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Indian Economy

The WTO: Is It All Over Or Can Something Be Done?

  • 08 Nov 2018
  • 9 min read

(The editorial is based on the article “The WTO: Is it all over or can something be done?” which appeared in Livemint on 30th October 2018. It analyses the issues related to WTO in the current global economy.)

The World Trade Organization (WTO) is the multilateral international organization dealing with the rules of trade between nations. However, the inability of WTO to build consensus between developed countries and developing countries on the number of issues such as subsidies, non-tariff barriers, dumping etc. raises doubts over the effectiveness of WTO.

Recently, WTO has been criticised by US President Trump as a “catastrophe” and a “disaster”. The US has raised several allegations against the WTO and how it is bad for the US economy. the other allegations are:

  • WTO is incapable of dealing with a non-market economy such as China.
  • WTO’s dispute settlement system is broken and in need of a major overhaul.
  • WTO treats its single largest investor unfairly, claiming that the US loses almost all the lawsuits in WTO.

Non-market Economy - in which government intervention is important in allocating goods and resources and determining prices.

How Unilateral Action by Countries is Challenging WTO?

United States of America

The US has announced a series of unilateral tariff increases outside the WTO framework. These include:

  • Safeguard tariffs to guard against a surge in imports of solar cells and washing machines,
  • Imposition of 25% tariffs on the import of steel and 10% on imports of aluminium from all countries, (including India) on national security grounds and
  • Discriminatory tariffs on imports of about $50 billion from China.

Safeguard action by countries, like the one taken by the USA, is allowed under WTO, but to be WTO compatible, it has to follow a process that involves consultation between the parties, and a possible resort to the WTO to determine WTO compatibility. No such consultations between the parties took place when it came to the USA and China.

Retaliatory Tariffs by EU and China

  • Predictably, US action led to retaliatory tariffs being applied by China and the EU. India has said it will consider retaliation but has not imposed tariffs so far.
  • In a world characterized by global supply chains, tariffs on China will affect countries upstream of the supply chain. It will create uncertainty about investment decisions and weaken the global economy.

Options left:

  • Canada recently invited 12 like-minded countries to Ottawa to consider how WTO can be reinvigorated.
  • The Ottawa meeting reaffirmed the importance of a rules-based multilateral trading system and stressed the indispensable role the WTO is playing in facilitation and safeguarding trade.

Suggested Steps to Revive WTO

  • Improving the WTO’s Dispute Resolution Mechanism
    • WTO has a strong dispute resolution system. Disputes are first referred to a dispute resolution panel and appeals against the decisions of the panel go to an appellate board. The board has seven members.
    • Unhappy about some specific rulings of the appellate board, the US has blocked appointments to replace members retiring at the end of their term, including reappointments. The board is now down to three members only, which is the minimum for a quorum. If the US does not change its position and agree to new members being appointed, the dispute resolution process in the WTO will be crippled.
    • Consequently, most members of WTO, which includes India, have joined forces to work out a strategy to beat the US action of disrupting the working of the dispute settlement body (DSB) by opting for an alternative mechanism of dispute resolution, provided for in the WTO rules, which would allow them to have arbitration outside the DSB.
    • Under it, instead of approaching the DSB, the parties mutually agree on the procedures, including the selection of the arbitrators, and the judgment is enforceable in the same way as when adopted through the appellate board.
    • Resorting to this option will sort out part of the problem since the disputes involving the US might still stay unresolved. But following this procedure will give WTO members enough time to overhaul the working of the DSB to restore its effectiveness.
  • Monitoring the Transparency of Member Country’s Trade Practices
    • This relates to the issue of the practice of member countries reporting open and hidden subsidies. It is argued that the current provisions are not sufficiently clear, and are also not effectively enforced. Compliance with reporting requirements is largely ignored.
    • It is reasonable that common degrees of transparency should be expected from all countries. Therefore a more stringent and transparent mechanism can be negotiated to deal with this issue.
  • Reinvigorating the WTO Negotiating Process
    • To break the logjam in negotiations is to reconsider the WTO's consensus rule itself. The rule gives each country a veto.
    • Instead, decisions can be taken by qualified majority. Voting strength of each country could be based on share in world trade, and the qualified majority needed could be about 85%.
    • This would mean that any proposal accepted by members accounting for 85% of world trade would go through.
    • An alternative approach would be to allow plurilateral agreements within the WTO which become effective for those members who enter into them. This would enable members who want a higher level of commitment to enter into an agreement provided it is open to other WTO member countries to join later if they wished.

A “WTO minus America” Option

  • If USA is not interested in WTO mechanism and does not show any interest in its revival, in that case, the adequate reaction by U.S. trade partners would be to join forces in order to protect the multilateral trading system.
  • They need to make clear that, if the U.S. doesn’t cooperate, they stand ready to put together a “WTO minus America” option - a formula similar to what Japan achieved with the Trans-Pacific Partnership after the U.S. pulled out.

Way Forward

  • The WTO was born out of negotiations, and everything the WTO does is the result of negotiations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations.
  • The system’s overriding purpose is to help trade flow as freely as possible because this is important for global economic development and well-being.
  • Trade relations often involve conflicting interests. Agreements, including those painstakingly negotiated in the WTO system, often need interpreting.
  • Thus the most harmonious way to settle these differences is through a neutral procedure based on an agreed legal foundation. Such a harmonious process is only possible with the spirit of cooperation between members of organization.
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