7 The risk of a collapse of the multilateral trading system is real and must be addressed systematically
Plan A might fail for a variety of reasons, in particular if the various bad scenarios materialise. The EU therefore must reflect on a Plan B. This Plan B is clearly not a desired outcome, but it would be careless not to reflect on what the world would look without a functioning WTO and with trade relations based on power relations. The risks are too high for the EU to ignore such an outcome.
In the worst-case scenario, the WTO could collapse quickly – ie over the next few years if the US refuses to replace members of the Appellate Body – or the organisation might gradually lose relevance over the next decade or two if its negotiating arm is not revitalised. In the latter case, the EU has more time to execute Plan B, but Plan B is still needed today.
If the United States refuses to replace the members of the Appellate Body, the EU, with China, Japan and others, could conceivably continue for a while to operate under present dispute settlement arrangements minus the United States, until a more permanent arrangement is found that engages the world’s largest economy (or until a new US administration reverses course). It is also possible that the EU, China and several other parties could decide to resort to an alternative mechanism for dispute resolution within the WTO, ie arbitration under Article 15, a procedure that is purely voluntary and that the United States might or might not decide to accept.
However, none of the alternative arrangements are likely to be permanent. Unless the negotiating arm of the WTO is revitalised – which would almost certainly become more difficult if the US remains outside – the EU cannot discount the possibility that the days of the WTO as we know it are numbered. Not only would the dispute settlement system have lost credibility and the negotiating arm ground to a halt, but the EU would have lost its most important ally in its effort to modernise the organization, move forward on the new issues and provide a counterweight to China’s rising power. The day might then come when, even for the EU’s multilateralists, the benefits of WTO membership might be more than offset by the constraints it imposes and the unwieldy nature of its negotiating procedures.
In those unfortunate circumstances, the essence of Plan B would be a wider set of bilateral and regional trade agreements. However, while under Plan A the purpose of these agreements is to support and complement the WTO, under Plan B the purpose of the EU’s bilateral and regional agreements would be to replace the WTO to the greatest extent possible. That means that the EU must seek an even wider set of agreements that also include effective dispute settlement provisions. Already, individual EU members are covered by bilateral and regional agreements (the EU itself) for, on average, about 75 percent of their trade. Several new agreements are also being negotiated with Singapore, Vietnam, Mexico, Chile, Australia and New Zealand (European Council, 2019). Assuming the agreements hold, individual EU members would be protected to a significant degree from the worst consequences of a world without the WTO. Assuming NAFTA or some version of it survives, the US would also be protected to a degree, though less so than EU members. China is the least protected of the large traders, but is working towards more bilateral trade agreements, including through its Belt and Road Initiative.
Under Plan B, the EU’s greatest challenge would be to avoid that its trade with its largest trading partners, the US and China, becomes continuously disrupted by a series of unmanageable disputes. While the EU could possibly rely on its size and influence to maintain some order in its trade with small nations, based on historical norms even in the absence of trade agreements, the same cannot be said of the US and China, with which the EU is quite evenly matched.
In fact, a distinct possibility under Plan B would be that the global trading system breaks down into three major blocs – with far reduced trade between those blocs and increased trade within them. The global economy would certainly suffer a major blow from such a scenario.
Under Plan B, bilateral negotiations with the US and China would therefore acquire far greater urgency. At present, the most important of these is the strained negotiation with the United States, a successful conclusion of which would almost certainly require a major redrawing of the EU’s red lines (as mentioned). Further down the road, the initiation of a bilateral trade agreement with China would be just as critical. Current exploratory negotiations with China are limited to a bilateral investment treaty. As part of Plan B, the EU should immediately launch a study on what a trade agreement with China would entail. It could well turn out that such an agreement would be unviable, because the terms would be unacceptable either to the EU or to China, or to both.
The EU will also need to reach a comprehensive bilateral trade agreement with the United Kingdom, which is one of its most important trading partners, because the WTO framework would no longer be available. Here, its weight gives the EU considerable leeway in setting the terms of the agreement as the UK will be fully dependent on an agreement with the EU, by far its most important trading partner (46 percent of the UK’s good exports go to the EU).
If the WTO falters, and if the EU was than unable to reach bilateral trade agreements with the United States and China, trade relations with the EU’s most important partners could continue for a while to be based on inherited norms. A natural initial reference point would be the presently applied tariffs and rules of the WTO. It is conceivable that such disciplines could be maintained under bilateral interim deals and could be enforced under an agreed dispute settlement system, such as arbitration or such as already exists as provisions in many bilateral regional agreements.
As part of Plan B the EU should start to study how such a system could be made to work to minimise disruption. A system of this kind would be hugely inferior to the present WTO, but it could also offer some advantages of speed and flexibility. For example, remedies could be better articulated, including the possibility of financial compensation. And, the system would allow for the negotiation of partial rules or agreements in specific sectors, allowing for a process of continuous renewal.
From a global perspective, such arrangements would be clearly far inferior to the present multilateral system. However, this shortcoming could be mitigated to some degree by allowing for an open architecture under which third countries could negotiate to become part of one of the ‘mega-regional’ arrangements, of which there would naturally be three, EU-US, EU-China and China-US. Clearly, the most exposed to a collapse of the present system would be the middle and lesser powers, whose bilateral agreements cover little trade. For example, countries such as Brazil, India and South Africa – countries with a history of protectionism – would be more exposed than countries such as Chile, Mexico and Morocco.
The preparation of Plan B should not be done solely by experts working in isolation. It should instead involve consultations with a wide group of stakeholders. One notable consequence would be to sharpen the understanding of what a failure of Plan A might entail. It is important that everyone understands that the counterfactual to redrawing the EU’s, the US’s and China’s red lines might not be the status quo, but something far worse.
