WTO in Crisis: EU Options for Shaping a More Effective Global Trade System

The 13th WTO Ministerial Conference will take place from February 26 to 29, 2024. The topics to be discussed cover a wide range of issues: fisheries subsidies, a dispute settlement reform, customs duties on electronic transmissions, agriculture and food security, trade-related aspects of intellectual property rights in the context of COVID-19 vaccines, e-commerce, subsidies for industrial sectors and agriculture and more.

The diversity of topics shows the great need for multilateral coordination and agreements. Unfortunately, growing demands on the performance of the WTO are coming up against increasingly limited opportunities for action. The EU should, therefore, consider its own measures to intensify international cooperation.

WTO – Its role in global trade

The World Trade Organization (WTO) replaced the General Agreement on Tariffs and Trade (GATT) as an organization in 1995. The aim of the WTO is to reduce trade barriers and thus promote international trade. The WTO is also responsible for settling international trade disputes. This is done by the Dispute Settlement Body.

After the end of the Second World War, multilateral efforts to promote the international division of labor focused on reducing import tariffs on goods. In recent years and decades, the range of topics has expanded. The WTO now also deals with the liberalization of cross-border trade in services, the protection of intellectual property, the link between trade and environmental issues, and the promotion of environmental sustainability, to name just the most important topics.

Rule-based globalization under pressure

For a long time, international trade was dominated by the dismantling of trade barriers and the conclusion of free trade agreements. For example, the average level of global import tariffs fell from 40 percent after the end of the Second World War to less than four percent at the beginning of the 1990s as a result of several GATT rounds.

As a result, the share of global exports of goods and services grew significantly faster than global gross domestic product (GDP), an indicator of an increasing international division of labor.

However, following the Lehman Brothers bankruptcy, which led to a severe global economic crisis, tariffs –  trade barriers were increasingly used again. Globalization became “Slowbalization”.

Currently, the international division of labor is increasingly characterized by protectionist measures. In addition to tariffs, more and more economies are using additional trade-restricting instruments, including subsidies for domestic companies, sanctions, and export bans.

The reason is an increasing number of countries are not only aiming to increase the prosperity of their population with their foreign trade policy, but also achieve geopolitical goals with trade policies. To this end, protectionist measures are being taken to harm other countries – weakening their political power.

Rule-based globalization is increasingly becoming power-based globalization. This is resulting in growing trade disputes, which the WTO is responsible for settling. However, it has been unable to perform this task for some time now.

WTO’s ability to act significantly weakened

According to WTO rules, the Dispute Settlement Body must have at least three judges. However, after the term of office of two of the remaining three judges expired on December 10, 2019, this requirement is no longer met because the US has prevented the appointment of new judges.

Hence, there is no multilateral institution to decide on trade disputes. This can lead to considerable disruption in the international division of labor and cooperation. Without a global dispute settlement body, countries can take measures that violate the rules of international trade without fear of sanctions.

It would be possible to tolerate this weakening of the WTO if the need for global cooperation were to diminish. However, the opposite is the case.

The need for global solutions is increasing

The increased use of protectionist measures is restricting the international division of labor and, therefore, international cooperation. These national isolationist tendencies are being met with a growing need for international cooperation, as many current problems can only be solved internationally. Here are just three examples:

1. An intact environment is a global public good. No nation can protect the environment on its own. For example, reducing ocean overfishing can only be achieved through a joint reduction in catches by all countries. An “Agreement on Fisheries Subsidies“, which is the subject of the upcoming WTO conference, would be a helpful step in this direction.
2. The reduction of global greenhouse gas emissions harmful to the climate can only be achieved by all countries working together. The most sensible solution would be a uniform global carbon price that applies in all countries. The WTO would be an organization that could initiate the necessary global climate club. Moreover, International cooperation is a key prerequisite for developing green technologies.
3. A third global challenge is food security for the world’s population. Wars, poverty, natural disasters, regionally unequal growing conditions for food, climate change, and the loss of biodiversity are the main causes of very different food supplies for people around the world. The disruption of grain supplies from Ukraine in the wake of the Russian war of aggression shows just how important international agricultural trade is for the food security of the world’s population.

What can we expect from the WTO conference?

In view of the global challenges outlined above, it is crucial to strengthen the WTO’s ability to act.

In its resolution of February 8, 2024, the European Parliament consequently made numerous demands of all WTO members. To name just a few: the restoration of the dispute settlement system as quickly as possible, ratification of the agreement on fisheries subsidies, answers to the role of subsidies in the context of climate change, greater consideration of climate and environmental protection aspects to make international trade more sustainable and much more.

However, given the US’s blockade stance on appointing judges to the dispute settlement system and the geopolitical tensions, expectations of the WTO conference should not be too high. Instead, the EU should consider how it could react to a WTO that is still limited.

Options for the EU

The EU has a variety of possible responses to a weakening WTO. Here are three proposals, all of which relate to the goal of climate neutrality.

First, the EU can try to take its own measures to solve the problems outlined above. In the context of climate protection, it has already done so by setting its own carbon price, which is significantly higher than in many other regions of the world. To prevent the relocation of emission-causing activities to other countries – known as carbon leakage -, the EU’s carbon price is combined with a “Carbon Border Adjustment Mechanism“. However, this is an economic challenge for the EU’s trading partners.

Secondly, the EU could agree on a coordinated approach to reducing climate-damaging subsidies. Many developed economies support their economies with subsidies that damage the climate. In Germany, for example, these include reductions of the electricity tax and energy tax for the manufacturing sector and for agriculture, energy tax reduction for diesel fuel, exemption of kerosene from energy tax for the kerosene used in commercial air transport and many more. An EU-wide reduction in these subsidies would significantly increase the incentive to use climate-friendly technologies and products.

Thirdly, the EU can intensify its efforts to conclude new free trade agreements. Aspects of environmental and climate protection should be increasingly integrated into these agreements. This would set a global example for other free trade agreements.

It is of central importance that EU member states can only enforce their standards, e.g., in the areas of environmental, climate, and consumer protection, at a global level if they work together. As individual states, the European economies are too weak economically and politically compared to the economic heavyweights the US and China.

About the author

Thieß Petersen is Senior Advisor at the Bertelsmann Stiftung, specializing in macro-economic studies and economics. His focus lies on the causes and effects of financial and economic crises as well as the chances and risks of globalization. Among others, he has recently worked on the effects of carbon pricing and the benefits of a potential global climate club.