08 Nov

World Trade Threatened by Unilateralism

November 8, 2021

By Dan Steinbock

– Recently, the WTO celebrated the 20th anniversary of China’s entry into the global trading system. To overcome the threat of unilateralism, the WTO can no longer be an arm of the G7. It must become more inclusive and multilateral.

In the postwar era, the World Trade Organization (WTO) achieved significant reduction of trade barriers promoting trade expansion and facilitating trade frictions.

Yet, it has failed to negotiate a successful round of major trade liberalization since 1994. And it remains constrained by increasing polarization between developed and developing countries.

Until recently, rich economies fueled global economic prospects, which are today increasingly driven by large developing economies. A multipolar world economy needs a more inclusive, multilateral WTO.

From trade talks to WTO friction

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Established in 1995, the 164-member international organization replaced the General Agreement on Tariffs and Trade (GATT), created in 1948. Today, the WTO’s mandate is to oversee global trade rules and resolve trade disputes.

The latest round of multilateral trade negotiations, the Doha Development Agenda, was launched in 2001 but it ended in stalemate. The talks have been complicated by persistent differences among the US, European Union (EU), and developing countries on key issues, such as agriculture, industrial tariffs and nontariff barriers, services, and trade remedies.

The timing is telling. The stalemate ensued with the rise of the large developing economies, which increasingly drive the global economy. While rich economies insist on their past privileges, poor economies demand a proportionate voice.

Moreover, the trade stance of the US, the architect of the GATT/WTO system, is changing. Unlike the previous US administrations, the Trump trade-war hawks believed the WTO did not add “value” to American economy. They favored bilateral pressure to multilateralism and international rules.

The Biden administration prefers to use multilateral rhetoric for unilateral trade primacy, but the net effect remains the same. Hence, world trade’s lingering stagnation.

Double standards in high-income West

When the key clause in China’s agreement to join the WTO expired on December 11, 2016, President Obama, the EU and Japan were supposed to grant China its market economy status (MES).  They refused to do so. The Trump-Biden stance continues to build on that refusal.

When China joined the WTO, it was written into the agreement that member states could treat China as a “non-market economy.” Due to the size of the Chinese economy, government intervention, and state-owned enterprises, rich economies argued that Chinese domestic price comparisons must be ignored and “constructed values” should be used to gain a “true picture” of the Chinese economy.

In 2001, Chinese GDP was $1.3 trillion (12% of US GDP). Today, it is about $16.9 trillion (74% of US GDP), thanks to reforms and opening-up policies. Yet, China is still treated as it was two decades ago, as a pretext for heavy anti-dumping duties.

Imagine what would happen if these double-standards had been applied to rich economies when they were industrializing. In the 19th century America, tariffs were among the highest in the world, and infant-industry protection the norm. Washington saw US-based manufacturing critical to US sovereignty. In Western Europe, similar practices prevailed. And the same went for Japan at the turn of the 20th century.

The real litmus test of world trade

Had the WTO existed at the time and had these economies fully abided by its rules, Imperial Britain would have captured most markets in Europe and East Asia. Which is precisely why the US, Germany and France, Japan and other major economies resorted to tariffs and protection in the early stages of their industrialization.

If large emerging economies, led by China, and large developing economies, spearheaded by India, are subjected to the double standards of the high-income West, the net effect would devastate their markets and nascent industries. And it would undermine their catch-up growth, which is vital for rising living standards.

Furthermore, unlike the Western powers amid their industrialization, China has made vigorous efforts since 2001 to align itself with WTO rules, open its markets and abide by WTO rules, as vice-minister of commerce Wang Shouwen noted recently. Meanwhile, China’s overall tariff level has halved to 7.4 percent, which is lower than that of WTO’s developing members and close to that of its developed peers.

China is not the litmus test of the WTO or the world trade. Trade unilateralism is.

Risk of trade unilateralism     

Recently, the WTO has been strained by US tariffs, counter-tariffs by other countries, and subsequent trade rows. Several WTO disputes are pending dispute settlement decisions. In one involving US tariffs on China, a panel ruled against the US.

Pursued in the name of national or economic security, unilateral tariffs could derail the credibility of the WTO and its principles fostering new trade restrictions.

The Trump administration amplified these pressures, when it blocked appointment of new jurists to the Appellate Body, which reviews appeals of dispute cases but hasn’t functioned since December 2019. While the EU and others have proposed reforms to address US concerns, thus far they have been rejected by the US.

The Biden administration has pledged to reengage in multilateral cooperation. Yet, it is reluctant to reset Trump’s trade policy. The possible return of Trump or like-minded unilateralists to the White House by 2024 would escalate the risks. Unilateralism is undermining the system.

Among WTO members, the US has been a complainant in the most dispute cases since the system was established in 1995. Typically, the two largest targets of complaints initiated by the US are China and the EU, which, combined, account for more than one-third. The perception is that trade disputes are exploited to foster ailing competitiveness (Figure).

Figure WTO Disputes: US as Complainant

Source: WTO

 

Toward inclusive trade multilateralism

Since 2017, “my country first” doctrines have undermined world trade, investment and migration. and hence global economic recovery.

Relying on flawed economics, misguided nationalism and horrid xenophobia, such doctrines are the surest path to the kind of horrors that contributed to World War II.

In the early 21st century, when developing countries increasingly fuel global economic prospects, what the multipolar world economy needs is a WTO dedicated to inclusive multilateralism.

About the Author:

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net 

The original version was published by Shanghai Daily on Nov 5, 2021, the opening day of the 4th China International Import Expo (CIIE) in Shanghai, the huge business event that complements the Guangzhou (Canton) Export Fair

 


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