Struggling to Remain Relevant

World Trade Organization

Multilaterals March 3, 2021

Reports of its premature passing are greatly exaggerated. Maligned by many and ill-understood by most, globalisation is far from death – or dying. The Corona Pandemic, now into its second year, did expose weak links in cross-border supply chains and the perils of just-in-time manufacturing. Operational efficiency, it would seem, is at odds with risk mitigation.

The viral outbreak sparked a renewed interest in industrial policy and reawakened economic nationalism. Politicians of almost all ideological stripes are eager to forget their long love affair with deregulation, small government, austerity, and globalisation. Instead, many now appeal for a more robust and controlling state that prioritises the broad collective over narrow self-interest.

Politics is, however, more about perception – or smoke and mirrors – than it is about reality. The globalisation index compiled annually by box-mover DHL and New York University’s Stern Business School did retreat slightly last year when a few points were shaved off its 2017 high of 126 (the 100 base line was taken in 2000) to settle anywhere between 111 and 121. DHL/NYU expects a strong rebound to gather steam this year and barrel ahead in 2022.

The survey not only tracks goods but also people and money. As could have been expected given the lockdowns and travel restrictions, the mobility of people has plummeted to levels not seen since 1990. The global flow of money has also diminished some but is moving more sideways than down.

Supply Chain Woes

The World Trade Organization (WTO) forecasts the global trade in goods to have slowed by 9.2% for the whole of 2020 – considerably less than most economists had feared. Currently, cross-border trade volumes are down just three percent from their pre-pandemic level. An acute shortage of shipping containers held the rebound in check. Still, supply chain woes – real or potential – are worrying executives.

According to a survey of 10,000 global companies commissioned by HSBC, 93% are concerned that political unrest or protectionism could cause disruption. McKinsey found that larger companies now expect major supply chain interruptions to occur on average once every 3.7 years either from climate change, political upheaval, trade tensions, or cyber-attacks. The Corona Pandemic is no longer regarded a one-off event.

Instead of on-shoring production, as demanded by politicians, executives are diversifying their supply chains by adding redundancy in the form of multiple production locations.

The WTO has been largely absent from the renewed debate about the merits of free trade and globalisation. Plagued by indecisive leadership, overshadowed by the world’s three big trade powers, and rendered ineffective due its cumbersome dispute settlement procedures – and of late by it non-functioning Appellate Body as well – the organisation has become marginalised to within a whisker of irrelevance.

Tracing its roots to the 1944 Bretton Woods system, the WTO was initially conceived as International Trade Organization (ITO) – the third pillar of the post-war economic world order alongside the World Bank and the International Monetary Fund. However, Bretton Woods was a gathering of finance ministers who had little professional affinity with global trade. The charter of the proposed ITO was only approved four years later in Havana, Cuba, by which time eight major trading powers led by the United States had already signed a provisional General Agreement on Tariffs and Trade (GATT).

The ITO was meant to secure full employment, protect workers’ rights, prevent the formation of monopolies, manage commodities trading, and reduce barriers to cross border trade, amongst others. The US government put a stop to all that and refused to submit the treaty to the senate for ratification, considering the ITO charter too detailed for any practical application. In 1950 President Harry S Truman gave up on the ITO, arguing that its mandate would interfere with domestic economic policy and therefore infringe on the sovereign prerogatives of the state.

Growing GATT

From the early 1950s, countries seeking to iron out differences on trade increasingly turned to GATT which over the years and decades that followed grew into an international organisation. Seven global rounds of negotiations on the liberalisation of trade would take place until the Uruguay Round, started in 1986 and finished in 1994, established the World Trade Organization charged with administering and extending the rules and regulations agreed upon in the eight and final GATT round.

Since its foundation in 1995, the WTO has tried – and failed – to conclude a new general agreement on trade. In the Doha Round, initiated in 2001, progress has been negligible and deadlines missed since 2005. Its future is now uncertain. Developing countries hold out for more than a generic definition on trade in ‘fair products’ as demanded by most developed nations.

Other stumbling blocks include free trade in services and protectionism via farm subsidies. The Corona Pandemic has thrown an additional spanner in the works with a revival of non-tariffs barriers at the request of consumers concerned about global warming and social inequality.

Only fourteen ‘countries’ – mostly micro states, rouge states, and non-recognised territories – remain outside the WTO. Though the organisation has been struggling to keep its relevance in light of the exponentially growing number of bilateral and multilateral trade agreements signed between member states without input from Geneva, the WTO’s GATT-based trade framework serves as barebones set of rules and standards that enable a reasonably smooth flow of goods between its 164 member states.

The organisation watches over the proper implementation of the five basic principles that rule international trade, including non-discrimination (of member states), reciprocity, enforceable commitments (schedules), and specific rules that allow governments to restrict trade under exceptional circumstances.

Disputes are settled in a three-stage process that includes initial consultations, the establishment of an ad hoc adjudicating panel and, finally, a ruling by the standing Appellate Body – a sort of trade supreme court. Only states can initiate the proceedings and are usually awarded up to 15 months to execute any settlement rulings. Failure to do so may result in the prevailing state demanding compensation.

Cover photo: World Trade Organization offices in Geneva, Switzerland.