Let Us Organize World Trade

by Michael R. Czinkota and Valbona Zeneli

There is broad historic agreement that the World Trade Organization (WTO) has been one the most successful international institutions; its membership accounts for more than 98 percent of world trade. However, today’s global economic landscape is changing rapidly, coupled with retrenchment and distancing from multilateral agreements. Combined, these factors impact the discernible value and role of the WTO going forward.

Changed patterns of trade and investment

The expansion and development of IT infrastructure, telecommunications and computing made the global revolution of the last few decades possible. New technologies, nonexistent when the WTO was established in 1995, have become crucial for growth and development in this decade. The outsourcing revolution has affected the developing world in a major way: global manufacturing and new services have dramatically changed supply chains; corporate espionage and intellectual property infringements supported many corporates changes in developing countries; and WTO negotiations and augmented enforcement procedures have not been able to slow that trend.

Moreover, one of the most critical issues in global trade is the aspect of unprecedented imbalances. Today, China is the new top global merchandise exporter with a total of 2,263 trillion USD, or 16.25 percent of world exports, according to WTO reports. It is the largest global exporter of goods, 17 percent of world exports, and the third largest importer, 12 percent of global imports.

The U.S. is the main goods importer with 13.4 percent of the global imports, totaling 2.4 trillion USD. In 1994, the U.S. was running an annual merchandise trade deficit of about 120 billion USD; by 2017, the U.S. annual trade deficit with China alone has ballooned to over 375 billion USD.

Stalemate at the WTO: too big to be effective?

The last successful WTO negotiation—the Uruguay Round—was a result of a strengthened, single market in Europe, the creation of NAFTA and several plurilateral agreements, such as the Information Technology Agreement (ITA).

The Doha Round of negotiations, beginning in November 2001, aimed to achieve major reforms in the international trading system, with an explicit focus on developing nations. Nevertheless, this premise failed; disagreements concerning the agricultural sector, free trade of services and intellectual property rights have stalled negotiations.

Twenty years ago, the principal WTO concerns were pollution, global warming, disease and structural unemployment—none of these agenda items, arguably, have been addressed effectively, much less solved.

Size is also an issue. The WTO is comprised of 164 members, with widely diverse perspectives, levels of development, linkages and ambitions. The WTO system has become unwieldy because of the unanimity requirement of its voting process. The result: progress with new agreements is at a standstill. Case in point is the reduction of trade tariffs, which, at a global three percent of Most Favored Nations status, is at the same level as in 2000.

China: a “rule shaker” or a “rule maker”?

The West’s open invitation for China to join the WTO in 2001, paved the way for its rise to a global economic power. Since then, the balance of power at the WTO has changed dramatically. Chinese outward investment in the global economy has increased thirtyfold, from seven billion USD (making up only one percent of the global FDI) to almost 200 billion USD (13 percent of the global FDI).

China entered the WTO as a “rule taker,” evolved into a “rule shaker,” and now aims to become a “rule maker."

In fact, economic relations between China, the U.S. and the EU define many of the agreements and disputes at the WTO. Xi Jinping’s “China Dream” of national rejuvenation could be seen as a way to reshape the international economic system, putting China at the center.

China has not been an easy partner for the West. Initial optimism that China would turn towards a free market economy has yet to come to fruition. Moreover, with its “capitalism with Chinese characteristics,” the country has taken the main benefits of the open trade system by creating major distortions and causing disputes that the WTO lacked the capacity to handle. Controversial issues include Intellectual Property Rights (IPRs), free market revisions through government subsidies and State Owned Enterprises (SOE), unequal conditions for market access with major restrictions to market entry in China, and unfair technology transfer. Foreign firms operating in China struggle against restrictive regulation—the government requires them to hand over their intellectual property as a condition of market access. Asymmetrical market access and lack of reciprocity are magnified further at political levels.

With the existing WTO rule book, it is difficult to hold China accountable. Implications of Chinese “market distortion” and “unfair competitive conditions” consume global trade relations rhetoric; these opinions, voiced loudly by the current U.S. administration, are also shared broadly by other players, such as the EU and Japan. Due to high trade deficits, the U.S. is pushing for WTO reforms, increasing tariffs and blocking the nominations of seats on the WTO’s appellate body (where the U.S. is a major player in the dispute resolution process) as leverage. Desired reforms aim to regulate market distortions caused by government interventions, simplifying the process of gathering information on unfair trade and investment practices, broadening the scope of banned subsidies and setting boundaries to proportionate retaliation. But, at the end of the day, why would China agree on reforms that jeopardize its state-run economic model?

The WTO as a reflection of a “new world”

The WTO does not operate in isolation from changes and new developments impacting trade. In the last two decades, the world’s macroeconomic environment was shaken by at least two significant events: the spread of terrorism, and the financial crisis of 2008. Terrorism has enhanced the inward focus of the political and economic aspects of national security; the global recession has caused an inward retraction of production and services. International economic issues were largely ignored as attention shifted to domestic job creation, the security, and protection of domestic credit markets and enhancing liquidity. Further, financial and political conflicts seem to foster greater polarization among legislators in many countries around the world.

As a result of continued stalemates and disagreements at the WTO, external actors are adopting a new “do-it-yourself” approach defined by preferential plurilateral trade negotiations—handmade for and benefitting only a limited number of players.

In addition, there is the issue of China’s growth in influence. In September 2018, the U.S. together with the EU and Japan, signed a brief statement voicing shared concerns regarding the future of the WTO, questioning its validity as a primary platform for multilateral trade. As an immediate result of difficult trade relations between the U.S. and China, and tremendous pressure applied by the current U.S. administration, China afforded European companies access to some sectors, while pledging to cooperate with the EU on WTO reforms—a decision taken in July 2018 during the EU-China Summit.

Since the appearance of President Xi Jinping at the World Economic Forum two years ago, Beijing has been signaling that it is willing and prepared to assume the role of a new custodian of globalization. However, it seems obvious that China would not accept any reforms at the WTO, or any level, that would jeopardize its own economic model and welfare. At the same time, China wants to preserve the existing global trade order, as the outside world is more crucial than ever for its economic development.

Today’s global economic realities are not only introducing a new set of concerns and means of doing business, they are also challenging the very effectiveness of the WTO’s historical role as an arbiter of world trade.

Valbona Zeneli is the Chair of the Strategic Initiatives Department at the George C. Marshall European Center for Security Studies. The views presented are those of the author(s) and do not necessarily represent views and opinions of the Department of Defense or the George C. Marshall European Center for Security Studies.

Michael R. Czinkota is a professor at the University of Kent in Canterbury and at the McDonough School of Business at Georgetown University, He is a former Deputy Assistant Secretary of Commerce in the United States Department of Commerce.