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Global trade wars are piling pressure on the World Trade Organisation. Can it survive?

Global Trade Wars

By Ian Lavis, on behalf of Praxity

The World Trade Organisation (WTO) is having to work harder than ever to diffuse global tensions over international trade. But with escalating tariffs and threats between member countries, and a growing danger of the US pulling out of the WTO altogether, there could be question marks over its future.

These are extraordinary times. US President Donald Trump has imposed steep tariffs on billions of dollars' worth of goods from the EU, Canada, Mexico and China, sparking retaliation in kind.

Meanwhile, the US is complaining about Russia’s retaliation to its steel and aluminium tariffs, and there are fears in some quarters that the UK is teetering on the verge of a ‘no deal’ Brexit. The latter would mean the UK having to agree a new list of tariff schedules with the WTO, but changes to tariffs between the UK and EU could trigger complaints from other nations, according to the Institute for Government thinktank.

Oh, and some analysts are warning we face the possibility of another global economic crisis. They include William White, Chairman of the Economic and Development Review Committee at the OECD, who warned in an FT article back in February “the odds of another crisis blowing up continue to rise” because global monetary policy is “caught in a debt trap of its own making”.

Everyone’s looking to the WTO to calm the international trade storm, but can it really make much difference when the most powerful nations on the planet increasingly accuse each other of flagrantly breaking WTO trade rules?

The WTO certainly has its work cut out. It is currently dealing with a sharp rise in the number of complaints about illegal trade activity around the world. It also faces the possibility of the US withdrawing its membership amid claims by President Trump that the WTO is too weak on China. Meanwhile, China has criticised US tariffs on its imports. And so it goes on.

In August alone, the following complaints and appeals were instigated:

  • A complaint by the US about Russian duties on US imports
  • A complaint by China about US tariffs on Chinese imports
  • An appeal by the US in dispute with Canada over paper duties
  • An appeal by Ukraine in dispute with Russia over railway equipment import restrictions

Can the WTO successfully de-escalate rising global tensions? Can it persuade the US to remain on board? To help answer these questions, we need to examine why the WTO was created and how it works.

The role of the WTO

The World Trade Organisation is the only global international organisation dealing with the rules of trade between nations. If the 164-member countries don’t have free trade agreements with each other, they trade under ‘WTO rules’. The goal, says the WTO, is “to ensure trade flows as smoothly, predictably and freely as possible”.

Based in Geneva, Switzerland, the WTO sets and enforces trade rules, and seeks to resolve disputes using independent judges. Its trade agreements are negotiated and signed by the majority of the world’s trading nations and ratified in their parliaments. The organisation monitors the implementation of trade agreements, produces research on global trade and economic policy, and serves as a forum for settling trade disputes between nations.

The WTO was established in 1995 to replace the General Agreement on Tariffs and Trade (GATT), whose rules were broken with impunity. While the rules of the WTO are arguably harder to break, there has been a significant rise in trade-related disputes in the first half of 2018.

Since 1995, members have filed more than five hundred disputes with the WTO. Most of these are settled in consultations or by agreement before advancing to litigation. If consultation fails, a panel is chosen by the WTO’s Dispute Settlement Body to hear the case. The panel’s recommendations, if not overturned on appeal, must be implemented by the offending country. If the country fails to respond, the plaintiff can then take targeted retaliatory measures, such as blocking imports or raising tariffs.

Critics claim the WTO doesn’t promote fair trade and does favour rich countries over poorer ones. Supporters say it is the best way to regulate international trading systems given the fact that every member country, however small, has an equal vote. Despite this, doubts persist over its effectiveness and members are increasingly developing separate, non-WTO agreements for their trading interests.

Mounting problems

In an article published earlier this year, the Council on Foreign Relations (CFR) says the WTO is “under considerable pressure”, adding: “Negotiations on a comprehensive development agenda have foundered on disagreements over agricultural subsidies and intellectual property rights, while members have increasingly turned to separate bilateral and regional free trade agreements to advance their trade interests. Meanwhile, US President Donald Trump has criticized the WTO for what he sees as its weakness in confronting China’s trade abuses and constraints on US sovereignty, placing the future of global trade rules into doubt.”

If anything, the pressure has increased since then. However, the WTO’s Deputy Director General, Alan Wolff, says it’s far too early to plan the WTO’s funeral. In a blog on the CFR website, he acknowledges the “serious risks to the world trading system of major players appearing to embrace conflict over working cooperatively together to deal with real problems”, but he adds it is “far too early to make arrangements for the WTO’s funeral”.

Mixed success

The Deputy Director General is confident steel tariffs – one of the most contentious global trade issues of 2018 – can be sorted out without the WTO collapsing. He admits there are “serious issues to be resolved” as to how appeals can be processed by the WTO dispute settlement system, but he denies there is no common ground upon which members can agree.

Despite its problems, the WTO has had some notable successes in recent years, with agreements to expand its Information Technology Agreement, to create a Trade Facilitation Agreement, and to ban agriculture export subsidies. Members have also declared their intention to move forward on electronic commerce.

However, one of its biggest initiatives – the Doha Development Agenda – has so far failed in its bid to reduce trade barriers in agriculture, critics say. The wealthiest countries pledged in Doha, Qatar, to scale back agricultural subsidies and trade barriers so that the poorest countries could export more rice, sugar and cotton, but little has happened according to the CFR.

The WTO has also come under fire for its action, or inaction, in the following areas:

  • Rules on drug patents which critics say limit access to medicines in poorer countries
  • Rules which some analysts say overrule national sovereignty and erode environmental and labour protections
  • Claims that forcing countries to compete with cheaper imports has resulted in job losses
  • Failing to adequately penalise countries that ignore global trade rules

What next?

The US, by far the most active participant of the WTO system, has been particularly damning in its criticism of the organisation recently. In a report to Congress on China’s WTO compliance, the United States Trade Representative (USTR) says: “The WTO’s dispute settlement mechanism is narrowly targeted at good faith disputes where one member believes that another member has adopted a measure or taken an action that violates a WTO obligation. It can address this type of discrete problem, but it is not effective in addressing a trade regime that broadly conflicts with the fundamental underpinnings of the WTO system.”

No prizes for guessing which trade regime the USTR is complaining about but recent action by the US in retaliation can hardly be deemed as following the principles of the WTO either. And herein lies the problem. The WTO is clearly seen as the ‘go to’ organisation to solve international trade disputes and is being asked to act on an increasing number of alleged contraventions, but it seems countries are rather inconsistent in how they use the system. Countries regularly appear to turn a blind eye to their own breaches while crying foul of other nations’ trading activities.

With consensus often hard to come by among WTO members, there has been an increase in plurilateral negotiations between smaller groups of WTO members. There has also been a rise in bilateral free trade agreements (FTAs) or larger regional agreements such as the Trans-Pacific Partnership (TPP), although the US withdrew from the TPP when President Trump took office.

It could be argued the WTO should do more to demonstrate that breaking the rules will not be tolerated, no matter how large the country. The WTO’s fiercest critics argue it needs to demonstrate it’s more than merely a talking shop – and global football – for the world’s most powerful and vociferous nations.

Leaders of the BRICS nations – Brazil, Russia, India, China and South Africa – recently signed a declaration supporting an open trading system under WTO rules. It says: “We underscore the importance of an open world economy, enabling all countries and peoples to share the benefits of globalisation, which should be inclusive and support sustainable development and prosperity of all countries. We call on all WTO members to abide by WTO rules and honour their commitments in the multilateral trading system.”

This declaration would indicate the WTO is still regarded as the best tool for bringing countries into line on international trade. At least in theory. Now we just need the WTO and its member countries, including those same BRICS countries, to demonstrate they are serious about following the rules of open trade. If they don’t, and if President Trump carries out his threat to pull out, the WTO may face its toughest challenge yet.