WTO’s many faults are on full display — now it must improve

While on most issues Washington and the country are more polarized than ever, a rare zone of agreement can be found in bipartisan bashing of the World Trade Organization (WTO). 

This fall from grace for an organization founded by the U.S. and nurtured by it to become the preeminent rulemaking and adjudication body for world trade has been a long time coming, the result of several organizational shortcomings.

{mosads}First is the dispute-settlement issue. The Trump trade team has continued an Obama-era policy of blocking the appointment of new WTO appellate judges, thus slowly strangling the functioning of the appellate process as retiring judges are not replaced. 

The U.S. criticism is that the WTO body issues findings based on overly broad interpretations of WTO rules, which go well beyond the negotiators’ intent. This debate is conceptually similar to the “originalism” versus “pragmatism” debate in U.S. constitutional law. 

In the WTO context, however, the deeper issue is U.S. sovereignty and the supremacy of U.S. law, which critics claim is being violated by the WTO.

Then there is what might be called the WTO’s “original sin.” Today, WTO membership terms are negotiated. In the founding days of the General Agreement on Tariffs and Trade (the WTO’s predecessor), however, new members were free to set most any tariff schedule. 

Hence, different WTO members have very different obligations. In 1949, founding-member India, for example, set many prohibitively high bound tariffs, severely limiting imports.

Until today, while India sets most applied tariffs significantly lower, it retains the founding member WTO right to raise tariffs to the trade-killing bound rate at any time — and frequently does so. 

Similarly, China’s 2001 admission as a non-market economy quickly revealed the inadequacy of the WTO’s rules for managing the trade distortions of tens of thousands of state-owned enterprises, non-market-based pricing and the like. 

In spite of China’s 2001 pledge to transition to a market-based economy, many of these trade distorting practices and lack of transparency persist.  

Two-thirds of the WTO’s 164 members continue to self-designate their legacy status as “developing country,” which allows them to claim benefits and exemptions from many WTO rules. Many of these countries can no  longer plausibly claim to be “developing.” For example, 10 of the Group of 20 members claim WTO developing country status. 

Lack of timeliness is also a problem. Negotiating rounds aimed at modernizing WTO rules have been a Homeric task, taking decades and sometimes ending in failure. With 164 members and a consensual decision-making policy, finding common ground has proven practically impossible. 

Dispute settlement is afflicted with the same problem: Although the dispute settlement rules prescribe “prompt settlement” taking no longer than a year, typically the process takes much longer. The average time is 2.5 years, with some cases taking much longer. In a commercial context, delays of this sort can be financially ruinous.

Finally, the WTO fails to incorporate an essential component of any law-based adjudication process — an effective mechanism for deterrence of illegal behavior. The sole WTO obligation of the offending party is to eventually eliminate the offending practice.  

WTO rules do not allow for the awarding of compensation for damages. As one dismayed U.S. petitioner put it: “Under WTO rules, you can steal my car and use it for free for several years. If you are eventually caught, the only penalty is to return my car.” 

The lack of any requirement to pay compensation incentivizes delay since the offending party can continue to benefit from the unfair practice without fear of paying additional compensation. 

{mossecondads}With its consensual rulemaking and diverse views among its 164 members, finding agreement on reform within the WTO will prove a daunting task. Simply quitting the WTO as some suggest is no solution since the U.S. and the world need some supra-national mechanism for the governance of international trade. We need a better WTO. 

A promising way forward is the creation of a WTO-linked agreement among willing members to create a “WTO Plus” code that addresses the organization’s shortcomings while offering enhanced market access (“MFN Plus”) for the code’s members. 

Besides having precedent within the WTO, this code approach avoids the need for consensus and protracted reform negotiations while providing the incentive of better market access for WTO members who join the code. 

The need for a more effective supranational rulemaking body is a must-have for effective trade policy reform.  That guarantees priority attention by Trump’s trade team, so a major push on this is likely once a U.S.-China deal is agreed.    

Don’t be surprised if we see the emergence of WTO reform as a high priority U.S. agenda item in the latter half of 2019 and for U.S. reform proposals to dominate the 2020 WTO Ministerial.

Michael J. Delaney is a trade policy consultant for TransNational Strategy Group, a commercial, economic/political and policy consulting firm. Previously, Delaney worked as a State Department foreign service economic/commercial officer and at the Office of the U.S. Trade Representative (USTR) as assistant USTR for South and Central Asia and Iraq.