WAR AGAINST TRADE

Perhaps, never has the World Trade Organization (WTO) faced problems as serious as now for 23 years of its existence. It is likely that if events develop in the same direction and with the same speed, the WTO will not be able to fulfil its basic functions physically in 2019. European Commissioner for Trade Cecilia Malmström insists that it is urgently necessary to develop Plan B in case it is impossible to rescue the WTO.

Major threats

1. In 2019, the WTO may be unable to act as an arbiter in economic disputes. According to Roberto Azevedo, the Director-General of the organisation, "the dispute settlement system is a fundamental principle of WTO". His predecessor, Pascal Lamy, called WTO’s Appellate Body "the jewel in the crown" due to the key role it has played since the establishment of the organisation in preventing major trade wars.

2. Possible universal use by WTO members of the excuse "for national security" when trying to evade their obligations or setting up customs barriers. The rules of the organisation concede such an excuse but only in the event of global catastrophes, such as wars or natural disasters. Until last year, the use of this excuse was almost banned.

3. The fragmentation of WTO into "interest groups". Some suggest a solution to this problem by concluding a new WTO agreement with new rules of the game that are acceptable to all. However, sceptics believe that this option is not realistic, since WTO members cannot agree among themselves now. They believe that the future will be behind "interest groups" within the WTO, which will join to solve individual problems. The 11^th WTO conference held in December 2017 showed that such groups were already being established. For example, the United States, Japan and the EU have agreed to strengthen trilateral cooperation within WTO to address issues related to the overcapacity of production facilities and the forced transfer of technologies.

4. Failure to comply with WTO decisions may become a norm. Large players such as the US and the EU have not always complied with the regulations on cases lost at the WTO arbitration court but now, when the U.S. explicitly negates the significance of this organization, all other countries will also ignore its decisions.

5. The rules of international trade were set during 1947-1995 and have not been updated since. They do not take into account modern realities, such as electronic commerce and so on. Attempts to remedy the situation are complicated by the fact that it is difficult to find a common mechanism that suits everyone.

6. Disagreements between developed and developing countries, as well as within these groups, are growing.

7. The dispute over whether China is considered a market economy or a developing economy complicates relations between the WTO members.

8. The current open confrontation between the two largest economies of the world, the U.S. and China, will have negative implications for everyone.

9. Some experts believe that another problem is the excessively stringent WTO rules that deter some countries from joining the organisation.

The organisation that regulates 97% of international trade

As the successor to GATT (General Agreement on Tariffs and Trade), which existed from 1947 to 1995, WTO’s mission is to formulate and protect the unified principles of international trade. As a platform for negotiations and impartial arbitration of economic disputes, this organization unites 163 states and the EU as a collective participant. Among the countries of the former USSR, only four are not WTO members. Three of them (Azerbaijan, Belarus, and Uzbekistan) have observer status. Turkmenistan initiated the negotiations with the organisation in 2013.

As a WTO member, the country assumes obligations to fulfil more than 50 norms and rules that regulate about 97% of the world trade of goods and services. In the event of disputes or violation of the principles of free trade, the damaged party has the right to seek assistance in arbitration, whose verdict is obligatory for everyone.

More than 500 cases have been considered by the WTO since its establishment. The U.S. has filed a record number of claims (114 times) acting as defendant in 130 of them. It is followed by the EU with 97 against 82, respectively. Interestingly, although China is the largest player in world trade (almost 13% of world exports followed by the U.S. and Germany) has filed only 15 claims against 39 claims where it was a defendant.

Less judges

The United States, a WTO member most actively using the organisation’s potential in economic disputes, has suddenly began accusing all other countries of abusing the dispute resolution procedure for obtaining beneficial results instead of solving problems through negotiations. It sounds strange considering that 90% of lawsuits filed by the U.S. get verdicts in favour of the U.S.

In fact, the U.S. has lost almost the same number of cases filed against it but using its special status of the sole superpower, it does not always comply with WTO decisions.

When the WTO demanded to abolish the introduction of high protective duties on imports of European steel in 2002, the United States had to agree. But the U.S. has ignored the verdict on abolishing subsidies to the cotton industry adopted in 2004 for ten years.

The WTO Dispute Settlement Commission consists of seven judges elected for four years by consensus of all members. Since the U.S. has ignored the voting three times under the Trump administration, it has four judges only. At the next re-election scheduled for September 2018, this number can fall to three, which by the WTO rules is the minimal number of judges. In 2019, if there are two judges left, the WTO will not be able to perform one of its main functions.

Status benefits

To prevent strong imbalances between the developed and developing countries, most of which were colonies in the past, GATT (WTO) developed a system of preferences, which is designed to boost economic development in these countries. These rules are valid to this day. For example, the developing countries may have higher customs tariffs to protect their domestic markets.

Among the developing countries, WTO recognises a group of about 50 states with the lowest subsistence minimum. Basically, this includes the countries of Asia and Africa. They are entitled to additional benefits.

The developed countries are obliged to observe the maximum possible elimination of customs and non-tariff barriers for the import of goods from developing countries.

To coordinate efforts on protecting their interests, the developing countries united under the G77 group in 1964, which gradually expanded and now consists of 140 states. Later, the unions of developing countries in different composition (G24, G33, G90) were formed.

However, the relations between developed and developing countries are not ideal. The disagreements between them only increase. Some believe that not all members always observe agreements on benefits. Others insist on systematic checks individual countries against the status of developing country, as well as the periodic review of the volume of benefits provided.

A perfect example of this was a recent confrontation between the U.S. and China.

Dangerous contender

After entering the WTO in 2001, China has taken an obligation for gradual transition to a market economy over 15 years. The issue of WTO-China relations is very painful for both sides. Yet another, no less important issue is whether a country with one of the world's largest economies should still be considered a developing economy.

As a result, on the one hand, China is forced to accept that its exports are subject to much higher anti-dumping duties than if it were considered a market economy. On the other hand, as a "developing" country, China has the right to benefits. In addition, participation in alliances of developing countries allows China to lobby for his own interests.

"China, which is a great economic power, is considered a developing nation within the World Trade Organisation. They therefore get tremendous perks and advantages, especially over the U.S. Does anybody think this is fair? We were badly represented. The WTO is unfair to U.S.," said President Donald Trump on Twitter justifying his country's actions to set customs barriers for Chinese products.

The tariff barriers including for steel and aluminium are not something new. They have been repeatedly used before, including by the United States. But this time the U.S. justifies its actions by "national security". In other words, it is the reason that the WTO, according to its own rules, has no right to challenge. If other countries follow this example, the consequences will be catastrophic.

The WTO predicted a 4.4%-increase in world trade in 2018. However, it warns that this forecast may not come true if the trade war between the two main economies of the planet escalates. Bloomberg clarifies that in this case, instead of growth, world trade will fall by 4-8% while the world GDP - by 0.5-1.5%.

It seems that no one, except Donald Trump, believes that "trade wars are good and they are easy to win."