The G20 can contribute to the reform of the World Trade Organization by investing political capital – a move which would strengthen the trading system that its members rely on
Economic interdependence was a guiding goal of the world trading rules developed in the immediate aftermath of World War II. Access to developed markets, opened incrementally through multilateral trade negotiations, spurred trade and investment that contributed to economic development in both rich and poor countries. Germany and Japan recovered from wartime devastation of their own making; Korea went from an impoverished country to an economic powerhouse; and China and Russia joined the World Trade Organization. In less than two decades, China became the world’s leading exporter and Russia became a top global supplier of oil and gas.
But what happens when economic interdependence creates overdependence on specific markets for critical raw materials, food and industrial components? What happens when major powers disregard the trading rules designed to safeguard the benefits of interdependence and restrict trade and investment for bogus security reasons?
The weaponisation of trade
Over the past decade, examples abound of major economies ignoring their WTO obligations or invoking frivolous security claims to justify protectionist measures. Trade has been weaponised, deploying import barriers, financial sanctions and export controls, and consumer boycotts as tools of political coercion to counter military aggression, deter foreign investment and punish foreign criticism of domestic policies. Subsidies and local content requirements have become core components of national industrial policies designed to discriminate against strategic competitors and promote investment in domestic industry (including reshoring of foreign plants). Countries imposing such measures seem to have given short shrift to the risk those policies pose to the global trade and financial system and their own long-run economic welfare.
The WTO rulebook, largely unchanged from the 1990s, needs to be updated and augmented to address these new challenges. But if the modest results of the recent ministerial meeting are any indication, WTO members are unlikely to bridge their differences in multilateral negotiations in areas such as subsidies provided to farmers or state-owned enterprises, trade-related climate measures needed to implement decarbonisation commitments, or data access and localisation rules to govern the burgeoning digital economy. Crafting new WTO rules is further complicated by the continuing impasse over reform of the WTO’s dispute settlement process – as long as the Appellate Body remains disabled, any country can postpone indefinitely rulings against its practices by simply appealing panel decisions into the void (because rulings cannot be finalised until the appellate process is concluded).
Dispute settlement reform needs to proceed apace with new rulemaking. Why negotiate new rules when multilateral enforcement of existing obligations is uncertain? Unfortunately, the major trading nations that want new trading rules (such as to constrain state-owned enterprise subsidies) seem reluctant to compromise on dispute settlement reform, and vice versa.
Moreover, major trading nations increasingly act outside of WTO norms, by either ignoring WTO requirements altogether or invoking exemptions for measures applied for self-justified national security interests. Countries would never cede the right to contravene international obligations when interventions are needed to address national emergencies. But the perceived cost of abusing or neglecting WTO rules no longer weighs heavily in the trade policy considerations of major trading nations.
To confront these fundamental challenges, the major G20 powers will probably do little, focusing instead on regional or plurilateral initiatives. To be sure, such arrangements can promote needed economic reforms and the development of next-generation trading rules. But with limited application to non-member countries, including the world’s least developed and small and vulnerable states – that discrimination is avoided when the reforms and rulemaking are advanced through WTO negotiations.
A constructive role for the G20
For the G20 to play a constructive role in strengthening the trading system, the middle powers that comprise more than half its membership should together insist that the United States, China and Europe work with them to advance multilateral solutions to subsidies, climate, digital trade and dispute settlement challenges. G20 middle powers need to remember that they represent vital interests of the developing world in an equitable, well-functioning rules-based trading system.
The most immediate need is to agree on concrete steps to renovate the WTO.
The G20 should call for – and unilaterally commit to implement for three years – moratoria on new carbon border adjustments as well as extend the current ban on e-commerce levies to allow time to negotiate substantive, multilateral rules to govern these practices. The climate moratorium would coincide with the transition period before the imposition of import levies under the European scheme, setting a consequential deadline for completing WTO talks. Extending the e-commerce policy would enable negotiators to bring current WTO talks to fruition.
G20 members also should commit to negotiating tighter subsidy rules and reconstituting the two-step dispute settlement process. Focusing initially on specific measures would build momentum for more comprehensive reforms. Limiting government support to new low-carbon steel production plants, for example, with obligations to share advanced production technologies with developing countries would promote both economic growth and global decarbonisation. It would also mitigate a major source of trade disputes that led to disabling the WTO appellate body and hopefully spur talks on a more equitable, efficient dispute resolution process.
Such concrete action would signal that the G20 is willing to invest political capital in achieving WTO reform, removing key obstacles to WTO negotiations in 2023. With the major powers distracted by bilateral disputes among themselves, the other G20 members need to grasp the leadership mantle and spur reforms that strengthen the trading system from which they benefit so much.