How China can save the WTO and multilateral trade, and parry Trump’s tariff blows in the process

As the United States continues to wage war on its many trading partners (especially China), turning its back on multilateral negotiation channels and instead picking one-on-one fights in the style of a playground bully, there has been a deafening silence from the one dog that should have been barking its head off. That would be the World Trade Organisation.

It is a tragic irony that the one international organisation forged by four decades of multilateral negotiation to liberalise and oversee global trade has sat silent as the world’s largest economy – and by far the greatest beneficiary of liberalisation – launches a systemic assault on the multilateral trading system and threatens a return to anarchy in trade that would harm us all.

In a desperate attempt to prevent a descent into global trade chaos, both the European Union and Canada have proposed separate initiatives to fix the WTO. Canada hosted 13 WTO countries in Ottawa this week to discuss WTO reform. The EU’s thoughts have been released for public discussion, and will hopefully be taken up at the G20 meeting in Argentina next month.

China is not directly engaged in either initiative, but this must change if it is to parry US tariffs and gain credibility as a global player committed to multilateralism.

It must play an active role in drafting the reforms needed to make the WTO serve 21st-century purposes. And even more importantly, since many of the complaints about the WTO focus on China’s practices as a WTO member, it must seriously look at how it can open up and liberalise its own economy.

If Beijing fails to take a long, hard look at the state of reform in China, and does not play an important role in restoring the credibility of the WTO, then multilateralism is in jeopardy – and Beijing might have only itself to blame.

The EU paper elaborates on its staunch support for a multilateral trading system, which “has provided the basis for the rapid growth of economies around the world and for the lifting of hundreds of millions of people out of poverty”.

“It has been the guarantor of trade at times of growing tensions and the backbone of the international system of economic governance. Even at a time of the harshest economic conditions during the great recession, it has helped avert recourse to the trade wars that have fuelled economic decline in the past.

The real threat to global trade: the US war on the WTO

“As such the health and centrality of the multilateral system needs to be preserved. Its marginalisation, weakening and decline have to be prevented at all costs.”

Washington has been blocking appointments to the WTO’s Appellate Body, a seven-member appeals chamber that settles international trade disputes. If the WTO’s dispute settlement mechanism breaks down, the EU says, it would mean “going back to a trading environment where rules are only enforced where convenient and where strength replaces rules as the basis for trade relations”.

As someone present at the inception of the WTO, in Marrakesh in 1994, and passionately in agreement with the EU’s assessment of the organisation’s value, I share the Europeans’ disappointment at its underwhelming impact. The WTO’s failure to deliver any meaningful liberalisation in the past 23 years is nothing short of embarrassing.

Its failure to develop rules for the many changes in the global economy – starting with the advent of information technology and the digital economy – is inexcusable, as is its failure to properly enforce the rules agreed on back in 1994. Its one invaluable contribution has been its role as the world’s top trade court, in spite of ferocious US complaints about its “overreaching”. Thus, Washington’s efforts to strangle the Appellate Body are deeply troubling.

The EU and Canada have highlighted three urgent areas of WTO reform: modernising the rules to cover things like digital trade, international investment, domestic regulation, the role of state-owned enterprises, industrial subsidies and forced technology transfers; changing the crippling “consensus” rule that blocks any reform if any one of the WTO’s 164 members object; and rescuing the dispute settlement system.

Cost of the trade war: US$430 billion and counting

One of the most important proposed changes would be to rein back on the WTO members that claim developing-country status. There are no clear rules for deciding whether a country is developing or developed, and it is left to each country to decide for itself.

Currently, around two-thirds of the WTO countries have declared themselves “developing countries”, and are free to cite the organisation’s “special and differential treatment provisions” for developing economies as a justification for ducking out of liberalisation commitments.

China is clearly in the firing line here. It will need to think hard about graduating to the developed-economy category that will give it less freedom to opt out of liberalisation commitments. My own conclusion is that if China wants its trading partners to accept its claim that it supports multilateral liberalisation, it should opt in – and it would probably benefit from further liberalisation anyway.

Both EU and Canada tackle the paralysing “consensus” rule that has allowed certain economies – in particular India – to hold the WTO hostage, blocking important liberalisation initiatives. They say the rule should be amended to allow “alliances of the willing” to move ahead with liberalisation as they wish, and leave laggards to follow at their own pace.

This principle is at the heart of the Trade in Services Agreement currently in negotiation between 20-odd WTO members, and of “plurilateral” agreements like the Trans-Pacific Partnership, Asean, the Pacific Alliance or even the EU itself.

‘The WTO hasn’t resolved cases like China, which is both developing and developed’

Beijing is at a critical crossroads. It could embrace the Canadian and European initiatives to shore up the multilateral system, then start playing properly by the multilateral rules and addressing the complaints about obstacles to trade and investment in China.

Or it could put itself at the mercy of bilateral negotiations with the US while others look on unsympathetically, waiting for their turn to haggle over bilateral deals. The choice should be obvious.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view