Opinion

Life after the multilateral trading system

Considering a world absent a multilateral trading system is not to promote such an outcome, but to encourage all to prepare for the worst and instil greater clarity in the mind of policymakers as to what happens if compromise fails.

By: and Date: April 25, 2019 Topic: Global Economics & Governance

This article was published by Nikkei Veritas, Caixin, Handelsblatt, and Le Monde.

Caixin logo

Le Monde logo

The China-US trade talks, crucial as they are, divert attention from the main event: the World Trade Organization, the essential institution underpinning the post-war liberal economic order, is under threat of extinction. The community of nations must defend the institution as if there were no alternative, but must also think through the possibility that the WTO will sooner or later cease to exist as a functioning entity.

What then? To economists like us, and to most trade officials we know, a contemplation of this question is beyond the pale, a sure way to cut short a serious conversation. But world trade is the lifeline of the modern globalised economy and it would be irresponsible not to consider it.  For Europe especially, reliance on trade is complete. Germany, for example, relies on exports of over $21,000 per capita each year.

The danger to the WTO is clear and present, and it is on four fronts. First is the inability of trade negotiators to move forward on the most important issues facing the institution’s 164 members. These issues range from the time-worn, such as freeing trade in services and containing agricultural subsidies, to the new, such as digital trade, which have become critical to the 21st-century economy.

The second front – and the one where the threat is the most immediate – is the Trump administration’s decision to flout the WTO’s rules, even as it pays lip service to the institution’s importance and engages in legal hair-splitting to justify its unilateral actions. A blatant example is the invocation of national security to tax steel and aluminium imports from its allies, and the threat to do the same on cars.

Third, just as ominous is the United States’ challenge to the legitimacy of the WTO’s dispute settlement system, exercised in direct fashion by refusing to renew the mandate of members of its Appellate Body. The damage that the recent US policies have already wrought on the WTO is immense. Indeed, veteran trade officials will say – though only in private – that the US has already left the WTO. Even if a future administration reverses course, the system of international trade laws the US has promoted will have lost credibility, perhaps irreversibly.

Fourth, China – together with the EU, now the world’s largest exporter – must contain its many forms of obscure subsidisation and forced intellectual property transfer. But at least, unlike the present United States administration, China recognises that it is a major beneficiary of the multilateral rules-based trading system and officially supports it.

Imagining world trade without the World Trade Organization – that is, without clear rules – leads us to formulate four predictions.

First, the system will be based on a combination of power, bilateral deals, and (unenforceable) norms or practices from the days of the WTO. Without WTO disciplines, the balance of power within nations will shift from export interests to import-competing interests, spurring an escalation of protectionist measures across the world.

Second, power will be equally distributed among three major actors, namely the US, the European Union, and China. To contain the uncertainty, this ‘big three’ will try to strike bilateral deals with each other. But such deals will not have the high ambitions of, say, the now discarded Trans-Atlantic Trade and Investment Partnership. Instead, they will aim to preserve as much as possible of the rules and disciplines presently enshrined in the WTO, while recreating a bilateral mechanism for dispute settlement. In practice, striking even a minimal US-EU, US-China or EU-China trade deal may prove impossible. In that case, there will be a sequence of continuous and unmanageable disputes that will make the business and trade environment of even the largest players far less predictable.

Third, faced with the choice of chaos or a trade deal, many smaller nations will be forced into vastly asymmetric deals with China, the EU and the US. The trading system will naturally tend to splinter into three blocks around these giants. The likelihood of developing a common set of global rules to govern e-commerce, intellectual property protection, subsidies, carbon taxes, and investment will be close to zero.

Fourth, the new non-system of unilateral actions and bilateral deals is more than likely to generate a big increase in discrimination against third parties – examples of which can be seen in the more restrictive rules-of-origin, export restraints, managed trade, and geopolitically motivated exclusions sought most recently in bilateral deals by US negotiators. In short, world trade without the WTO would be a very bad outcome for the world economy, including for the larger nations.

The purpose of thinking about a world absent a multilateral trading system is not to promote such an outcome – on the contrary. It is to encourage all to prepare for the worst. It is also to instil greater clarity in the mind of policymakers as to what happens if compromise fails. By thinking about the dangers of the current trade war and a world without the WTO, we hope that policymakers will be able to chart a course towards retaining the rules-based trading system.  As the age-old expression goes, “forewarned is forearmed”.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic More by this author

Blog Post

How should the relationship between competition policy and industrial policy evolve in the European Union?

Competition policy aims to ensure that market practices and strategies do not reduce consumer welfare. Industrial policy, meanwhile, aims at securing framework conditions that are favourable to industrial competitiveness, and deals with (sector-specific) production rules as well as the direction of public funds and tax measures. But, how should competition policy and industrial policy interact? Is industrial policy contradicting the aims of competition policy by promoting specific industrial interests?

By: Georgios Petropoulos Topic: Innovation & Competition Policy Date: July 15, 2019
Read about event More on this topic

Past Event

Past Event

The 4th industrial revolution: opportunities and challenges for Europe and China

What is the current status of EU-China relations concerning innovation, and what might their future look like?

Speakers: Elżbieta Bieńkowska, Chen Dongxiao, Patrick Child, Eric Cornuel, Maria Demertzis, Ding Yuan, Luigi Gambardella, Jiang Jianqing, Frank Kirchner, Pascal Lamy, Li Mingjun, Gwenn Sonck, Gerard Van Schaik, Reinhilde Veugelers, Wang Hongjian, Guntram B. Wolff, Xu Bin, Zhang Hongjun and Zhou Snow Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2019
Read article More on this topic

Opinion

What bond markets tell about China’s economy

Macro data doesn’t provide a comprehensive picture to investors, but bond issuance data can fill in some gaps.

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: July 10, 2019
Read article More on this topic More by this author

Opinion

Farewell, flat world

In the last 50 years, the most important economic development has been the diminishing income gap between the richer and poorer countries. Now, there is a growing realisation that transformations in the global economy have been re-established centrally from intangible investments, to digital networks, to finance and exchange rates.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 2, 2019
Read about event

Upcoming Event

Sep
9
08:30

China-EU investment relations: Exploring competition and industrial policies

What parts of Sino-European cooperation are most essential for European leaders? What is the future of an EU-China partnership, and which areas are most important?

Speakers: Alicia García-Herrero Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

Where Brexit goes, the law shall follow

How the financial industry and the law firms that support it are preparing for what comes next

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: June 25, 2019
Read about event More on this topic

Past Event

Past Event

How comprehensive is the EU political realignment?

Has the left-right divide become obsolete in EU politics?

Speakers: David Amiel, Otilia Dhand, Nicolas Véron and Silke Wettach Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 25, 2019
Read about event More on this topic

Past Event

Past Event

China’s investment in Africa: consequences for Europe

How is Chinese investment impacting Africa, and what could be the consequences for Europe?

Speakers: Solange Chatelard, Maria Demertzis, Alicia García-Herrero, Abraham Liu and Estelle Youssouffa Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 24, 2019
Read article Download PDF More on this topic

External Publication

Soaring house prices in major cities: how to spot and moderate them

This article examines whether there are regional differences in house price growth within European countries and find a stronger cyclical pattern in capital cities compared to other regions, indicating a clear rationale for regional-level tools. The authors recommend using macro-prudential measures at a regional level, in particular loan-to-value and debt-to-income limits, to dampen the housing boom-bust cycle.

By: Grégory Claeys, Konstantinos Efstathiou and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: June 19, 2019
Read article More on this topic More by this author

Blog Post

GNI-per-head rankings: The sad stories of Greece and Italy

No other country lost as many positions as Greece and Italy in the rankings of European countries by Gross National Income per head, between 1990 and 2017. The tentative conclusion here is that more complex, country-specific stories – beyond the euro, or the specific euro-area fiscal rules – are needed to explain these individual performances.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: June 18, 2019
Read article Download PDF More on this topic

Policy Brief

A strategic agenda for the new EU leadership

Memo to the presidents of the European Commission, Council and Parliament. 'A strategic agenda for the new EU leadership' by Maria Demertzis, André Sapir and Guntram Wolff is the first of our 2019 Bruegel memos to the new presidents of the European Commission, Council and Parliament. Focusing on the most important economic questions at EU level, these Bruegel memos are intended to be a strategic to-do list, outlining the state of affairs that will greet the new Commission.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 13, 2019
Read about event More on this topic

Past Event

Past Event

Past, present, and future EU trade policy: a conversation with Commissioner Malmström

What was trade policy during the last European Commission? What will be the future of European trade under the next Commission?

Speakers: Cecilia Malmström, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 13, 2019
Load more posts