The story so far: U.S. President Donald Trump earlier this month attacked the World Trade Organization (WTO) for allowing countries such as India and China to engage in unfair trade practices that affect American economic interests. While addressing a gathering in Pennsylvania, Mr. Trump took issue with the “developing country” status enjoyed by India and China at the WTO. He argued that these countries are not developing economies, as they claim to be, but instead grown economies that do not deserve any preferential trade treatment from the WTO over developed countries such as the U.S.

What is the “developing country” status?

• The “developing country” status allows a member of the WTO to seek temporary exception from the commitments under various multilateral trade agreements ratified by the organisation. It was introduced during the initial days of the WTO as a mechanism to offer some respite to poor countries while they try to adjust to a new global trade order marked by lower barriers to trade. Countries such as India and China, while seeking exception from various WTO agreements, have argued that their economic backwardness should be considered when it comes to the timeline of implementation of these agreements. The issue of farm subsidies, for instance, is one over which rich and poor countries have had major disagreements.
• The WTO, however, does not formally classify any of its members as a developing country. Individual countries are allowed to unilaterally classify themselves as developing economies. So, as many as two-thirds of the 164 members of the WTO have classified themselves as developing countries.

         How do countries such as India and China benefit from the special status?

• The WTO was envisaged as an international trade body to help foster more trading in goods and services between nations by lowering various barriers to trade such as tariffs, subsidies and quotas. Towards this end, several trade agreements have been ratified over the years under the WTO.
•  Developing countries such as India and China, however, as earlier mentioned, can seek to delay the implementation of these WTO agreements owing to their disadvantaged economic status. They can continue to impose tariffs and quotas on goods and services in order to limit imports and promote domestic producers who may otherwise be affected adversely by imports that are lower in price or better in quality. India, for instance, subsidises agriculture heavily in the name of food security in order to protect its farmers. While local producers may be protected by protectionist barriers such as tariffs, consumers in India and China will have limited access to foreign goods.

Is the U.S. justified in criticising the WTO?

• While the “developing country” status was supposed to help poor countries ease gradually into a more globalised world economy, it has had other unintended effects. Since the WTO allows countries to unilaterally classify themselves as “developing”, many countries have been happy to make use of this freedom. Even many developed economies such as Singapore and Hong Kong which have per capita income levels higher than the U.S., have made use of the provision to classify themselves as growing economies.
• Further, countries such as China justify that while their per capita income level has increased many-fold over the last few decades, these are still far below that of high income levels in countries such as the U.S. Thus, Mr. Trump may have a prima facie case in urging the WTO to address the issue of how countries arbitrarily classify themselves as “developing” to justify raising trade barriers. This is, however, not to say that WTO rules always work to the advantage of developing countries alone.
• Developed countries such as the U.S. have tried to force poorer countries to impose stringent labour safety and other regulations that are already widely prevalent in the West. These regulations can increase the cost of production in developing countries and make them globally uncompetitive. Developing countries further view the introduction of labour issues into trade agreements as beyond the scope of the WTO, which is primarily supposed to be an organisation dealing with trade. Many economists also oppose the fundamental argument of poorer countries that low per capita income levels justify their decision to raise trade barriers. They argue that free trade benefits all countries irrespective of their income levels. In fact, they argue that protectionist trade barriers impede the transition of developing economies to higher income levels. The developing country status may thus simply be a false pretext to justify protectionism.

What lies ahead?

• Mr. Trump’s criticism of the WTO is seen by many as the opening of a new front in his trade war against China. Earlier, the U.S. President had termed China as a “currency manipulator” for allowing the yuan to depreciate against the dollar. China and the U.S. have also been slapping steep tariffs on imports from each other since early last year. China’s developing country status at the WTO gives Mr. Trump yet another opportunity to attack China. Since developing countries are likely to oppose any efforts to stop them from protecting their domestic economic interests, global trade rules are unlikely to experience any drastic reform any time soon.
• Further, ahead of the next ministerial-level talks of the WTO scheduled to be held in Kazakhstan next year, the inability of the WTO to rein in global trade tensions has raised questions about its relevance in today’s world. This is particularly so given that global tariff rates over the years have dropped more due to bilateral trade agreements rather than due to multilateral trade agreements brokered at the WTO.
• Further, the dispute resolution mechanism of the WTO, which can pass judgments on disputes, lacks the powers to enforce them as the enforcement of decisions is left to individual member states. While initially envisaged as a global body to promote free trade, the WTO has now deteriorated into a forum where competing governments fiercely try to protect their narrow interests.

World trade organisation

History

From the early days of the Silk Road to the creation of the General Agreement on Tariffs and Trade (GATT) and the birth of the WTO, trade has played an important role in supporting economic development and promoting peaceful relations among nations.

The General Agreement on Tariffs and Trade (GATT) traces its origins to the 1944 Bretton Woods Conference, which laid the foundations for the post-World War II financial system and established two key institutions, the International Monetary Fund (IMF) and the World Bank.

• The conference delegates also recommended the establishment of a complementary institution to be known as the International Trade Organization (ITO), which they envisioned as the third leg of the system.
• In Havana in 1948, the UN Conference on Trade and Employment concluded a draft charter for the ITO, known as the Havana Charter, which would have created extensive rules governing trade, investment, services, and business and employment practices.
• The Havana Charter never entered into force, primarily because the U.S. Senate failed to ratify it. As a result, the ITO was stillborn.

Meanwhile, an agreement as the GATT signed by 23 countries in Geneva in 1947 came into force on Jan 1, 1948 with the following purposes:

• to phase out the use of import quotas
• and to reduce tariffs on merchandise trade,
• The GATT became the only multilateral instrument (not an institution) governing international trade from 1948 until the WTO was established in 1995.
• Despite its institutional deficiencies, the GATT managed to function as a de facto international organization, sponsoring eight rounds (A round is a series of multilateral negotiations) of multilateral trade negotiations.

So, the GATT became the only multilateral instrument governing international trade from 1948 until the WTO was established in 1995.

• The Uruguay Round, conducted from 1987 to 1994, culminated in the Marrakesh Agreement, which established the World Trade Organization (WTO).

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments.

The WTO has 164 members (including European Union) and 23 observer governments (like Iran, Iraq, Bhutan, Libya etc).

Goals of WTO

1. The WTO’s global system lowers trade barriers through negotiation and operates under the principle of non-discrimination.
2. The result is reduced costs of production (because imports used in production are cheaper), reduced prices of finished goods and services, more choice and ultimately a lower cost of living
3. The WTO can stimulate economic growth and employment.
4. The WTO can cut the cost of doing business internationally.
5. The WTO can encourage good governance. Transparency — shared information and knowledge — levels the playing field.
6. The WTO can help countries develop: Underlying the WTO’s trading system is the fact that more open trade can boost economic growth and help countries develop.
7. The WTO can give the weak a stronger voice: Small countries would be weaker without the WTO. Differences in bargaining power are narrowed by agreed rules, consensus decision-making and coalition building.
8. The WTO can support the environment and health: The trade is nothing more than a means to an end. The WTO agreements try to make trade support the things we really want, including a clean and safe environment, and to prevent governments using these objectives as an excuse for introducing protectionist measures.
9. The WTO can contribute to peace and stability: When the world economy is in turmoil, the multilateral trading system can contribute to stability.
10. Trade rules stabilize the world economy by discouraging sharp backward steps in policy and by making policy more predictable. They deter protectionism and increase certainty. They are confidence-builders.

Why are countries calling for WTO reform?

•  First, two-thirds of the WTO’s 164 member states continue to claim “developing country” status, a designation that allows them to take advantage of certain benefits and exemptions to obligations not granted to advanced economies. However, economic realities suggest that many of these countries have the capacity to take on fuller obligations. For example, 10 Group of Twenty (G20) members claim developing country status at the WTO. Since the WTO allows for self-classification, there is no universal definition for developed or developing status.
• Second, the WTO’s negotiating arm is atrophying. At the root of the degrading negotiating function is the difficulty for WTO members to reach a full consensus, which is required to agree to new agreements, obligations, and rule changes. The failure of many countries, including major economies like China, to comply with notification and transparency obligations has made negotiating new rules and agreements even more difficult. The United States, the European Union, and others have called for rules that would punish members for not complying with their transparency obligations. The consensus requirement, however, will likely present a formidable roadblock to such rules being agreed to. Certain members, including China, have taken advantage of the overall impasse at the WTO and continue to maintain discriminatory barriers against imports, intervene in markets to support state-owned enterprises, and fail to report subsidies to the WTO accurately.
• Third, some countries (but primarily the United States) have concerns with the WTO dispute settlement system, the main process to resolve trade conflicts between members. Specifically, the United States is concerned the Appellate Body, which permits countries to appeal against adverse rulings, has exercised decisionmaking and arbitration power beyond its original mandate. Successive U.S. administrations have claimed that the Appellate Body, through its rulings, adds or diminishes to the rights of WTO members by reinterpreting WTO agreements, despite WTO members having never agreed to those interpretations. While desire for reform is broadly shared across the WTO community, member states’ opinions and proposals on how to proceed vary significantly.

What reform proposals are being suggested?

•  Several countries have tabled WTO reform proposals. In September, Canada released a white paper outlining discussion points for the upcoming October meeting. The broad objectives suggested a general focus on improving the “efficiency and effectiveness” of the WTO’s ability to monitor member states, “safeguarding and strengthening the dispute settlement system,” and updating trade rules and regulations to ensure the WTO’s relevance for modern trade issues. This paper is primarily designed for shaping future conversations rather than suggesting specific policy proposals.
• In early September, the European Union published a more specific and prescriptive "concept paper." These proposals aspire to level the playing field between member states by creating stronger rules and definitions governing state-owned enterprises and “market-distorting subsidies.” The EU paper also calls for improving transparency and subsidy notifications from member states, removing investment barriers in service industries, and adopting specific rules to discourage forced technology transfers. These recommendations encourage stronger punitive measures against repetitive or intentional non-compliance from member states.
• Regarding the dispute settlement system, the concept paper recommends expanding the Appellate Body panel from seven to nine judges, redefining membership of the Appellate Body from part-time to full-time, and allotting more resources to the Appellate Body Secretariat. This paper attempts to actively insert EU reform ideas into the negotiations, whereas the Canadian paper seeks a more bottom-up approach to WTO reform discussions.
• In addition to these two proposals, the United States, the European Union, and Japan have begun trilateral negotiations on new trade and investment rules to better address non-market practices. On September 25, the three governments issued a trilateral statement calling for reporting and monitoring reforms and updated rules governing self-classification of developing country status. The statement also shared concerns regarding coercive technology transfers, industrial subsidies and state-owned enterprises, and other “non-market-oriented policies and practices of third countries.” The trilateral exercise is largely aimed at negotiating new rules to address China’s state-driven economic policies but could have some spillover into WTO reform discussions.

Do these proposals have any chance of success? What are countries’ objections?

• Since the WTO is consensus-based, reaching an agreement on reforms among all 164 members is extremely difficult. The Doha Round of negotiations, launched in 2001 to lower trade barriers and codify rules, has stalled despite numerous attempts to revive it. Many developing countries resolutely oppose calls to narrow the parameters of developing country status. Any number of developing countries and their self-proclaimed champions, including China and India, could spoil reforms that would limit their rights, as they have done in the past. Beijing has already dismissed many of the proposed reforms, releasing a paper this summer arguing it has abided by its WTO obligations—a claim Washington hasrejected.
• There are also major divisions among advanced economies that limit the chances for reform. While the European Union suggests expanding and strengthening the Appellate Body’s jurisdiction, the United States has repeatedly said the Appellate Body must be held more accountable and remain within a limited purview, a longstanding concern.
• Considering this broad disagreement between the United States, China, the European Union, and others, the chances that all WTO members reach consensus on actionable reforms are slim.

 What happens if the WTO cannot agree on reform proposals?

•  Should reform proposals fail to satisfy member states’ demands, the divisions could lead to the disintegration of key pillars of the organization. The Trump administration has blocked vacant Appellate Body seats from being filled and has stopped the reappointment of one its members, leaving the appeals panel with just three judges—the minimum for it to function. Two additional judges’ terms expire in 2019, and if they are not replaced or reappointed the Appellate Body will no longer be able to function. That would render the WTO unable to fully resolve trade conflicts between member states, one of its founding mandates. This could result in more bilateral trade disputes as individual states take it upon themselves to resolve conflicts through retaliation.
• The consensus rule will not only diminish chances of Appellate Body reform but also reduce the likelihood that the entire WTO membership will agree on new trade liberalizing agreements. One possibility moving forward could be a plurilateral agreement with a group of like-minded countries on a new set of rules that serve as an addendum to the broader WTO. The advantage of this form of arrangement is that a U.S.-led group of countries could attempt to establish a standard set of rules and create incentives for outside nations to adopt the plurilateral measures to enjoy their benefits. Of course, this approach could also work in reverse, allowing other nations to construct a plurilateral system that excludes the United States.
• However constructed, plurilateral agreements also have their limits. For example, neither the United States nor the European Union can effectively resolve issues pertaining to the dispute settlement system using a plurilateral agreement, because any agreement on it would need to address the WTO mechanism itself. Even if a group of like-minded countries were able to reach a plurilateral agreement, excluding major economies would threaten the multilateralism of the WTO. Additionally, developing countries have voiced opposition to WTO Secretariat resources being devoted to plurilateral negotiations that they are not party to.

Without reforms, one or more major economies could leave the WTO, as President Trump has threatened. This would cripple the other two pillars of the WTO—its negotiating and monitoring arms—which are already atrophying. The absence of the WTO could potentially lead to a proliferation of bilateral and regional trade agreements that may better address member states’ complaints on a case-by-case basis. However, a bitter disintegration of the WTO could come with a Hobbesian erosion of trust between states. Governments may opt for self-sufficiency and isolation, rather than engagement and integration. An erosion of the WTO could lead to the return of more trade barriers, loss of predictability and certainty for multinational companies and governments alike, and the absence of a credible venue to mediate trade disputes and serve binding decisions. Those developments could extract a high cost on the global economy and severely diminish global growth and economic stability for years, if not decades