Revitalising Multilateralism: Pragmatic Ideas for the New WTO Director-General

Richard BALDWIN:
As background, I will first discuss the current economic situation, which is the setting for the idea that the World Trade Organization (WTO) is primed for a new launch into multilateralism, and the current COVID-19 situation. Following that, I will discuss the opportunities for restoring WTO centrality to the world trade system.

Considering the current economic situation, manufacturing and trade at the world level are back to pre-pandemic levels, but services are lagging. These indicators decreased when the pandemic hit but have returned to previous levels at an incredibly fast pace. Furthermore, high-frequency data suggest that world trade is already back.

However, the share of world trade that has returned is uneven, geographically speaking. East Asia, Europe, and North America are differently synced in this pandemic. The U.S. and Europe are starting to pick up, and East Asia started to pick up a while ago; the rest of the world is still facing challenges. The advanced economies are recovering faster to pre-COVID-19 growth rates. We had a recession in 2020, so some cumulative growth has been lost. However, the cumulative loss is going to be much smaller than the loss in the emerging markets. It is clear that China is doing well during this crisis.

In summary, the current economic situation is a world economy that is recovering, which is good for trade cooperation. However, it is differentiated around the world, with some of the emerging markets lagging behind.

As for the pandemic and COVID-19 infection levels, the situation is very different around the world, with East Asia doing better than North America, South America, and Europe; the situation in Africa is unknown. The vaccination rate is very uneven; North America and Europe are making progress on vaccinations, but the rest of the world is not.

The pandemic will not be resolved anywhere until it is resolved everywhere. This creates an opportunity for WTO centrality, as it is a historic moment. For the last 25 years, the center of trade liberalization and innovation has been shifting to regional trade agreements. However, COVID-19, the global recession, and climate change are multilateral issues that have to be solved at the world level. That gives the WTO an opportunity to once again take the reins of the world trading system. The idea is to demonstrate that the WTO can play a helpful role in solving the world's most challenging issues, and then restore centrality and work on the other issues.

In this case, there are three issues to leverage. First, it is valid to say that COVID-19 is not only a health problem but also a trade problem. It is natural that the WTO takes a key role in fighting the pandemic and be seen as doing so. Producing billions of doses of vaccines and distributing them will require a well-functioning trade system with multilateral cooperation, and that is the opportunity for the WTO. The second issue is that economic recovery requires a trade recovery. The recovery is ongoing, but it is uneven, and it is important to make sure that protectionist instincts do not shut down the recovery. The third issue is that once we start to move beyond the pandemic, climate cooperation will move to center stage again, and climate is also a trade issue. In particular, Europeans and Americans are talking about carbon border taxes or border adjustment measures. So, there will be significant discussions about enhancing cooperation using things like tariffs or taxes at the border.

This is a historic chance for the WTO to be a global champion for saving lives. Trade will be critical to defeating the pandemic. We have to start with a push to keep the trade routes open for medical vaccines. That is the specific issue that could bring the WTO back into centrality. Another opportunity for the WTO is multilateral cooperation on digital trade, because of the focus that COVID-19 has brought to the need for digital communication.

Simon EVENETT:
I will discuss the underlying potential causes for the challenges faced by the WTO. These challenges are based on three well-known issues. First is the Appellate Body, which has undermined the juridical aspects of the WTO. Second, the Doha Round was not a success, which compromised the negotiating function. Third, we have a monitoring and deliberation function that is struggling to provide the sort of inputs that WTO member governments need. These are symptoms of an underlying malaise that has a number of aspects.

First, there has been a lot of long-term scarring caused by the previous systemic crisis. A number of the subsidies that have been put in place have not been unwound, and as a result, we had an accumulation of trade distortions building up. On top of this is the rise of China and the geopolitical rivalry that has gone with that. Also, we have the structural changes in the world economy, especially the expansion of the digital economy. This is particularly important because it calls into question the relevance of the WTO. We do not have a specific agreement on digital matters at the WTO. We certainly have WTO principles that bear upon the digital economy, but until we get an accord on the digital economy, the business community is going to doubt the relevance of the organization in the 21st century. Together with these issues, the questions of vaccine production and distribution have undermined the system and its ability to function.

In the book that Professor BALDWIN and I wrote, we wanted to collect suggestions from about 20 or so leading experts on how the WTO could respond to this current situation. We asked the chapter authors to make specific recommendations, which we collated and classified into three groups. We recommended that the WTO start with confidence-building measures, and then follow with more substantive changes to its operating procedures and its agreements. One essential group of recommendations relates to the ability of the WTO to react to systemic crises. COVID-19 is the second systemic crisis the WTO has had to deal with in 15 years, and I think not everyone is happy with the speed with which it reacted, as well as its ability to muster international cooperation in times of trouble. Some of the chapters in the book describe institutional changes, which would help facilitate meetings, dialogue, and other communication between governments. However, in terms of substantive matters, there is room for negotiating a trade and public health initiative to keep supply chains open, and we must go back to the drawing board and look at every single way in which we can facilitate the global recovery with international trade and investment.

The second vital track to work on is to restore the WTO's centrality in the trading system. The WTO has slipped from view in terms of where people like to solve problems, and the pandemic plus the other systemic questions provide a great opportunity for the WTO to become active again.

When it comes to updating the WTO rule book, the first step is to assess what is working and what is not. A number of the chapters in the book called for such assessments as a way of informing WTO members about where there could be room for further progress. However, the deeper point is that we have to encourage the WTO member governments to start thinking about what they want the organization to achieve, perhaps over the next 10 years.

Recently, during the Saudi presidency of the G20, the WTO members got together and tried to identify common principles, which proved difficult. Instead of trying to identify common principles, we would like to frame the discussion in terms of what needs to get done and what the common core is which we could align on. It may be that not everything people want to accomplish will make the final cut of the common core. Therefore, we need to decide which imperatives, goals, and outcomes we want to achieve in 10 years.

We identified eight imperatives that we hear WTO members describing. The key question is which of these eight imperatives command enough of a following that would allow them to go forward. The goal should be to try to identify the imperatives everyone can agree on, instead of promoting reforms toward a more market-based economy, which some WTO members want but which may be opposed in the long run. This will be important in setting expectations about what the organization can realistically accomplish over the next 10 years. Also, this will help rebuild the credibility of the WTO in the eyes of prime ministers and presidents, who have seen this organization as incapable of delivering.

The eight imperatives include encouraging countries to integrate further into the world trading system and trying to reduce uncertainty and binding policies. The market reform imperative would likely not get widespread support and may not be able to go forward. The fourth imperative is the need to be able to manage clashes between different capitalist systems. This was known as the interface problem in the past.

Japan had a special role to play because it was the emergence of Japan in the world trading system, and the frictions with the United States, which led people to worry in the 80s and 90s that there was a systems clash. We have a different type of systems clash now, with the question of how to manage the frictions between different types of capitalism arising to the forefront. Another related point is how to manage disruptions to the trading system and how we can encourage compliance with the WTO agreements. The best outcome is for countries to naturally comply through being encouraged to not break the rules in the first place.

The seventh imperative is how the WTO can stay relevant in an era with climate change, digital technology, etc. The eighth imperative is for this organization to be able to manage crises better.

We suggest that the WTO members and their ambassadors discuss and sort through this list of eight imperatives and figure out which of them have enough support among the WTO membership. In other words, we have to think through what the purpose of the WTO is, and what purpose can guide the activities over the next 10 years. We then need to communicate that this is the purpose of the WTO, signaling to national capitals, prime ministers and presidents what the intention to deliver actually is, and then we have to follow through on it. This is a deliberative process designed to restore the credibility of the WTO.

URATA Shujiro:
This is a timely contribution to the revitalization of the WTO because the new Director-General just took office recently and COVID-19 has presented a good opportunity to consider the role of the WTO and revitalize it. Dealing with the challenges faced by the WTO is daunting, but they have been addressed by Professor BALDWIN and Professor EVENETT.

I agree with most of their recommendations. My first concern relates to the recovery of the U.S. economy. Since President Biden took office, the U.S. economic recovery has accelerated. So, the concern is whether this rapid recovery may lead to a "high-pressured" economy which creates inflation. This is a concern because high inflation tends to lead to high interest rates, and high interest rates have negative impacts on developing and emerging countries. So, I wonder what Professor BALDWIN and Professor EVENETT think about the possibility of inflation, particularly which may result from the overheated U.S. economy.

COVID-19 is giving the WTO an opportunity to take the lead on the global trade issues. It is a chance for the WTO to be a global champion for saving lives. I would like to know what Professor BALDWIN's and Professor EVENETT's assessment is of the WTO regarding COVID-19 so far?

Professor BALDWIN and Professor EVENETT identified five challenges related to COVID-19--global economic recovery, digital trade, climate change, competing forms of capitalism, and market-led vs state-led capitalism. I would like to know what they think about other existing challenges such as growing inequality. Why was the anti-globalization movement so heated? One reason is the growing income inequality. The WTO may not be the appropriate institution to consider or formulate policies to deal with growing inequality. However, I believe this is related to globalization, so I wondered whether they think this is an important challenge that the WTO has to take up. Another difficult challenge facing the WTO is the special and differential treatment of developing countries.

A big issue is the rise of China which is posing a challenge to the existing international order. I would like to know what they think about the China issue. There can be two views on the China issue, the pessimistic view is that the WTO cannot function as expected if China and the U.S. and other democratic countries that are pursuing market-led capitalism cannot agree on the rules on trade and investment. The constructive view is that because of the differences in the opinions, they can use the WTO to discuss the issues, which may lead to mutually acceptable rules.

Regarding the eight imperatives, and particularly the systems clash imperative, it is desirable for multilateral trade cooperation to occur, especially with China, but it may be difficult. Considering the compliance imperative, with the situation of special and differential treatment favoring developing countries, changes may not be easily accepted by developing countries. About the relevance imperative, it is important, but it is going to be very difficult to maintain the perceived relevance of the WTO in relation to key political, corporate, and societal stakeholders around the world, especially considering the differences that exist with China.

I would like to know the responses and reactions to your recommendations from WTO ambassadors, trade officials, researchers, etc., particularly if you have any reactions from Chinese officials or a Chinese audience. Also, what are your next steps? It seems that there has been little progress on WTO reform. What are the reasons for the lack of progress?

Richard BALDWIN:
There seems to be a question of whether we are going into another emerging market crisis where emerging market debt is rapidly rising. It is possible to get inflation and rising interest rates in a high-pressure economy. The last time this happened was almost 25 years ago with the Asian financial crisis. However, the present case is different. First, a lot less of the debt is in dollars. Having to pay your interest in dollars but having your tax based in a local currency is less of an issue than it was before. Second, flexible exchange rates are widely spread now among emerging countries, and part of the financial crisis in Asia was related in part to fixed exchange rates. However, the fundamental nature of the crisis now is different. There seems to be demand-led inflation and demand-led increases in interest rates. This is a very different situation than the circumstances that caused problems for some emerging markets during the Asian crisis, where recession conditions preceded the rise in interest rates, so export earnings were falling as debt payments were rising. In the current situation, their exports will be increasing because of the recovering economy, so the key point is that in this case interest rates will rise because growth will also rise.

Moving on, is the WTO the right place to discuss multilateral trade and the COVID-19 recovery and climate issues? The issue is that since the Doha Round, the WTO has been a relatively underperforming international organization. It is difficult to determine the cause, whether it be leadership or something else. A difficult situation was created by the massive tariff liberalization by developing countries, which did not lead to reciprocity. The fuel that had moved the GATT forward, which was the two-way cutting of tariffs, was lost to emerging markets through their own unilateral liberalization, which overall was positive, but it meant that the WTO functioned differently than before. Also, the nature of trade changed as factories started crossing borders. So, trade became more entangled; the flow of goods, services, information, and people became combined. Therefore, deep assurances were needed, which did not naturally fit in the WTO, since relatively few countries were involved in the manufacturing global value chain.

The issues with the WTO over the last 25 years were related to particular changes in the global trading system. The overall ability to cooperate on a multilateral basis was not fundamentally undermined. It was the nature of the issues that changed, and therefore, the nature of the cooperation changed.

Climate change is naturally a multilateral issue. For example, the Montreal Protocol was multilateral, involved trade sanctions, and was successful. With situations like climate change and COVID-19, where it is essential to get most of the world on board, the WTO is the natural forum for action because it is the only multilateral body where talks can be held about trade in an effective way.

Simon EVENETT:
We have to recognize that China is a major force to be considered. It is probably not going to reform its state capitalism economic system in response to WTO pressure or pressure from trading partners. We are then left with the situation of how to get along with them. How do countries that have systems of state capitalism and more market-based systems minimize the tensions between them? Also, how can they find ways to move forward in some areas? It does seem that the U.S. and China are moving forward on climate change issues, so there is some room or potential for cooperation.

The practical question is about how to coexist with different types of systems and there is historical precedent with the GATT for such considerations. Now, we should also be asking how the existing tools help us to address this issue. One natural question is if America does not think that China is behaving properly, why don't they use anti-dumping and countervailing duty investigations? The question suggests that there are elements of the WTO tool kit which are already there to address differences. Are any new tools needed? Some people might say that the very fact that many Chinese subsidies are upstream and pervasive demonstrates the need for different types of tools. However, at least, we should be having a conversation about how to manage these frictions. This will require, on the American side, a step back from just insisting that the WTO's sole purpose is to promote market-based reform. If they keep insisting on this imperative, then it is hard to see how the conversation can proceed. Proceeding from a perspective of limiting conflict or tension might be more constructive.

Regarding the reaction from officials, there is a sense among them that the current situation cannot continue as it is. Also, there is a sense that there has been a loss of momentum in the last few years, especially from the leadership of the WTO. However, we should expect change, as there is much commitment to this system, which governments, including trade diplomats, do not want to give up on. It is important to take the right actions forward to increase the set of options for governments.

Richard BALDWIN:
Regarding China, President Biden is holding a fighting action on trade. He is trying to undertake some massive reforms inside the United States. The view is that trade is a difficult issue for the democratic coalition, and he is trying to keep that coalition moving forward to change the nature of American domestic society. This may mean that Biden is not interested in tackling these issues in the next few years. Regarding the second issue, it seems that the U.S.-China interface will be solved bilaterally. For example, President Nixon put a unilateral 10% tariff on Germany to force the devaluation of the deutschmark. This action sparked a resolution of the interface problem. So, I think we should keep the bigger interface issue out of the WTO. There are plenty of tools and rules for intellectual property theft, subsidies, and state-owned enterprises. The big interface piece will have to be done bilaterally.

The fundamental message is that if the WTO raises the level of the discussion to "let's help the trade system change lives," that will perhaps change and shift us into a different gear when it comes to cooperating on things like fishing subsidies or e-commerce. If we can get heads of state interested in what the WTO is doing, because they are addressing the big issues facing humanity, then progress may be made.

Q1: How do you envisage the principle upon which the line between developed and developing countries is to be drawn in the WTO with developing economies leapfrogging through the Sustainable Development Goals?

Richard BALDWIN:
I do not think it is as big of an issue as it was before, because it is most obvious on tariffs, but the rules are being applied a little bit more. In terms of China, it is simply one more aspect of the China issue. The other successful developing countries are not a huge issue and the issue of graduating from one status to another is not new. Since tariffs are all low, it is not as big of an issue as it was before.

Simon EVENETT:
This question of special and differential treatment has become unnecessarily polarized. There have been several useful analyses that have highlighted the need to think about what contributions countries can make to the system, and how they can be supported in making more contributions. I prefer the agreement on trade facilitation as it matched additional obligations with financial and technical support for the countries that needed them. It is important to recognize that countries do differ in terms of their technical capabilities and administrative expertise.

Q2: In recent years, "the spaghetti bowl" of free trade agreements (FTAs) have expanded as WTO functions receded. However, the expansion of FTAs is forcing trading companies to have more negative spaghetti-bowl effects. Although import barriers have been the focus of attention in world trade to this point, COVID-19 has brought export restrictions to the forefront in addition to government procurement agreement (GPA) and labor standards, which are challenging to solve with FTAs.

Richard BALDWIN:
We should multilateralize regionalism. The idea of the spaghetti bowl is an issue; however, there is progress on it. The Regional Comprehensive Economic Partnership (RCEP) will help reduce some of the issues. The self-lowering of tariffs on imported parts and components have also reduced the spaghetti-bowl issue, which was particularly overbearing in the early 2000s. It is not urgent to resolve this now, since the problems were most relevant to tariffs, and tariffs have decreased significantly. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP) is a good model, and it may spread.

Q3: COVID-19 forced countries to change the rules by which they operated, whether they liked it or not. The change was also enhanced by the conflicting positioning between countries such as the U.S. and China. Would the WTO be an appropriate forum for engaging in some control of bilateral action?

Simon EVENETT:
The key here is to reorient this discussion away from essentially talking past each other about the sanctity of different types of economic systems. I found Professor BALDWIN's comments interesting regarding the likelihood that the biggest systems-clash issues are likely to be dealt with bilaterally. I am not sure that the Europeans will be able to align on this issue because they too have a lot of state intervention in their economy. The Americans have state intervention too, but the Europeans have a lot more of it, which actually resembles certain aspects of the Chinese systems.

Q4: Regarding the following three issues, (1) the existence of two systems (free market vs. state capitalism), (2) countries that support new rules and those which do not, and (3) institutional frameworks which require consensus leading to the impossibility of decision making: Is there a sufficient sense of crisis and recognition that things may collapse if these systems do not change?

Richard BALDWIN:
Regarding the need for consensus, the system cannot change in the WTO. This was put in by the U.S. and the U.K. when they were the dominant trade powers because they did not want to get outvoted—and none of the big powers will want to be outvoted. The whole idea that we would use voting to get things through ignores the fact that none of the big countries wants to be outvoted; this is never going to change. We are learning to live with it better by allowing like-minded groups to undertake plurilateral or quasi-plurilateral trade facilitation agreements, but I think we are never going to be able to escape consensus in the WTO because the U.S. and China would not agree to it.

Simon EVENETT:
We must not let consensus and an obsession with consensus prevent the kind of institutional innovation which we are potentially seeing with the plurilaterals, and with the new form of multilateralism where we combine obligations with aid. I hope that the discussion about consensus does not become a mechanism for blocking progress, as that is how some governments are trying to use the consensus argument now.

Q5: Professor EVENETT mentioned the need to frame the conversations to move forward and explore a set of options. However, is there really a democratic set of options, or rather are we about to welcome a set of rules with Chinese characteristics?

Simon EVENETT:
The imperatives were defined in a way that they were not inherently American, Chinese, Japanese, or any nationality. Each of them represents an outcome which the WTO members might want to align around. In many ways, I do not see those imperatives as necessarily siding with one or the other. The systems-clash imperative is basically a requirement to try to figure out how we can all cooperate, even though our economies are different. I would urge people to ask what we want the WTO to accomplish over the next 10 years and which of the list of eight imperatives or other items can form a common core, and then look at how to take them forward. For some countries that want to do more, that is exactly where the plurilateral options and regional trade agreements come in. We need to be able to focus, in the multilateral case, on what it is that we actually agree on, and what type of outcomes we want to accomplish.