Diwali 2022. Amid much fanfare surrounding UK prime minister Boris Johnson’s recent India visit, the deadline has been set for a free trade agreement (FTA) to be signed between the two countries. The agreement, which will cover more than 90% of tariff lines, aims to double bilateral trade of both goods and services between India and the UK to about $100 billion by 2030.
Johnson’s visit and the news of the FTA have come at a time when countries are uncertain about the impact of the Russia-Ukraine war on the world economy and how goods and services should be safely traded between nations. In the prevailing circumstances, the idea of signing multilateral trade deals and exposing domestic markets to the vagaries of the world order is being dismissed by many countries.
This fear has given way to the rise in the number of regional and bilateral set-ups which has cast a shadow over multilateralism in world trade, a major proponent of which has been the World Trade Organization (WTO).
In 1995, with the birth of the WTO, a new globalised order, which was dependent on free trade between countries, was envisaged. A successor to the General Agreement on Tariffs and Trade (GATT), a group of 23 nations founded in 1948, the WTO, through a grand structure, wanted to govern and promote fair trade among its 164 current member states. While GATT majorly looked at trade in goods, the WTO additionally covered trade in services and intellectual property and created new procedures for dispute resolution. The idea was to bind every country in the world through a web of trade to eliminate chances of another Cold War-like situation that had drained world leaders for close to four decades.
The US-China trade war, which flared up in 2018 and was dubbed as the second Cold War, played out anyway—even in the presence of the young international body’s multilateral trading system.
While the US is an original member of the WTO, China had formally requested to accede to the WTO in 1995 but became a member only in December 2001. Since then, it has achieved many a feat—from becoming the second largest economy in GDP terms and the largest merchandise exporter to becoming the top destination for inward foreign direct investment among developing countries, the list is long.
There are also complaints galore. Issues surrounding intellectual property rights, anti-dumping instances, subsidies and tariff rates have been brought up against China by the US, the European Union, Japan, Australia and other countries at the forum. Over the years, China’s presence in the international organisation and its subsequent ascent in global trade has attracted friction between the communist country and its capitalist counterpart in the West.
The WTO’s existential crisis was aggravated when former US president Donald Trump criticised it for being unable to confront China’s trade distortion in the global markets. His successor, Joe Biden, has not done things very different to restore the command of the global institution that was once the epitome of an interdependent world.
But, just as capitalism is struggling to stand on its feet since the 2008 financial crisis, the WTO, too, seems to be losing relevance among member nations. The Russia-Ukraine war threatening the supremacy of the West-driven capitalism has left a question mark over borderless trade and the very idea of the WTO.
In 2018, Trump launched a trade war against China and its allies in Europe. In a bid to “Make America Great Again”, Trump used tariff as well as non-tariff barriers to cut imports from countries that, he believed, had undue advantage in trade due to China’s hidden subsidies. The WTO, despite a clear mandate to stall any attempt to levy such trade barriers, could not do much.
“Since a multilateral investment agreement is still not part of the WTO, a major challenge that it is facing is the misuse of its national security protection provision under which tariff and non-tariff barriers are being raised by developed countries,” explains Aradhna Aggarwal, professor of international economics at the Copenhagen Business School. She adds: “The way this provision is being invoked by these countries to protect their industries is detrimental to the basic principles of the WTO.”
For Trump, the trade war was just the beginning. Unsatisfied with the outcome of the trade war, he blocked the appointment of judges to the WTO’s Appellate Body in 2019, which continues to affect the functioning of the international trade facilitator.
Lorand Bartels, who teaches international law at the University of Cambridge, says, “The WTO has always had three functions: negotiating agreements on trade liberalisation, administering trade agreements and settling disputes about those agreements. Not having a final court of appeal is damaging.”
He points out the faultline within the structure of the WTO when it comes to settling trade disputes. “Every WTO member has a right of appeal before a WTO panel ruling which is binding. Some WTO members have taken the opportunity to appeal into the void. That way, they prevent negative panel rulings from taking legal effect. This inevitably reduces the prestige of the WTO and contributes to unilateralism, which is, in part, what the WTO was designed to stop.”
Trump’s moves, however, were the manifestation of a sentiment that has been brewing for a while now. Over the years, the world has witnessed the largest economy slowly retreating from global trade. A study by the Peterson Institute for International Economics traced it back to the financial crisis. “Global trade, as a share of world GDP, plunged during the global financial crisis but has recovered slowly since then. US trade, as a share of its GDP, also plunged but after a short rebound has continued to fall. This decline expanded the difference between global and US trade openness to 34 percentage points in 2019, the largest gap in half a century,” the study found.
Rise of Regionalism
The increasing geopolitical tension between the West and the Russia-China block have forced nations to safeguard their economic interests by getting into FTAs within regional blocks.
The China-led Regional Comprehensive Economic Partnership, a 15-nation forum, accounts for 30% of the global GDP and looks to eliminate 90% of the tariffs between its member nations.
India walked out of the agreement in 2019, citing pressure from the domestic dairy industry. It is now weighing its options in Quad, an Indo-Pacific geopolitical group with the US, Japan and Australia as its other members. Recently, India also signed FTAs with Australia and the UAE that will result in massive reduction of tariffs on certain products between the nations involved.
This throws up a pertinent question: what is the relevance of the WTO if nations prefer to negotiate through regional trade agreements (RTAs)?
As of March 2022, there were 354 RTAs in force, according to the WTO. While member nations notify the WTO about their RTAs and the WTO’s rules itself require RTAs not to be against the spirit of multilateralism, it is fairly difficult to decide whether any clause under an RTA will affect the spirit of equal treatment of all WTO members.
Aggarwal blames the archaic rules of the WTO for the rise in regionalism in world trade. “The rules of the WTO badly need reforms. These were negotiated during 1986-1995. Since then, the way global trade is taking place has radically changed. Besides, the world is seeing the fourth industrial revolution, which is all about digital technologies. China has emerged as a major power, changing the distribution of global power. In this changing world, FTAs are seen as the way forward. Countries do not seem to be interested in investing in multilateral agreements after the collapse of the Doha Round.”
The Doha Round that Aggarwal mentions refers to the trade negotiations that were carried out between the WTO’s members in 2001 in a bid to introduce lower trade barriers and revise trade rules. Covering 20 areas of trade, the talks, known as the Doha Development Agenda, was pointedly aimed at improving the trading prospects of developing countries, in which India played an enthusiastic role.
Two decades later, the world is yet to see the positive results of the moves that were supposed to diminish the barriers between the developed and the developing nations, with agriculture being the central agenda.
Despite several attempts and signing of a subsequent agreement, the Trade Facilitation Agreement, in 2017, the broad consensus among trade experts is that the Doha Round has failed.
In India’s case, the developed countries, which are eyeing access to the Indian market want it to stop buying food grains from farmers under the minimum support price mechanism and also abolish its famous public distribution system, which is heavily subsidised. This system, they say, has been distorting the market for other countries, as they are not being sell their products in Indian markets.
Over the last two years, these very mechanisms have been at the centre of India’s political debate. The Narendra Modi-led National Democratic Alliance government was forced to repeal the contentious farm laws that tried to reform India’s agriculture market in accordance with the need of the Doha round. The government also tasted electoral success by riding on the fact that it distributed free food grains to 800 million people and helped the country’s poor navigate the economic impact of the Covid-19 pandemic.
Can WTO Survive?
One constant criticism against the WTO has been that it promotes the interests of multinational firms. Bartels, however, disagrees and places the blame on the economic compulsions of different countries that stop them from getting into multilateral agreements.
Sunitha Raju, a professor at the Indian Institute of Foreign Trade, says that both developed and developing countries, despite the slow pace of negotiations, have come to terms with many things over the years. She points out that emerging challenges to the world economy will keep the international trade body alive. “Nobody knows how to define ecommerce. Under the FTA, every nation defines it differently. You need an organisation that helps countries come on the same page on this issue,” she adds.
One other area where Raju feels the WTO is indispensable is trade facilitation. “All countries do not have the same cost of transportation and logistics. FTAs allow you to negotiate these issues with the partner country, but you still have to do business with countries that are outside the FTAs. This is why th WTO will continue to hold its relevance, because it is not possible to resolve the multi-layered trade issues without having a multilaternal organisation,” she says, adding that it will also be difficult to negotiate issues related to sustainable development goals and environment through bilateral FTAs alone.