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

Opinion

Stability remains key to China

The most concerning aspect for the Chinese economy will still be to hold up domestic demand. The rapidly rising household debt will put further breaks of the households' ability to purchase durable goods

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: January 15, 2020
Read article Download PDF More on this topic

Policy Contribution

Market versus policy Europeanisation: has an imbalance grown over time?

This Policy Contribution tests the hypothesis that an imbalance has grown in Europe over the last few decades because markets have integrated to a greater extent than European-level policymaking, potentially creating difficulties for the democratic process in managing the economy. This hypothesis has been put forward by several authors but not so far tested empirically.

By: Francesco Papadia and Leonardo Cadamuro Topic: European Macroeconomics & Governance Date: January 9, 2020
Read article More on this topic More by this author

Podcast

Podcast

Will Iran disrupt the global economy?

Last Friday, Qassem Soleimani, head of the Iranian Revolutionary Guards’ QUDS force, was killed by an American airstrike outside Baghdad airport. The Ayatollah was not pleased and Tehran has promised to retaliate. At the time of recording, the world is still waiting to see how Iran might respond. Some of have speculated that they could disrupt the world’s oil markets by closing the Strait of Hormuz, which acts as a vital artery for around a third of the world’s liquefied natural gas and almost a quarter of the world’s oil. Today, oil prices surpassed $70 and if tension escalates the price is bound to grow. How dependent is the global economy on affordable Middle Eastern fossil fuel? This week, Nicholas Barrett is joined by Maria Demertzis and Niclas Poitiers to discuss how the US-Iran hostilities are affecting global economy.

By: The Sound of Economics Topic: Global Economics & Governance Date: January 6, 2020
Read article More on this topic More by this author

Opinion

Could the U.S. economy be experiencing a hidden tech-driven productivity revolution?

In the last decade, most advanced economies have grown more slowly than before. Slower growth has frequently been seen as a legacy of financial crises, especially that of 2007–2009.

By: Marek Dabrowski Topic: Innovation & Competition Policy Date: January 6, 2020
Read article More on this topic More by this author

Opinion

The Green Deal is not just one of many EU projects, it is the new defining mission

The EU has already invested so much of its political capital into the green transition that a failure to deliver would severely damage its legitimacy.

By: Jean Pisani-Ferry Topic: Energy & Climate Date: January 3, 2020
Read article More on this topic More by this author

Opinion

The WTO is dead: long live the WTO?

Should the EU fight to save the WTO when the US seeks to dismantle it? We argue that the only way for the EU to decide that is to first understand the US’s strategy (as distinct from its tactics) and then make up its mind in terms of how much of a threat it perceives China to be.

By: Maria Demertzis Topic: Global Economics & Governance Date: December 20, 2019
Read article More on this topic

Blog Post

Lessons from the China-US trade truce

The tentatively agreed deal between China and the United States temporarily stops a dangerous dynamic, yet it falls far short of the negotiating objectives of both sides. US trade policy has become a dominion of the executive branch guided principally by the President’s electoral interests. Meanwhile, China demonstrates its capacity to resist pressure: it will enact structural reforms at its own pace in line with its interests. Sadly, the deal confirms that the United States no longer feels obligated to follow WTO rules, and can induce others to do the same.

By: Uri Dadush and Marta Domínguez-Jiménez Topic: Global Economics & Governance Date: December 19, 2019
Read article More on this topic More by this author

Podcast

Podcast

Capture the nodes

How do states exercise power through global economic networks? The multilateral world order is supposed to be harmonious, but by seizing the nodes of production, powerful forces can control access to the global economic system and threaten to lock their rival out. This week, Nicholas Barrett and Guntram Wolff are joined by Henry Farrell, Professor of political science and international affairs at the George Washington University, and Abraham L. Newman, Professor of Government at the Georgetown University, to discuss their theory of weaponised interdependency

By: The Sound of Economics Topic: Global Economics & Governance Date: December 16, 2019
Read article More on this topic More by this author

Podcast

Podcast

Appellate Body Politic

This week, the WTO's Appellate Body, the dispute settlement body, became inoperational: it no longer has the necessary number of judges to render verdicts. What does this mean for international trade and multilateralism? Are we now living in a world without dispute settlement? This week, Guntram Wolff is joined by Alan Beattie, the author of the FT's new Trade Secrets newsletter, and Alicia García-Herrero to discuss the crisis of the Appellate Body.

By: The Sound of Economics Topic: Global Economics & Governance Date: December 12, 2019
Read article More by this author

Opinion

Watch out for China’s currency in case of no-deal scenario

The U.S. and China’s negotiations on a phase-one deal seem to have stalled again. The market was already aware of the limited nature of the likely deal, but was still hoping for it. Against this backdrop, the investors have reacted negatively to the increased likelihood of not reaching a deal on December 15. If this is the case, the U.S. will apply additional tariffs on Chinese imports. The obvious question to address, thus, is, what can happen to China under such a scenario?

By: Alicia García-Herrero Topic: Finance & Financial Regulation Date: December 11, 2019
Read about event More on this topic

Past Event

Past Event

The Great Reversal-Causes and implications of the rising corporate concentration in the US

During this event, Thomas Philippon presented his thesis on market concentration and explained the reasons behind the rising corporate market power in the US.

Speakers: Thomas Philippon, Georgios Petropoulos and Reinhilde Veugelers Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 11, 2019
Read article More on this topic More by this author

Podcast

Podcast

Getting post-Brexit trade deals done

The UK goes to the polls on Thursday to decide who (and if) they want to "get Brexit done". But, as soon as Britain leaves, it will have 11 months to agree a trade deal with the EU. Is it possible? Nicholas Barrett is joined by Maria Demertzis and Niclas Poitiers to discuss post-Brexit trade deals with the EU and the USA.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: December 10, 2019
Load more posts