As we prepare to enter post-Covid-19 era, an important question concerns the future of the global trading system, which has been under stress since well before the onset of the dreadful pandemic.
Though global merchandise trade took a significant hit in the first half of 2020 and fell as much as 15% in the second quarter, it exhibited astonishing recovery in the second half of the year. According to a March 31, 2021, press release by the World Trade Organisation (WTO), merchandise exports fell by only 5.3% over the full year. This compares with a whopping 12% fall in 2009 following the global financial crisis. WTO predicts that merchandise exports volume would rise by 8% in 2021.
Global merchandise exports have thus survived well the onslaught of Covid-19. With vaccine supplies expected to rise at an accelerated pace globally, prospects for the WTO forecast coming true are excellent. While this fact removes weak global market as a source of worry in the immediate aftermath of Covid-19 crisis, we would still face challenges posed by the fissures and fractures in the WTO system.
Central to the enforcement of multilaterally agreed rules under the auspices of WTO is its dispute settlement body (DSB), which does for international trade disputes what domestic courts do for civil disputes. If a WTO member feels that another member has violated its trading rights enshrined in WTO rules, it can bring a case against the latter in DSB. If the initial efforts to settle the dispute through intermediation fail, DSB appoints a panel to investigate and hear the case and give a ruling. If either party is dissatisfied with the ruling by the panel, it can take the matter to the appellate body (AB). Ruling by AB is final and binding.
Judges to AB are appointed for a four-year term (renewable for at most another term) by consensus among WTO members. At any time, AB can have up to seven members of which three make the quorum for hearing a dispute.
For more than a decade, the United States has been unhappy with the rulings by AB in cases brought against it. As a result, beginning in 2011, it has been vetoing the renewal of AB members completing their first term as well as the appointment of others to succeed them. Cumulative effect of the vetoes has been that the total number of AB members fell to two on December 11, 2019, one short of the quorum for a hearing.
Consequently, WTO is no longer able to enforce its rules. If this emboldens one or more members to begin exploiting the system by violating the rules, members whose rights are violated and are unable to seek a remedy via DSB are bound to respond in kind. That is what has happened in cases of steel and aluminum tariffs and US-China trade conflict.
While the United States has expressed its displeasure with a number of features of how DSB has operated, so far, it has not placed a proposal to reform it to WTO membership. Therefore, the path to bringing the DSB process back on track is simply not clear.
In part, the United States’ reluctance to offer a reform proposal may be rooted in its dissatisfaction with WTO on other counts, many of them centred on China. It contends that under the existing WTO rules, it is not possible to satisfactorily deal with China’s state-owned enterprises, industrial policy, subsidies and intellectual property rights violations. China for its part resents the United States for not making good on its promise to give it market-economy status.
The United States also remains unhappy with developing-country status (which qualifies them for special and differential treatment under WTO rules) to countries such as China, India and Brazil. Additionally, it wants greater transparency and better enforcement of WTO notification obligations.
Most of these issues cannot be resolved without renegotiation of many of the current WTO rules. Unfortunately, rule-making negotiations are currently stalled and may take some years to return on track. In the meantime, one can only hope that member countries would recognise the value of trade benefits they have enjoyed within a rules-based multilateral trading system since World War II and adhere to their commitments and obligations.
As far as India is concerned, with global merchandise exports holding up at $18-19 trillion and commercial services exports at another $6-7 trillion, it has much to gain from the current system even if it is somewhat broken. To return the country quickly to 7-8% growth path in the post-Covid-19 era, it must unwind its higher tariffs rather than continue with the losing strategy of import substitution.
For geopolitical reasons, India aims to distance itself from China. To achieve this objective while simultaneously improving its access to foreign markets, its recent decision to pursue free trade agreements with the United Kingdom and European Union is a very welcome development. India has much to gain from duty-free access to these large markets. The issue of protecting the interests of sensitive import-competing products should be handled via a 10-15 year phase out of tariffs on them rather than protection in perpetuity.
Arvind Panagariya is Professor of Economics and the Jagdish Bhagwati Professor of Indian Political Economy at Columbia University.
To read the original blog by Times of India, please click here.