ESSAY / Albert Vidal

What once achieved great successes oftentimes seems to lose its momentum and, sometimes, it even can become obsolete forever. When this occurs, there are usually two options: one can either try to reform it and save it, or adapt to the changes and play resiliently. But taking that decision involves sacrifices, and there will always be victims, no matter what one chooses. We can see this happening today with the World Trade Organization (WTO), particularly in regards to its function as a forum for the multilateral liberalization of trade.

In this essay, I argue that the WTO has lost its function as a forum for the multilateral liberalization of trade; rather, its only function is now to settle disputes through the Dispute Settlement Mechanism (DSM).

I have developed three main arguments to support my opinion. First, the failure of the Doha Round has marked an inflection point. With tariffs in its lowest point ever, states decided to abandon the WTO structure due to its slowness and resort to other mechanisms such as Free Trade Agreements (FTAs) and Regional Trade Agreements (RTAs) to liberalize the remaining barriers. The WTO has been deprived of one of its core functions, which could be toxic for smaller economies. Second, the uniqueness and effectiveness of the WTO’s DSM has conquered many hearts in the international arena and most states rely on it to solve its disputes. It has functioned so well, that it is now dealing with some disputes that had previously been part of trade liberalization negotiations. Third, the WTO does not have a clear mandate to decide on today’s most significant trade barriers: behind-the-border barriers. Most FTAs and RTAs deal with them in a more effective way than the WTO. Let’s now develop these reasons.

Toward a system of elites

The first argument that supports my thesis has to do with the failure of the Doha Round and its consequences. If we look back to the average tariff rates of the past decades, we see how they went down from 22% in 1947, to 15% in 1965 and to less than 5% after the Uruguay Round[1]. In 2004, the average tariff rate was less than 3.8%, and global tariffs remained highest in the least developed regions of the planet. The Doha Round, which began in 2001, was thought to address the remaining agricultural subsidies and other minor tariffs that still were in place. But in 2008, talks collapsed due to a lack of commitment by many parties[2]: lobbies in Western countries pushed hard to maintain the agricultural subsidies, while developing economies demanded more protection for farmers.

Suddenly, some countries (in particular the biggest economies) realized that engaging in negotiations within the WTO framework wasn’t worth it, since reaching consensus for such sensitive issues would be an almost impossible task. Besides, very few tariffs actually remained in place. Thus, they decided to resort to other channels, such as Free Trade Agreements (FTAs) and Regional Trade Agreements (RTAs). What were the consequences of such drift?

Since 2001, more than 900 FTAs[3] and 291 RTAs[4] have been signed: there has been a true explosion. They are attractive, because they deal with areas where the WTO has failed[5] (e.g., non-tariff barriers and investment). FTAs and RTAs are technically allowed by the WTO, but they are problematic, because the members of such trade agreements end up forming their own blocs to trade freely, which excludes other minor countries. Consequently, FTAs and RTAs are now undermining the multilateral trading system[6], because them being preferential provokes trade diversion and increased costs. Besides, they reduce the value of a potential outcome from the Doha Round and, by abandoning the WTO framework, it is easier for bigger economies to use their bargaining power.

In short, powerful and rich members have removed the function of freeing trade from the WTO by engaging in FTAs and RTAs. They once came together to give this organization a role in liberalizing trade; now, following the functionalist theory, they have come together again to remove such function. One might ask, what will then happen with the WTO? Actually, not everything is lost.

What remains of the WTO: the most effective international tribunal

A second reason is that the WTO’s DSM has functioned so well, that it has even absorbed some of the issues that were previously dealt with in negotiations. The DSM was created with the aim of resolving trade disputes among members, being one of the two initial functions of the WTO. Since 1995[7], members have filled more than 570 disputes and over 350 rulings have been issued, most of which have been complied with (compared to less than 80 rulings of the International Court of Justice in a longer span of time). Almost 100 cases have been settled by a mutually agreed solution before advancing to litigation. Such figures make it the most widely used and effective international tribunal in existence.

One might wonder how this is possible. The secret rests in its five features: first, its procedure is extremely quick (it should take just one year to settle a dispute without appeal); second, it allows for Alternative Dispute Resolution mechanisms and encourages diplomacy before going for the judicial option; third, it allows for appeal; fourth, its panel is made by experts; fifth, it allows for retaliation.

Some may object by pointing out to the paralysis that the DSM is suffering due to Trump’s blockage of nominations to seats on the appellate body, which could leave the system inoperable[8]. My answer to that is that Trump is the exception to the rule, and everything should be going back to normal with the coming administration.

The increasing number of active disputes (Appendix B) does not necessarily mean that law is being broken more often; rather, it is a reflection of the growing faith countries have in the DSM. In fact, the lack of progress in the Doha Round has pushed some countries toward the WTO’s DSM to solve disputes that should have been part of trade liberalization negotiations[9] (e.g., agricultural subsidies).

Non-tariff barriers are better dealt with outside the WTO

A third reason to justify why the WTO no longer functions as a forum for multilateral trade liberalization is that the unclarity of the extent to which the WTO can decide on non-tariff barriers makes states uneasy when it comes to negotiating such issues within the WTO framework. I may also remind that most of the barriers still in place today are non-tariff ones, and the WTO has not yet developed universally recognized rules on them.

Again, solving issues like the harmonization of standards through the required-consensus of the WTO’s rounds is incredibly complex. This means that states prefer either to simply bring them to the WTO’s DSM or to deal with those challenges bilaterally and through regional deals.

That is why, in my opinion, the WTO needs to undertake certain reforms to regain its lost function: it should promote non-litigious dialogue outside the official frameworks[10]. Simultaneously, it should develop relationships with the existing FTAs and clarify the extent to which it will decide on behind-the-border measures.

Final reflection

To put it briefly, the WTO has lost one of its two core functions due to three main factors. The most important one is that many countries are tired of the rigid WTO structure for trade negotiations, and have decided to work toward the same direction but with different methods. At the same time, the DSM has earned a tremendous reputation during almost two and a half decades and, although it is now going through difficult situation, it has a bright future ahead. Lastly, the bulk of barriers to trade that remain standing are so complex, that the WTO cannot effectively address them.

I would like to end by referring to the reflection with which I began this essay. It seems to me that we can still save the WTO as a forum to liberalize trade multilaterally, but we cannot pretend for it to be as it was in the past. It will never again be the central and unique leader of the process. Instead, it will have to develop relationships with existing FTAs, RTAs, and other functioning partnerships and agreements. But at least, we can try to reform it and soften the damaging consequences that are affecting countries outside these elite clubs.