The WTO is in big trouble

The Director-General of the World Trade Organisation (WTO), Roberto Azevedo, says the institution has descended into 'paralysis'.

Director-General of the World Trade Organisation, Roberto Azevedo, Bali, 2013.

Following the failure to get India to remove its objection to advancing the deal on trade facilitation that was struck at the Bali WTO meeting in December 2013, Azevedo recently told the WTO membership:

This could be the most serious situation that this organisation has ever faced. I am not warning you today about a potentially dangerous situation – I am saying that we are in it right now.

The Bali agreement, which was the first of its kind achieved by the WTO in its history, was seen as breathing life into the organisation and its ability to advance multilateral trade negotiations. At the heart of the Bali deal was trade facilitation; reducing red tape and streamlining customs procedures. The Bali agreement went down to the wire, with India opposed until its concerns over food stockpiling were resolved. A deal was eventually struck on the basis that India's concerns would be resolved by 2017.

Multilateralism seemed to be alive. [fold]

However, India indicated in July that it would not support the trade facilitation deal because insufficient attention had been given to resolving its concerns over food stockpiling. India now says there has to be a permanent solution to food stockpiling before trade facilitation progresses. The WTO's General Council, its executive branch, meets on 21 October to again consider the issue. One Geneva-based diplomat has said that the WTO will enter into an 'existential crisis' if there is no resolution to this impasse, with the consequences 'too heavy' to contemplate. The EU ambassador to the WTO said:

What is at stake is not only our ability to reach agreements, but also to implement what has been agreed. There should be no mistake, the current stalemate will have consequences on the WTO and the multilateral system.

The deadlock over the trade facilitation package is paralysing the WTO. The Bali agreement included measures to benefit less developed countries, and these are also being held up. Importantly, the future work of the WTO is in limbo. Immediately following the Bali deal, when there was a renewed sense of confidence, WTO trade ministers agreed to develop a work program by the end of 2014 with the aim of concluding the long-stalled Doha Round negotiations. This work program will now most likely not be completed by December.

The failure to advance multilateral trade liberalisation has seen countries increasingly turn to preferential bilateral and regional trade agreements. As noted by the WTO Director-General, however, there are many big trade issues that can only be tackled in an efficient manner in a multilateral context. Trade facilitation is an example. It makes no sense to cut red tape for just one or two countries. Also, financial and telecommunication liberalisation are best negotiated on a multilateral rather than on a bilateral basis. And issues such as farming subsidies cannot be resolved through bilateral arrangements.

Bilateral trade deals are inconsistent with a trading system dominated by global value chains. The growing fragmentation of production across national borders emphasises the importance of open trade and investment regimes. The proliferation of bilateral arrangements has resulted in a noodle bowl of agreements, each with complex country-of-origin provisions. Determining the country of origin is particularly difficult when goods are increasingly made 'in the world', with components sourced from many countries. This accounts for the fact that, according to surveys, few Australian companies take advantage of concessions offered under bilateral agreements because of their complexity.

The world should be concerned that the WTO, and the multilateral trading system, is paralysed. The global economy has prospered through a rules-based global trading system administered by the WTO. However, in the past three years global trade growth has been disappointing, growing less than global GDP. During most of the 1990s and early 2000s, global trade outpaced real GDP growth by a factor of two. If global economic growth is to strengthen, trade needs to make a bigger contribution, and this can come from a new wave of multilateral trade liberalisation.

The WTO needs a major shake-up. But this will only come if the crisis confronting the global trading system is acknowledged. On reflection, it is probably unfortunate that the Bali deal was reached. The WTO trade ministers meeting last December was widely seen as make-or-break for the WTO. If there had been no agreement, there would have been a crisis, and the need for changes to the way the WTO operates would probably have been confronted. Now the WTO is in a crisis, but this is not getting sufficient recognition.

The hope is that this issue will be high on the agenda for the Brisbane G20 Summit. The G20 is a global forum and its focus cannot be on bilateral or regional trade deals that discriminate against other countries; it has to be on the future of the global trading system. Multilateral trade liberalisation and the WTO badly need leadership. Let's hope it comes in Brisbane.

Photo courtesy of Flickr user World Trade Organisation.

Mike Callaghan