Amid 'trade war', retaliatory action and impending slowdown, where is WTO?

The headlines shout “Trade war”. Week after week, there are announcements of new trade sanctions and higher tariffs. Retaliatory action follows. Global organisations warn of an economic slowdown, but the friction only escalates. Question: Where is the World Trade Organization (WTO) in the middle of all this? Isn’t it supposed to set the rules for trade and deal with trade disputes?

 

The answer is that it is going to get busy quite soon. China, India and others have filed complaints against the US for imposing high tariffs on steel and aluminium imports, creatively citing national security as the reason. Adjudication starts after a mandatory 60-day waiting period. The US imposition of tariffs under another part of its trade law may be tested too — for the first time. So, while President Donald Trump describes WTO as a “catastrophe” and threatens to pull the US out of the organisation, his trade actions are designed to test and stretch, but not fall foul of, WTO rules. And to the extent that the actual steps taken so far are quite limited and well short of the bluster and rhetoric, WTO rules may yet prevent the break-out of a full-fledged trade war.

 

But the risks remain, and WTO’s limitations are showing. Its inability to bring successful closure to the Doha Round of multilateral trade negotiations, perhaps an indication of the success of earlier rounds, points to the virtual end of one role: the freeing of trade. Most of the action in recent years has been outside the WTO’s multilateral framework, in bilateral or plurilateral discussions and agreements.

 

A second vital WTO function, the settling of trade disputes, is also in danger. Its appellate body for disputes may soon become non-operational. It has seven members, but three seats are vacant because the US has blocked fresh appointments. If the existing strength drops another notch to three members, it does not have the quorum to meet. That could be the kiss of death for dispute settlement.

 

In any case, dispute settlement takes years to do, during which non-compliant tariffs and retaliatory action prevail. China has been gaming the system to impose tariffs that it knows will eventually be ruled out of court after a couple of years, but it gains from them in the interim. Besides, a country that files a successful trade complaint only earns the right to impose penal tariffs on the offending country. In a fast-moving scenario where retaliatory tariffs have already been imposed, dispute settlement as WTO understands it loses meaning.

 

Meanwhile, the US has imposed unilateral trade and other sanctions on countries like Russia, North Korea and Iran, with knock-on effects on any countries that ignore the sanctions (hence India’s difficulty in continuing to buy oil from Iran, or missiles from Russia). There is no international sanction for such action, but it is effective nonetheless. In all of this, the US is simply exploiting its unique clout.

 

And yet, as with the skewed funding of the North Atlantic Treaty Organization (Nato), Trump has a point. WTO does have limitations. Chinese mercantilism (apart from currency manipulation) has gone on for years, even as unfair trade practices have flourished (including by the US when it comes to agricultural subsidies). What neutralises WTO in such situations is that it cannot act on its own; it has to wait for member-nations to take the initiative.

 

The time may have come for a wholesale review, but international institutions in all fields operate on the assumption that the big boys are on the same page and will play by the rules. That is no longer the case. Can you leave out the big boys and have everyone else to get back to the rules, on the lines of Japan’s push for a Trans-Pacific Partnership without the US? It won’t work because deals without the two biggest trading nations have little meaning. The easier (or less difficult) option would be to reform WTO, and take on board some of Trump’s complaints.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel