Challenges Facing the World Trade Organization: An Overview

• Date: 01 December 2018
• Published date: 01 December 2018
• DOI: http://doi.org/10.1111/1467-8462.12301
• Author: Gary P Sampson

Challenges Facing the World Trade Organization: An Overview

Gary P Sampson

Abstract

Tensions are running high in the world trading

system. Suff‌icient conditions now exist for a

continuing degeneration of trading relations

creating a downward spiral and launching a

serious trade war with unknown consequences.

History has shown this scenario can be avoided

if trading relations are based on agreed rules,

enforced by an effective compliance mecha-

nism and fully respected by governments. With

the World Trade Organization (WTO) now at

its heart, the very existence of the rules-based

trading system is under threat. Challenges

facing the WTO and the reforms needed to deal

with them are addressed in this article.

1. Introduction

Tensions are runninghigh on many fronts of the

world tradingsystem and the source of tension is

multifaceted. The implications for international

trade, international relations and eventually

world peace are unknown. A common thread

is discriminatory trade restrictions taken unilat-

erally, absentof international scrutiny, followed

by retaliatory measures. Unfair practices con-

cerning intellectual property, gaining trade

advantages via state-owned enterprises and

dumping are also on a long list. The result is

that suff‌icient conditionsnow exist for a serious

degeneration of trading relations creating a

downward spiraland launching a true trade war.

History tells us a downward spiral can be

avoided if trading relations are based on rules

agreed to by all trading partners, enforced by an

effective compliance mechanism and fully

respected by governments. This has been the

experience of the multilateral trading system

for over 70 years: from 1 January 1948 with the

creation of the General Agreement on Tariffs

and Trade (GATT), and from 1995 with the

founding of the World Trade Organization

(WTO).

1

Martin Wolf (2002, p. 183) expressed

the majority view at the time of his writing: ‘the

multilateral trading system at the beginning of

the twenty f‌irst century is the most remarkable

achievement in institutionalized global eco-

nomic cooperation that there has ever been’.

Fast forward to current times. Asked if his

proposed trade policies would contravene the

WTO, Donald Trump replied: ‘It doesn’t

matter ... if that’s the case we’re going to

pull out. These trade deals are a disaster. The

WTO is a disaster’(EURAAVTIV 2016).

In what follows, challenges facing the WTO

are identif‌ied along with suggestions as to what

reforms could assist in dealing with them.

2

In my

view, reform will not come as a ‘big bang’as

* Professor of International Economics, Melbourne

Business School, Melbourne University, Victoria 3010

Australia; email <G.Sampson@mbs.edu.>. The author

would like to thank Peter Lloyd, Seraf‌ino Marchese,

Andrew Mackenzie, Andrew Farran and Edwini Kessie

for most helpful comments.

The Australian Economic Review, vol. 51, no. 4, pp. 453–473 DOI: 10.1111/1467-8462.12301

°

C2018 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd

proposed, for example, by President Macron

(2018): ‘what is required is a complete overhaul

of the regulations which structure international

competition’. This will not happen. I will argue

that what is required is a ‘bottom up’approach.

Simply put, much of the WTO works well but the

real risk is to lose what works in the process of

reform: in other words, ‘don’t throw the baby out

with the bathwater’. Further, only governments

can reform the WTO. There can be expert group

recommendations and advice from individuals

on how the WTO should be reformed, but reform

can only come from within: in other words,

the WTO must ‘pull itself up with its own

bootstraps’.

There are two recurring themes in the

following. First, the critical importance for

Australia of a well-functioning multilateral

trading system for both economic and geopo-

litical reasons. Second, for a variety of reasons,

Australia is particularly well placed to play a

leadership role in advancing proposals for

reform. I will f‌irst overview the characteristics

of the multilateral trading system that are

relevant for the discussion of the challenges

that follow. The article closes with a conclu-

sion. Given the rapidity with which trade

policy changes (just a Tweet away), attention

has been focused on the more systemic

challenges facing the WTO.

2. A Remarkable Achievement?

2.1 Trade Liberalisation and Membership

In March 1948, 56 countries signed the Havana

Charter, an agreement to create an International

Trade Organisation (ITO). The ITO was to

have a wide policy brief dealing not only with

international trade but also many other impor-

tant policy areas. The ITO never came into

being; it was not ratif‌ied by the US Senate who

argued it would be too invasive in internal

affairs. Because of the US rejection, no other

state ratif‌ied the ITO. Elements of the Charter

would later become the General Agreement on

Tariffs and Trade (GATT), an interim agree-

ment awaiting the eventual creation of an ITO.

The wait was long; it took almost half a century

to the create the WTO.

The GATT was born in Geneva in 1948 as an

agreement between 23 governments to liberal-

ise tariffs and remove quantitative restrictions

for trade in goods. In today’s parlance, the

GATT evolved as a plurilateral agreement

and emerged almost half a century later as a

multilateral institution, namely, the WTO with

125 members.

3

The WTO today has a vastly expanded

mandate with 164 members and rules covering

98 per cent of world trade. That there are 22

countries waiting to join is not surprising.

Countries that have undertaken the reforms

required to join the WTO have grown 20 per

cent faster than the overall world average for the

past 20 years (Wolff 2018). World trade has

increased 262 times in value terms (US$) since

1948 and 60 times in real terms. The average

growth of world trade over the past 20 years is 5.3

per cent per annum. As world trade has increased

faster than world production in virtually every

year since 1947, it is an arithmetic truism that the

share of international trade in world GDP has

increased; from just 18 per cent in 1947 to 56 per

cent in 2017. All but a small fraction of world

trade takes place smoothly according to WTO

rules; at the rate of A$3.2 billion per hour.

In 1948 world tariff averages for industrial

products were around 40 per cent. They are 4.2

per cent today. Importantly, tariffs have been

‘bound’at a maximum rate allowable under

WTO agreements. The average bound rate for

Australia is 9.9 per cent with 97 per cent of its

6,186 tariff lines bound. Like other countries,

Australia applies a rate which is equal to or

lower than the bound rate (i.e., the applied rate)

with the difference being the ‘binding over-

hang’. This provides a measure of f‌lexibility to

increase rates when the government considers

it necessary. It also provides negotiating room

to further lower bound tariffs when exchanging

market access possibilities. Australia’s applied

tariff is 2.5 per cent giving it the largest

‘overhang’(7.4 per cent) of any developed

country. From a commercial and negotiating

perspective, binding tariffs is as important as

reducing them. Uncertainty is regularly cited

by business as the most signif‌icant non-tariff

barrier to trade. Australia is the 23

rd

world

largest exporter of goods and has 1.2 per cent of

454 The Australian Economic Review December 2018

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C2018 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research, Faculty of Business and

Economics