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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is director-general of the World Trade Organization
In the past six months, the global trading system has been jolted by the US’s unilateral actions. More than a few people have proclaimed the demise of the World Trade Organization. Such obituaries have appeared since at least the 1980s but the ongoing disruptions are unprecedented in speed and scope, and have undeniably shaken confidence in open and predictable trade. World trade did collapse in the 1930s. So understanding where it may go from here requires a close look at the facts.
The WTO secretariat projected last month that global goods trade volumes would grow by 0.9 per cent this year. Though well below the 2.7 per cent projected before the new US tariffs, this is an improvement from the 0.2 per cent contraction predicted in April. With the recent agreements, US trade-weighted average tariffs have jumped from 2.4 per cent at the beginning of the year to 18.4 per cent.
Despite all this, the rest of the world has mostly continued to trade on normal terms, as businesses scramble to recalibrate. WTO analysis suggests that roughly 72 per cent of global goods trade is still operating on basic “most favoured nation” (MFN) tariff terms. This is down from 80 per cent at the beginning of the year, and may dip further. But the system is showing resilience. WTO members have, at least thus far, avoided what could have been a bruising retaliatory trade war with the US. And they have generally refrained from escalating restrictions on each other’s goods and services, as happened in the 1930s.
Even as we begin to see Chinese trade shifting to other markets as trade with the US contracts, most WTO members have responded with instruments inspired by the existing rule book. Whether this continues or not remains to be seen. It looks increasingly like we have a global trading system marked by a stable core within an unstable equilibrium. The question is how the core can hold.
Much of what is blamed on trade these days has more to do with technological changes, inadequate social policies, and macroeconomic imbalances in big nations such as China and the US. But the trading system itself does need reform. Built for interdependence not over-dependence, too many members today are overdependent on the US for market demand and on China for critical supplies. This is not a recipe for global resilience.
Successive US administrations have made reasonable criticisms about the WTO’s rule book. And while one may not agree with today’s unilateral approach, it is clear that several of these criticisms are valid. Complaints about lack of transparency from members, level playing field issues, unfair trading practices and potential over-reach of the appellate body must be addressed.
Other members have their criticisms too. Several feel the WTO system does not deliver sufficient benefits for the most vulnerable, and allows too many farm subsidy-related market distortions. Many emerging market economies say they need more space to industrialise — and some advanced economies now do too.
WTO members should use the present crisis to tackle the problems they feel bedevil the system. This would mean modernising the rule book, which mostly dates back to the early 1990s. The treasured consensus decision-making system must not become a recipe for paralysis. One way to do this would be to make “plurilateral” agreements easier. These already allow coalitions to negotiate in areas of importance to them, such as digital trade or investment facilitation. Members who are not yet ready would be free to join later, or not. This would help the WTO become more agile in responding to changes such as artificial intelligence.
Another area where members need more creativity is the WTO’s dispute settlement system. It remains the only trade dispute resolution mechanism with global reach, although its appellate body has been paralysed since 2019. Under the radar, though, more and more members are still using the system to resolve disputes.
Reforms must preserve what works. Although too many did not share adequately in the gains, trade liberalisation has enhanced prosperity in rich countries, and helped lift 1.5bn people out of extreme poverty. Beyond tariffs, the WTO offers much more that the public is often unaware of. Its agreements on health and safety standards, information technology, customs valuation, and intellectual property continue to provide predictability for companies, consumers and countries. These pillars are a global public good, one that must be preserved and strengthened.
Repositioning the WTO and the broader multilateral trading system is daunting but exciting. The good news is that momentum is building. “Middle powers” such as Singapore, Switzerland, Uruguay, Australia, the UAE, New Zealand, and the UK, see the global trading system as central to their prosperity, and are trying to deliver the necessary modernisation. Work is ongoing among ambassadors in Geneva to identify reforms and means of implementation. But they can’t do it alone. In today’s context, ministers will have to bring their political heft to the task. The status quo is not an option.
