08 Key issues for a ‘WTO 2.0’
The WTO must balance the demands of 21st-century trade and unresolved ‘old’ trade issues. Reform must also address concerns about China’s trade policies while ensuring that China has a meaningful voice in the system.
The fact that 23 countries are currently seeking accession to the WTO shows that the organization is still seen as having a purpose.109 However, a number of issues need to be addressed for the WTO to have continued relevance in the future, not least in light of COVID-19. This chapter provides an overview of the most important policy considerations and offers some recommendations, without being exhaustive.
The global trade landscape has changed significantly since the WTO was set up in 1995, but many of today’s trade issues are not adequately addressed by WTO rules. Ensuring that the WTO’s mechanisms and procedures adapt to new economic realities and pressures will require reform of rules in certain areas – such as trade involving state-owned enterprises, and the provision of subsidies to them – that have come into sharper focus as China has risen in global economic prominence. It will also require the creation of disciplines in areas that did not exist 25 years ago, such as e-commerce and digital trade. Given the pressing issues around climate change, increased efforts to align trade and environmental sustainability could help to both tackle climate change and reinvigorate the WTO. In future, WTO members will have to strike a balance between moving forward with negotiations on 21st-century issues and keeping sight of the unresolved ‘old trade issues’ such as agriculture and development. On top of these substantive issues, the WTO will have to address institutional issues (especially the above-mentioned difficulties around developing-country status) in order to stay relevant. The key aspects in this regard will be resolving the WTO Appellate Body crisis and reforming the dispute settlement system.
China and a level playing field
China became a member of the WTO on 11 December 2001, following lengthy negotiations. But China’s integration into the WTO has not been smooth. The nature of China’s economic system, combined with the size and growth of its economy, has created tensions in the global trading system.
The US and the EU viewed China’s WTO accession as a critical lever for promoting domestic economic reform in the country, reducing trade and investment barriers, and bringing China into the rules-based international trading system. However, by 2006, despite China having taken important steps on the road to economic reform, the signs showed important challenges remained. For instance, the first WTO Trade Policy Review of China found that ‘despite China’s efforts, the enforcement of intellectual property rights (IPRs) remained problematic’.110 In its most recent Trade Policy Review of China, the WTO remarks that ‘[e]xcess capacity in some energy and manufacturing sectors and implicit assistance to state-owned enterprises (SOEs) have increased over a number of years’.111
The issue is not simply that China violates the spirit, if not the letter, of certain WTO rules. A critical part of the problem is that the rulebook of the WTO is inadequate for addressing the challenges that China presents in respect of intellectual property, state-owned enterprises and industrial subsidies.
As a result, the US has turned to unilateral measures (such as imposing tariffs under Section 301 of the US Trade Act of 1974) to tackle China’s policies and practices related to technology transfer, intellectual property and innovation. The EU disagrees with this approach, even though it shares many of the US’s concerns regarding China’s harmful policies.
Unfortunately, efforts by the US and China to deal with their trade and technology stand-off have primarily occurred outside the WTO framework. The US–China ‘phase-1’ deal mentioned above contains a separate dispute settlement and enforcement mechanism. Moreover, that deal focuses on China importing an additional $200 billion worth of US goods and services over the next two years. Even though this target was unrealistic from the start, the COVID-19 pandemic has made reaching it all but impossible. China has fallen behind on its purchasing obligations,112 raising doubts about the longevity of the arrangement.
While the US–China phase-1 deal includes language on intellectual property rights and technology transfer, it remains to be seen whether these commitments will be implemented. The deal does not address some structural issues such as industrial subsidies and state-owned enterprises. This was left for a second phase of talks. But a phase-2 deal now seems very unlikely as US–China tensions rise over the origin and handling of COVID-19, as well as over China’s imposition of a new national security law in Hong Kong.
Another issue is that many of China’s harmful policies and practices are not directly – or are only insufficiently – disciplined by WTO rules. On competition, China’s state-owned enterprises present a major challenge to the global trading system. But the WTO does not address the issue of state-owned enterprises in a comprehensive way. The key provision covering trade and the role of the state is GATT Article XVII, which concerns governmental and non-governmental enterprises that deal with goods for export and/or import.113 Countries such as the US have thus increasingly turned to bilateral and regional free-trade agreements to better deal with the issue. The TPP (now the CPTPP114 after the US’s withdrawal from the agreement) and the USMCA each have a chapter on state-owned enterprises.115
As far as industrial subsidies are concerned, the WTO Agreement on Subsidies and Countervailing Measures nominally covers this aspect but has proven ineffective.116 In response, in 2017 the US, the EU and Japan launched trilateral efforts to identify ways to better deal with market- and trade-distorting subsidies and to strengthen WTO rules on them. The three parties outlined their proposal in January 2020.117 While this is a welcome step, it will be almost impossible to get China to agree. The problem of how to deal with subsidies will become increasingly important in light of COVID-19, given the renewed focus on subsidies and industrial policy in supporting beleaguered economies around the world. The best way forward lies in an open plurilateral agreement.
The problem of how to deal with subsidies will become increasingly important in light of COVID-19, given the renewed focus on subsidies and industrial policy in supporting beleaguered economies around the world.
Another contentious matter concerns whether China should be treated as a market economy.118 China contends that the language of its WTO protocol of accession effectively requires other members to end their treatment of China as a non-market economy for the purposes of calculating margins in anti-dumping proceedings after December 2016. But the US and the EU continue to treat China as a non-market economy for the purposes of assessing anti-dumping duties. In December 2016, China launched WTO dispute settlement cases against the US and the EU for not granting it market-economy status. China pursued the case only against the EU, but suspended the process in June 2019.119
The issue of China’s status as a non-market economy came up again recently. Article 32.10 of the USCMA greatly limits the ability of the three parties to enter into a free-trade agreement with a non-market economy.120 Even though China is not named directly, the article is seen as targeting the country and has been dubbed the ‘China poison pill’.121 Similar provisions will likely be replicated in future bilateral free-trade agreements that the US strikes (for instance, with the UK).
Given its weight in global trade and the world economy, China has a potentially important role to play in reforming the WTO. But precisely what role is China currently playing – and what role should it be playing?
China has engaged with the debate on WTO reform. The country’s May 2019 reform proposal emphasizes ‘efforts to make necessary reform to the WTO’.122 The proposal lists breaking the impasse over the Appellate Body, and advancing negotiations on fisheries and e-commerce, as priorities for action. On the sensitive issue of special and differential treatment, China’s stance is that the rights of developing WTO members should be safeguarded. Regarding state-owned enterprises, China reiterates a vague commitment to ‘fair competition’ and stresses the ‘imperative to respect the diversity of development models among Members’.123
China is also trying to work with others on WTO reform. For instance, in 2018 it established a working group on the issue with the EU, and in November 2019 China hosted a ‘mini-ministerial’ meeting for approximately 30 WTO members in Shanghai.
China is therefore portraying itself as a guardian of the global trading system at a time when the US is retreating from that role. This, together with China’s engagement in WTO reform, increases Beijing’s ability to set and shape the reform agenda.
In light of China’s global economic rise and its economic model, the key question is whether the WTO rules can be updated and enforced in a way that can accommodate two inherently different economic regimes – that of China’s state capitalism and that of the major market economies. The solution cannot lie in seeking to change the nature of China’s economic system. Rather, it must be about designing enforceable rules that allow the two systems to interface, and about reaffirming the centrality of the WTO in the global trading framework. Even if a more integrated system can be achieved, however, there will likely be some regulatory decoupling over sensitive technology areas that affect national security.
E-commerce and digital trade
In 1998, realizing that e-commerce would play a growing role in the global economy, WTO members established a work programme ‘to examine all trade-related issues relating to global electronic commerce’.124 According to the most recent data, the value of global e-commerce reached approximately $26 trillion in 2018.125 As the COVID-19 pandemic accelerates the shift to e-commerce, rules to regulate online trade will be more important than ever. But in contrast to trade in goods and services, few international rules govern cross-border e-commerce.
In 1998, members also agreed to the ‘WTO e-commerce moratorium’, which has been regularly renewed since then and has helped to facilitate digital trade by ensuring that tariffs are not applied to cross-border data flows. Recently, however, the moratorium has been called into question by developing countries because of its implications for collecting revenue.126
As mentioned earlier, more than 75 WTO members also launched an initiative in 2019 with the aim of establishing global rules on e-commerce. While the launch of these negotiations is a positive development, and a sign that the WTO is still seen as a forum in which to advance trade rules and establish a rulebook for new trade issues, the format has a number of critical shortcomings. For instance, India did not join the negotiations despite being one of the fastest-growing e-commerce markets. In addition, the Chinese approach to the internet and proposal for facilitating e-commerce reflect a state-driven model that contrasts with the positions of the US and the EU, making a full agreement on e-commerce difficult. Even the differences between the US and the EU around issues of data flows and privacy raise questions about the possibility of reaching a meaningful consensus.
In the short term, negotiators might find it easier to focus on a general stocktaking of the e-commerce initiative, or on agreeing a roadmap for the negotiation process and future work in relation to e-commerce. In the medium to long term, efforts could shift to advancing concrete texts for negotiation and reaching partial agreements on e-commerce rules.
To allow other WTO members to join down the road, and to potentially turn a plurilateral initiative into a multilateral one, it will be critical to keep the negotiation process open and inclusive. Otherwise, the international rules facilitating e-commerce risk becoming fragmented.
Investment
Trade and investment are closely linked, but the WTO has only dealt with the latter issue on an incomplete basis. In particular, the Agreement on Trade-Related Investment Measures (‘TRIMs Agreement’) and the General Agreement on Trade in Services contain limited provisions. During the 1996 WTO Ministerial Conference in Singapore, a Working Group on the Relationship between Trade and Investment was established. But in light of differences between developed and developing countries, multilateral attempts to negotiate rules on investment protection and liberalization at the WTO have not borne fruit. Ultimately, investment was dropped as a WTO negotiating issue in 2004.
In the meantime, countries have covered investment provisions through bilateral investment treaties (BITs) and in chapters of bilateral and regional free-trade agreements. New attempts to include investment in the WTO were started in 2017. More than 70 WTO members launched ‘structured discussions with the aim of developing a multilateral framework on investment facilitation’.127 By the end of 2019, 98 WTO members were moving towards negotiations on a new international framework on investment facilitation for development at the WTO.128 By focusing on investment facilitation – and excluding the thorny issues of market access, investment protection and investor–state dispute settlement – this initiative stands a greater chance of success than past efforts.
Agriculture and development
The WTO Agreement on Agriculture, which came into force in 1995, was an important milestone, but reform efforts have not halted: policymakers continue to seek to make agricultural trade fairer and more competitive. In particular, WTO members are targeting reform of subsidies and high trade barriers, which distort agricultural trade. In 2015, WTO members committed to abolishing agricultural export subsidies. They also agreed to find solutions to the issue of public stockholding for food security purposes (an issue that demands new attention in the context of COVID-19). And they agreed to develop a special safeguard mechanism for developing countries and trade rules for cotton.129 WTO members continue to conduct negotiations on these issues. The next WTO Ministerial Conference needs to serve as a target for making progress. It will also be important to consider agriculture notification obligations, an area in which compliance has been notoriously low.
Development issues and the interests of developing countries have long been a focus for the work of the WTO – not least since the Doha Development Agenda was launched in 2001. But in order to move the debate forward, the problem of self-declared developing-country status must be tackled.
Environmental sustainability
Trade and the WTO have key roles to play in efforts to achieve the UN Sustainable Development Goals (SDGs) and the Paris Agreement climate goals. WTO members have discussed various trade sustainability issues, and talks have advanced to varying degrees. Three areas stand out as having the potential for progress in the short term, and could make a significant contribution to a green recovery from the COVID-19 crisis.
First, WTO members should prioritize the conclusion of an agreement on limiting subsidies to fisheries. WTO negotiations on fisheries subsidies were launched in 2001, but resulted in little progress. At the WTO Ministerial Conference in Buenos Aires in 2017, WTO members agreed to secure a deal on fisheries subsidies that delivers on SDG 14.6 by the end of 2019.130 While the deadline has been missed, a meaningful agreement needs to be the core environmental priority for the next WTO Ministerial Conference. If WTO members do not deliver on this mandated goal, they will undermine the credibility of the WTO at a critical time. If multilateral progress remains elusive, plurilateral efforts could bear more fruit.
Second, the WTO can play a role in reforming fossil fuel subsidies. At the Buenos Aires Ministerial Conference in 2017, a coalition of 12 WTO members led by New Zealand called on the WTO ‘to achieve ambitious and effective disciplines on inefficient fossil fuel subsidies that encourage wasteful consumption’.131 The next WTO Ministerial Conference presents an opportunity to renew this statement and attract a broader group of supporters.
Third, WTO members need to focus on concluding negotiations for the Environmental Goods Agreement (EGA). As mentioned in Chapter 5, negotiations were launched in 2014 but none have taken place since 2016. Revitalizing the process by developing the EGA as an open plurilateral agreement would send a powerful signal, and would help to bolster the relevance and credibility of the WTO.132 By engaging on this topic with a broad range of stakeholders – from international organizations (such as the United Nations Conference on Trade and Development (UNCTAD) or the United Nations Environment Programme (UNEP)) to business groups and civil society organizations – WTO members could better address the traditional divides between those groups and the habitual silos between policymakers and policy shapers in the trade and environmental sustainability space.
Linking trade and non-trade issues
The links between trade policies and issues such as environmental and labour standards have long been recognized, both in terms of the impact of trade on these areas and vice versa. But the degree to which non-trade issues should be linked to WTO negotiations and become subject to WTO rules and disciplines remains the subject of intense debate.
Past efforts to link non-trade issues to trade were pursued in order to encourage greater compliance and enforcement. By linking non-trade issues (which are traditionally hard to enforce) to the global trading system, countries could take advantage of a functioning dispute settlement mechanism under the WTO. However, this particular reason for issue linkage has become redundant as the WTO Appellate Body crisis continues.
There are limits to what the WTO can and should do regarding non-trade issues. Careful calibration is needed, particularly regarding the role of the WTO in relation to the SDG mandate.
One potential advantage of issue linkage is that it could improve alignment and policy coherence between trade and efforts to tackle climate change. Another benefit is that it could foster a broader range of compromises in the package deals of commitments on which trade agreements are typically built. For example, the addition of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) to the Uruguay Round provided larger scope for agreement.133
But there are limits to what the WTO can and should do regarding non-trade issues. Careful calibration is needed, particularly regarding the role of the WTO in relation to the SDG mandate. If the linkage is too weak, the WTO risks not being relevant in efforts to tackle a key global challenge. But if the linkage is too great, the WTO risks being overburdened at a time when the organization is under stress already. Perhaps the best way forward is not to focus too much on creating new rules on trade and environmental sustainability, but to focus instead on greater policy coherence and increased interaction between stakeholders.
Building domestic support
Because the WTO is a member-driven organization, reforms must be determined by member governments and other relevant authorities. Moving the debate and the reform process forward will therefore require policymakers to build domestic support. This can be challenging in some contexts. A survey by the Bertelsmann Foundation shows that only 35 per cent of respondents in the US see the WTO as an important organization, compared to 84 per cent of respondents in China.134 In European countries, slightly more than 40 per cent of respondents have a positive perception of the WTO.
Fostering domestic support for the WTO will require greater involvement from the business community. In this regard, it is positive that 26 business organizations wrote a letter to the US president in December 2019, calling for the US to embrace plans to reform the WTO Appellate Body that build on the ‘Walker principles’.135 The International Chamber of Commerce and the B20 (the business arm of the G20) are also working closely with the WTO, and have outlined recommendations for reforming the organization.136 Despite these initiatives, the business community could still play a larger role and stimulate more vigorous public debate on the WTO and rules-based international trading system.
In the US, a bipartisan group of members from the House Committee on Ways and Means introduced a resolution in December 2019 encouraging the Trump administration to work with allies to reform the WTO.137 The resolution has been presented for consideration by the full House of Representatives. This rare bipartisan move shows that there are champions of the WTO in Congress – and could hopefully open a window for constructive engagement. If some, even smaller, aspects of the WTO can be reformed, then this would strengthen the case domestically of those who back the WTO and want the US to reclaim its role as a key shaper of a reformed international rules-based trade order.
109 World Trade Organization (2020), ‘Summary Table of Ongoing Accessions’, March 2020,
https://www.wto.org/english/thewto_e/acc_e/status_e.htm (accessed 14 Jul. 2020).
110 World Trade Organization (2006), ‘Trade Policy Review: China, Concluding remarks by the Chairperson’, April 2006, https://www.wto.org/english/tratop_e/tpr_e/tp262_crc_e.htm (accessed 14 Jul. 2020).
111 World Trade Organization (2018), ‘Trade Policy Review: China, Report by the Secretariat’, 6 June 2018, https://www.wto.org/english/tratop_e/tpr_e/s375_sum_e.pdf (accessed 14 Jul. 2020).
112 Bown, C. (2020), ‘US-China phase one tracker: China’s purchases of US goods’, Peterson Institute for International Economics, 2 July 2020, https://www.piie.com/research/piie-charts/us-china-phase-one-tracker-chinas-purchases-us-goods (accessed 14 Jul. 2020).
113 World Trade Organization (undated), ‘State trading enterprises’, https://www.wto.org/english/tratop_e/statra_e/statra_e.htm (accessed 14 Jul. 2020).
114 The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
115 While the chapter on state-owned enterprises in the USCMA is not aimed at the three parties directly, the agreement can be seen as a blueprint for future negotiations, and that chapter thus sends an important signal.
116 Bown, C. and Hillman, J. (2019), ‘WTO’ing a Resolution to the China Subsidy Problem’, Working Paper 19-17, Peterson Institute for International Economics, October 2019, https://www.piie.com/sites/default/files/documents/wp19-17.pdf (accessed 14 Jul. 2020).
117 European Commission (2020), ‘Joint Statement of the Trilateral Meeting of the Trade Ministers of Japan, the United States and the European Union’, 14 January 2020, https://trade.ec.europa.eu/doclib/docs/2020/january/tradoc_158567.pdf (accessed 14 Jul. 2020).
118 The key implication of non-market economy status in anti-dumping proceedings is the possibility to use other methodologies for calculating the normal value of products.
119 Miles, T. (2019), ‘China pulls WTO suit over claim to be a market economy’, Reuters, 17 June 2019,
https://www.reuters.com/article/us-usa-china-wto-eu/china-pulls-wto-suit-over-claim-to-be-a-market-economy-idUSKCN1TI10A (accessed 14 Jul. 2020).
120 According to Article 32.10 of the USMCA, ‘a Party shall inform the other Parties of its intention to commence free trade agreement negotiations with a non-market country’ at least three months before commencing negotiations. The party also has to provide requested information, and provide the other parties with the full text of the agreement and annexes for review. Finally, a free-trade agreement with a non-market economy allows the other parties to terminate the USMCA with six months’ notice.
121 Lawder, D. and Freifeld, K. (2018), ‘Exclusive: U.S. Commerce’s Ross eyes anti-China “poison pill” for new trade deals’, Reuters, 5 October 2018, https://www.reuters.com/article/us-usa-trade-ross-exclusive/exclusive-
u-s-commerces-ross-eyes-anti-china-poison-pill-for-new-trade-deals-idUSKCN1MF2HJ (accessed 14 Jul. 2020).
122 World Trade Organization (2019), ‘China’s proposal on WTO reform’, Communication from China, 13 May 2019, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/GC/W773.pdf&Open=True (accessed 14 Jul. 2020).
123 Ibid.
124 World Trade Organization (undated), ‘Electronic commerce’, https://www.wto.org/english/tratop_e/ecom_e/ecom_e.htm (accessed 14 Jul. 2020).
125 United Nations Conference on Trade and Development (2020), ‘Global e-Commerce hits $25.6 trillion – latest UNCTAD estimates’, 27 April 2020, https://unctad.org/en/Pages/PressRelease.aspx?OriginalVersionID=552 (accessed 14 Jul. 2020).
126 World Trade Organization (2018), ‘Work Programme on Electronic commerce – Moratorium on customs duties on electronic transmissions: Need for a re-think’, Communication from India and South Africa, 13 July 2018, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/GC/W747.pdf&Open=True (accessed 14 Jul. 2020).
127 World Trade Organization (2017), ‘Joint Ministerial Statement on Investment Facilitation for Development’, 13 December 2017, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/MIN17/59.pdf&Open=True (accessed 14 Jul. 2020).
128 World Trade Organization (2019), ‘Joint Ministerial Statement on Investment Facilitation for Development’, 22 November 2019, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/L/1072R1.pdf&Open=True (accessed 14 Jul. 2020).
129 World Trade Organization (undated), ‘Agriculture negotiations’, https://www.wto.org/english/tratop_e/agric_e/negoti_e.htm (accessed 14 Jul. 2020).
130 Target 14.6: ‘by 2020, prohibit certain forms of fisheries subsidies which contribute to overcapacity and overfishing, and eliminate subsidies that contribute to IUU fishing, and refrain from introducing new such subsidies, recognizing that appropriate and effective special and differential treatment for developing and least developed countries should be an integral part of the WTO fisheries subsidies negotiation’.
131 World Trade Organization (2017), ‘Fossil Fuel Subsidies Reform Ministerial Statement’, Communication from 12 WTO members, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/MIN17/54.pdf&Open=True (accessed 14 Jul. 2020).
132 Bacchus, J. (2018), The Willing World: Shaping and Sharing a Sustainable Global Prosperity, Cambridge: Cambridge University Press.
133 Centre for International Governance Innovation (2019), CIGI Expert Consultation on WTO Reform, p. 25.
134 Hoekman, B. (2018), Revitalizing Multilateral Governance at the World Trade Organization,
Report of the High-Level Board of Experts on the Future of Global Trade Governance, Bertelsmann Stiftung, https://www.bertelsmann-stiftung.de/fileadmin/files/BSt/Publikationen/GrauePublikationen/MT_Report_Revitalizing_Multilateral_Governance_at_the_WTO.pdf (accessed 14 Jul. 2020).
135 Americans for Prosperity (2019), ‘Letter to the President’.
136 International Chamber of Commerce (2019), ‘ICC issues recommendations to reform global trade’, 9 October 2019, https://iccwbo.org/media-wall/news-speeches/icc-publishes-recommendations-on-reforming-the-multilateral-rule-based-trading-system-at-wto-public-forum/ (accessed 14 Jul. 2020).
137 Schweikert, D. (2019), ‘Bipartisan Resolution Reaffirming United States’ Commitment to the World Trade Organization Led by Reps. Schweikert and Kind Passes Committee’, 17 December 2019, https://schweikert.house.gov/media-center/press-releases/bipartisan-resolution-reaffirming-united-states-commitment-world-trade (accessed 14 Jul. 2020).