The Oracle Says
Along the banks of lake Geneva, in Switzerland, lie the headquarters of the World Trade Organisation, one of the legacy institutions set up and left over by the League of Nations. It is a great irony that the League of Nations itself was crippled by American isolationism, and now the continued existence of the WTO is itself facing a stern test under a resurgence of American nationalism, which is being promoted by Donald trump’s America First mantra.
The global trade order has recently come under unprecedented strain. Whilst cracks have been evident for a while now, the unsuccessful conclusion of the Doha Round, launched in 2001, remains one of the most obvious failures. However, the WTOs inability to keep pace with changing business conditions, which are now increasingly shaped by nationalistic attitudes, represents by far, the greatest threat to the continued relevance of the WTO. It is not surprising that disagreements between China and USA over trade practices present a real danger to the survival of this age old institution. The genesis of the US China trade tiff is a consequence of the many failures by the World Trade Organization, one of which has been the inability to promote truly free and open trade arena, in which all competitors are treated fairly. While the WTO is just one element of a larger system, it is supposed to play a critical role, that of resolving disputes and arbitration of conflicts. Does the WTO therefore have capacity to intervene in the US China trade war, given the scale and potential fallout? If the WTO cannot fix the disagreements between these two large economies, will the consequences not extend well beyond the boundaries of these countries, and ultimately cause heads to roll in the offices in Geneva?.
The world economy is now hostage to three problems. Firstly, the causes of the current standoff between the USA and China come directly as a result of the structural imbalances that underpin global trade patterns. The United States has for decades run persistent trade and budget deficits, as a consequence of the size and general maturity of its economy. All the while, this state of affairs is consistent with economic logic, but recently the Americans have realized that in the long term, such a position politically unsustainable.
That has led to the second problem, the resurgence of American unilateralism as a possible remedy to address the rising imbalances. Donald Trump firmly believes that the perennial trade deficit affecting the US economy are a direct result of unfair trade practices or bad trade deals that the US has historically entered into. His solution is therefore very simplistic and he has resorted to imposing tariffs on an array of goods to force Americas trading partners to reform their trade policies and practices, especially with respect to trade with the USA. Almost every single one of Americas trading partners has denounced Trumps actions and most, but not all, have had the capacity to retaliate with measures of their own. Donald Trump has naturally ratcheted up the game, responding not with empty threats, but bold escalation.
Then there the third and final issue: China. Chinese trade policies are perceived to have helped domestic companies at the expense of their foreign competitors. Chief amongst this basket of issues, is that for many years, there have been misgivings that Beijing has routinely forced foreign companies, including American firms to hand over their intellectual property as a pre condition for setting up and doing business in China. Trump has therefore made an easy meal of this claim, making it the cornerstone of his trade stance against China. Some major European businesses concur with Trumps view, and in a recent survey conducted by the EU Chamber of Commerce in China, a fifth of the respondents claimed that they indeed felt compelled to hand over various technologies in exchange for market access.
It is the WTO that is supposed to superintend over such matters and by doing so effectively, pressure for unilateral actions would diminish. Unfortunately, the WTO seems to have failed in this role leading to mounting fears any WTO sanctions that may come imposed upon Washington will be ignored, compounding the institution’s failures and potentially fatally undermining its future. In the same breath Trump’s administration sees inaction by the WTO as confirmation of its belief, that the institution is no longer capable of doing its job and thus protecting Americas interests.
In order to counter the growing prospect of the WTO becoming irrelevant or collapsing altogether, China and the European Union agreed to launch a sub group within the WTO, whose mandate will be to try and plug the organizations shortcomings by updating global trade rules.
It is unprecedented that whilst America has launched an extraordinary economic fight against China, some of the largest trading countries are pushing institutional reform efforts and they are not engaging the USA. In December 2017, representatives from Japan, the EU and the U.S. announced that they were going to “enhance trilateral cooperation in the WTO and in other forums” to eliminate “unfair market distorting and protectionist practices by third countries.” However, since then, Washington has chosen confrontation over co-operation, and has picked fights with all its major trade partners, mainly China. As parties have respond with measures of their own, it is the aggressors that have reacted as if they are the aggrieved party, calling retaliation “hypocritical” and dismissing the retaliatory measures as lacking legal foundation. However, Americas tantrums are self-serving, and should in fact be denounced.
The ineffectiveness of the WTO which is supposed to contain trade disputes and prevent retaliatory melees, poses a threat to its continued relevance. As things currently stand the WTO is s mere bystander, watching as the system it is supposed to oversee crumbles. Everyone is right to be deeply worried.
The writer is an economist and can be reached onoraclefiles@gmail.com.
