge subsidies, or even the gunboats of yore, if we want to succeed in world markets.   

A more level playing field, greater predictability in the way the game is played, and an honest broker to keep everyone to the rules, are absolutely critical. 

In short, if the WTO didn’t already exist, we would need to invent it.

It’s also important to be clear about what we mean by “the WTO”.  You often hear people saying, “The WTO isn’t doing enough”, or “The WTO is doing the wrong things”.  But it is we, the WTO members ourselves that write the rules, and commit to sticking to them.  So whatever needs fixing – it’s in our own hands.

WTO Functions

The WTO has three major functions.  It is a set of global rules.    It provides an independent way to settle trade disputes.  And it offers a forum to negotiate new rules and commitments.

All three of those functions has taken a hit over the last few years.

The rules

The last few years have seen some countries’ adherence to the rules become distinctly wobbly.   

The rules require transparency in trade policy.  Other than for trade nerds, it’s fair to say that monitoring what countries are up to falls into the “dull but worthy” category.  But it matters.   Sunlight is the best disinfectant, after all.  But many countries are laggards on notifications.

Stephen mentioned the trade war.  We saw both sides take action there that wasn’t sanctioned by WTO rules, including slapping on new tariffs without going through due process – something that NZ steel and aluminium producers know only too well.  The US sought to justify its actions on the basis of “national security”, which opened up an uncomfortable new discussion on sovereignty and the interplay with global rules, which most WTO members had carefully skirted around since the GATT was established.  Where that ends up is still unclear, but it’s bigger than the steel tariffs.

Dispute settlement

Let’s turn to our second major WTO function – dispute settlement.  This function seeks to preserve the balance of negotiated rights and obligations and mutual benefit among WTO Members.

The dispute settlement system is often described as the “jewel in the crown”, and for good reason.  Before it existed, countries could certainly pursue a trade grievance under the GATT.  But that dispute settlement system worked on the ‘negative consensus’ rule – it only took one WTO member to object; and you could be pretty sure that at least one GATT member would not be joining a consensus in favour of the complainant.  Turkeys generally don’t vote for Christmas.

By contrast, the WTO system works on a positive consensus rule – a finding of the system is only not adopted if everyone agrees.   That has had a powerful impact on everyone’s adherence to the agreed rules.   There’s no supranational WTO policy force that steps in to throw recalcitrants in jail.  It depends on everybody’s buy-in.

For New Zealand, we have taken – and won – cases against large trading partners including the US, EU, Australia, Indonesia and Canada.

However the US has slowly strangled the court of last resort, the Appellate Body.   The US’s complaint has centred on concerns that the Appellate Body is guilty of judicial overreach, has been too slow to deliver its findings, and a range of other procedural problems.    The Appellate Body is no longer in operation.   This has meant that countries can effectively ‘appeal into the void’ to get around an earlier stage dispute panel finding they do not agree with.

A group of WTO members including New Zealand, the EU, China and others have agreed to a pragmatic stop-gap solution, the Multi-Party Interim Appeals Mechanism.   One of New Zealand’s foremost legal scholars, Dr Penny Ridings, is a member of this new body.   But although it is good that it exists, by its nature the MPIA of course falls short of the global scope of the Appellate Body itself.

We have seen some signs from the Biden Administration that it is open to reengaging.  There is some validity to the US critiques, and a good basis for addressing them, in the form of a set of recommendations developed by the New Zealand Ambassador to the WTO, David Walker.  But it remains to be seen how much flexibility the US will show in practice.

That is likely to be particularly important as we come through COVID and start to turn collectively to economic rebuilding.  We will want people to stick to WTO rules, and not inadvertently harm others, no matter how noble the objective.

Negotiating function

The third function of the WTO is as a negotiating forum.

The WTO itself was formed out of what has turned out to be the only really big, really successful round of global trade negotiations, the Uruguay Round.

In the intervening 25 years, the WTO has struggled to negotiate major new outcomes.

That’s not to say it hasn’t delivered anything.  In fact, there have been several important outcomes, including very importantly for New Zealand, the elimination of agriculture export subsidies, which were the bane of the dairy industry for many decades, as well as an agreement to make it easier to trade.

But progress on the core negotiating agenda has faltered.  The big global Doha Development Agenda negotiations got underway in 2001 with a very ambitious mandate.  The Doha Round came close to conclusion in 2008 – but since then has in effect stalled.

The WTO has had a unique consensus-based decision-making process called the “Single Undertaking”, in which every country has had a seat at the table, and nothing is agreed on any single subject until everything is agreed.  That enabled countries to feel comfortable making concessions in sensitive areas in the expectation that they might get some wins in others.   It led to a ‘big bang’ of outcomes as we saw in the Uruguay Round. 

The Single Undertaking was also the method that was tried and so far, failed, in the Doha Round.

Countries have started to think about other ways to make progress. 

By the time of the 2017 WTO Ministerial Meeting in Buenos Aires, a number of different country groupings pressed for a new way of doing business – negotiations undertaken in ‘plurilateral’ settings, a kind of ‘coalition of the willing’.

As a result, we have a series of so-called “Joint Statement Initiatives”, or JSIs. 

In addition, informal working groups have been set up on other topics.

The WTO negotiating agenda

As you can see from this slide, we now face an impressive Venn diagram of possible reforms.  Where the intersection point will eventually coalesce is still very much a moot question.

This fragmentation of the negotiating agenda raises some big issues around how plurilaterals fit with the multilateral system, including with those fundamental principles of non-discrimination, and the long-established modus operandi of consensus.  

In particular, two important economies, India and South Africa, have raised concerns about going down this path.   They have questioned whether plurilaterals are strictly speaking “legal”, and how any outcomes would be incorporated into the body of WTO agreements and enforcement.

Now, there are some big dynamics at play here which have at least as much to do with geopolitics and economic interests as they do with legal scholarship, although there are also clearly some legal and technical issues that need to be worked through.   In a practical negotiating sense, too, there could be risks that some sensitive areas, like agriculture, risk getting left behind in this model. 

On the other hand, one of the major critiques of the WTO has been that it has failed to keep pace with those modern business models that Stephen talked about earlier.  The current rulebook is now 25 years old, or in some cases, 75.   The failure of the WTO rules to keep pace with business and policy thinking has in part helped to drive countries towards more forward-leaning FTAs.

Plurilaterals are a pragmatic approach that actually allow progress to be made – and that helps with credibility, as well as substance.

Making progress on the substance also goes to whether the WTO is match-fit for some of the profound economic, social and environmental challenges that we face – the response to the pandemic in the short term, but also big questions such as the intersection of trade with environmental protection, and technological innovation. 

I’m going to touch briefly on some of the key negotiating areas.

Agriculture

High up on New Zealand’s negotiating agenda is unfinished business from the Doha Round, including reform to trade-distorting agriculture support, where the overall pace of policy reform has stalled – and where sustainable agriculture policies and food security will be an increasingly important issue in the face of climate change. 

Just for context, the OECD has calculated that the total of all forms of support to agriculture came in at around US$708 billion on average in 2017-19.

E-commerce

There is a negotiation on digital trade, or “e-commerce” as it is termed.  Digital is rapidly becoming as important as electricity to modern business.   And global rules make sense for digital trade given that it is fundamentally borderless.   In short, we need to untangle a growing ‘digital noodle bowl’ of divergent and conflicting rules and standards around the world on critical elements like data flows, paperless trade, digital privacy regulation, building consumer trust and competition policy.

Services

Progress is also needed on services – the engine-room for global growth, and fundamental to both goods trade and those global value chains that Stephen mentioned.  However, as Stephen pointed out, services trade has taken a real hit from COVID, especially in some people-facing sectors like tourism and education, as you can see from this graph from the WTO looking at last year’s trade, especially in “travel”.   Trade reform could help to jumpstart renewed growth.

Inclusion

The last few years have also shown that at least in some countries there has been a real sense that trade hasn’t actually worked terribly well for everyday people.  As a result, inclusion needs greater attention.  To that end, there is pressure for workstreams on women’s economic empowerment and the ability of small businesses to participate in trade more successfully.

Environment, including fish subsidies

There are also negotiations on various dimensions of the relationship between trade and the environment.   Protection of the environment is one of the fundamental principles of the WTO, but the rules are not a good fit with modern concerns.  New Zealand has been one of the leading voices for win-win outcomes in this space.  The major focus is on eliminating the subsidies that contribute to the destruction of global fish stocks – but also a range of other environmental issues, including freeing up trade in environmental goods and services and an initiative that was launched last November called the Trade and Environmental Sustainability Structured Discussions, which could include topics like carbon border taxes.  All of which could help speed the transition to a low-carbon economy.

The WTO DG has recently called for WTO Ministers to come together in July to try to resolve fish subsidies – a mere 20 years after the negotiation started, and on a topic where all countries have already committed in the UN Sustainable Development Goals to make progress.  But that’s not to say we will get to an outcome without the political will to do so.

Pandemic trade policy

But the most pressing item for the WTO, as for everyone else in the world, is dealing with COVID-19 and its economic effects – what we could call “pandemic trade policy”. 

This critical work must focus on making sure that trade fosters and does not impede access to medical supplies, equipment, medicines and vaccines, and the inputs that go into making them.     Stephen talked about the risks of vaccine nationalism.  Turning inwards is, quite simply, bad medicine. The WTO is one way we can use trade levers to get better health as well as economic outcomes.

There is also pressure from the US, EU and to an extent Japan, for new disciplines on subsidies and industrial policy – largely aimed at China.   There is some validity to the concerns that have been raised – but it is also the case that it’s hard to see how effective new rules in this area can be developed without China’s full involvement and agreement.

What’s needed is a constructive conversation on this and other areas.   New Zealand is part of the Ottawa Group, along with the EU, China and others, that is trying to find common ground.  And there are positive signals from the Biden Administration and the EU about support for WTO reform.  But we also have a new EU trade policy which trumpets “strategic autonomy”, and a Biden priority on “buy American”.

The path ahead

Earlier this year, the WTO appointed an outstanding new Director General, Dr Ngozi Okonjo-Iweala – incidentally the first woman and the first African at the helm.

Dr Ngozi has a formidable task in trying to help find the intersection point of these myriad complex topics among the membership as a whole.  WTO Ministers are due to meet in November to agree outcomes.   She has recently said that the WTO needs to break out of the zero-sum deadlock. I quote: “We need to remind the countries and members that the WTO is here to deliver for people.  We can’t take 20 years to negotiate something”.  

It’s also the case that meeting and failing to agree any outcomes will be enormously damaging.  The system has stood the test of time – but it’s also fragile.

If we look back through recent history, it is often the case that global crisis gives rise to global action.  If we go back to where global economic governance started – the devastation of the Second World War – we saw the establishment of the GATT.   In 2001, a shocking act of international terrorism led to the launch of the last great round of multilateral trade negotiations, the Doha Round.

We now have the opportunity to harvest the current and looming sense of crisis to harness the global energy to reform and modernise the global trading system.  Whether we can pull it off is something that should preoccupy us all