Businesses can take action to address the uncertainties of the global trade system

Some of its rules are in urgent need of updating and cannot in any event be effectively enforced, whilst the requirement for consensus renders change hostage to the narrow interests of individual members. At the same time, some members have now taken positions which would seem inconsistent with key tenets of WTO rules, whilst others have simply acquiesced in that approach.

Ultimately, the erosion of the rules-based international trade order has had a direct effect on the extent to which businesses can operate, plan and grow. It is this need for greater stability and predictability for businesses and investors which has become the prime driver behind attempts to identify more effective rules-based alternatives, whether as interim arrangements or long-term solutions.

How the current WTO system developed

The current WTO system can be traced back to 1948, when the General Agreement on Tariffs and Trade (GATT) was established. Its purpose was to support reconstruction and economic development in the aftermath of the second world war by reducing trade barriers and avoiding the protectionism that had characterised the inter‑war period. The rules reflected a world in which many economies were still industrialising and where government intervention and subsidies were widely accepted.

In the 1990s, GATT was expanded and formalised leading to the setting up of the World Trade Organization (WTO) on 1 January 1995. The WTO introduced a more comprehensive rulebook and, crucially, a binding dispute settlement system intended to enforce compliance. The fundamentals of the system remained largely unchanged: developing countries were given ‘special and differential treatment’ to allow them to “catch up”, and subsidy rules were kept relatively permissive.

Criticisms of the WTO system

As some developing economies have matured, some policymakers in the West have started to perceive the WTO rulebook as unfairly weighted against them. For example, critics point to the fact that China and India retain self-declared developing country status at WTO despite the fact that they are now the second and fifth largest economies in the world, respectively. This, critics claim, matters in that “developing country” status affords countries certain flexibilities under various WTO agreements which are not otherwise available to developed countries, including longer timeframes for implementation of commitments and additional evidential hurdles in terms of other countries being able to challenge their “actionable” subsidies.

According to critics, this problem is exacerbated by the fact that the WTO’s subsidy control regime – the Agreement on Subsidies and Countervailing Measures (SCM Agreement) – is too weak and narrow to deal with the complex subsidy-related concerns that can arise in today’s world.  For example, the SCM Agreement only applies to subsidies that relate to goods – services are excluded. Its rules also provide for a rather crude binary distinction between prohibited and actionable subsidies with no inbuilt exemptions or flexibilities for “good” subsidies that might promote generally desirable objectives, such as R&D, regional development, or decarbonisation.

At the same time, the WTO dispute resolution system has effectively ceased to function. This is because the US has blocked the appointment of new judges to the Appellate Body with the effect that as of December 2019, the Appellate Body does not have the required quorum to issue rulings. That means that whilst WTO members can still bring complaints and obtain first-tier panel rulings, a losing party may block the adoption of an adverse panel report by “appealing into the void”.

It is unlikely that the US will change its position on this issue any time soon. This is because of long-held US concerns that the Appellate Body has been overreaching by adopting an overly interventionist and maximalist approach in its interpretation of WTO rules, thereby diminishing member rights and adding to their obligations in a way which is contrary to the rules that govern the settlement of WTO disputes.

The US also disagrees fundamentally with the approach taken by WTO panels as regards the interpretation of the “national security” exemption in GATT Article XXI(b). As far as the US is concerned, it is for each WTO member to invoke that exemption and doing so is not justiciable.  WTO panels do not accept this view. Instead, they consider that at least some of the Article XXI provisions are subject to the panel’s objective review, including the question of whether a situation that a member has invoked falls within the scope of “emergency in international relations”. 

A recognised problem – but no agreed solution

Ultimately, the US has held firmly to its own views on this point and is seeking the fundamental reform of the WTO dispute resolution system before it may agree to the appointment of new judges. However, the necessary consensus to bring about such change would seem difficult to find. 

In the meantime, at the initiative of the EU, 32 WTO members, including the UK, Australia, Canada, China and Japan, have signed up to the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) which effectively functions as a stop-gap arrangement for the appeal of panel decisions whilst the Appellate Body remains defunct. The parties to the MPIA have agreed to accept the decisions of an arbitration panel via this interim system as binding.     

Useful as this plurilateral arrangement may be, its effectiveness is limited by the very fact that it only applies when there is a dispute between parties to it. Key global trade actors, including the US and India for example, have chosen not to join the arrangement.

Permanent reform – including in relation to dispute resolution, subsidies, the criteria for claiming special and differential treatment, and on the need for consensus in decision-making – was discussed when trade ministers from around the world gathered at the 14th WTO Ministerial Conference, held in Cameroon, late last month. Unfortunately, the position of members differed significantly, and talks ended without an agreement; only a commitment from countries to undertake further work on the reform package before the next such conference takes place in 2028. The EU, amongst others, expressed its frustration with the lack of progress on reform, with the EU trade commissioner Maroš Šefčovič warning that the WTO risks "fading into irrelevance".

Alternative frameworks

In the meantime, a number of trading partners are actively looking for alternative arrangements that will provide the longed-for stability and predictability that is currently absent in the conduct of international trade. One framework that has the potential to take centre stage in the context of these attempts is the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership (CPTPP). 

The CPTPP is a multilateral agreement between 12 countries including Australia, Canada, Japan, Mexico, Singapore and the UK. It provides a comprehensive rulebook for trade of both goods and services, including digital trade, investment, rules of origin, competition and subsidies. It also includes relatively comprehensive dispute resolution mechanisms, providing for certainty and predictable enforcement of trade rules.

Among the notable absentees from the list of CPTPP members are the US, India, China and the EU. China applied in 2021 to join the group, although for the moment its membership is still outstanding as it requires unanimous approval of CPTPP members. More recently, EU officials and representatives of CPTPP countries have been discussing how they might cooperate to support rules-based trade and the multilateral trading system.

After meeting at the recent WTO Ministerial Conference, the EU and CPTPP confirmed that they have a shared understanding on issues such as the need for WTO reform and shared concerns including as regards “economic coercion that seeks to exploit economic vulnerabilities and dependencies”.

Although it would seem unlikely that the EU would want to join the CPTPP, the increasing intensity of the dialogue between the two groupings might yet lead to a more formalised structured arrangement between them that, for example, builds on the individual free trade agreements that the EU already has with most CPTPP members. 

Implications for businesses

None of this takes away from the need for businesses to continue to be vigilant and ensure that concerns over unfair competition, whether in the form of ‘dumping’ or unfair state subsidies, are brought to the attention of trade regulators.

Businesses also have an opportunity to influence trade policy by making their views known through trade bodies or participating in government or European Commission consultations.

At a more basic level, businesses could do worse than continue to review their purchase and sale agreements as well as supply chain contracts, to ensure that these deal with issues relevant to the current turmoil in global trade. Whether it is regional conflicts, blockades or tariff upheavals, it is important, for example, to ensure that contracts are clear as to who bears the risk of price increases or delays. Further, termination rights and force majeure clauses need to be clear enough and broad enough to cover situations that just a few years ago might have seemed less relevant or likely to arise. The question of which jurisdictional law governs the contract is also extremely relevant and merits careful consideration.

Ultimately, whilst businesses should plan ahead on the basis of the reasonable assumption that the current upheaval in the rules-based international trade order is likely to continue for some time, the web of bilateral and multilateral arrangements between key global trading partners may yet provide for the greater stability and predictability that businesses crave. That this might come at the cost of rendering WTO arrangements less relevant as the cornerstone of the rules-based international trade order might yet be the unavoidable consequence of a system that was built at a different time for a different world order.