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Jan 04, 2023

The World Trade Crisis

Geopolitical and geoeconomic conflicts are mounting, and the EU is responding with renewed vigor in trade agreements. But it also urgently needs to move forward with World Trade Organization reform.

World Trade Organization Director-General Ngozi Okonjo-Iweala is congratulated by Indian Minister of Commerce Piyush Goyal after a closing session of a World Trade Organization Ministerial Conference at the WTO headquarters in Geneva, Switzerland June 17, 2022.
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World trade has stalled. In its October 2022 forecast, the World Trade Organization (WTO) expects a significant contraction, with only 1 percent growth in 2023, compared to an estimated 3.5 percent in 2022. By comparison, world trade grew by an average of around 8 percent in the early 2000s until the global financial crisis.

Even before the COVID-19 pandemic, there were signs that differentiated supply chains, which now account for roughly half of total trade, were no longer functioning smoothly. The main reasons for this were a series of external crises: With the global financial crisis and, the inauguration of Donald Trump as US president, the conviction in the United States and other countries was waning that an open trading system would benefit everyone. As a result, the US created numerous tariff and trade barriers in the context of the emerging geoeconomic rivalry with China, , which also had a negative impact on other trading partners such as the European Union. In 2020, the COVID-19 pandemic caused further disruption for global trade. Although supply chains remained comparatively robust, the pandemic increased demand for specific goods while restricting their production and transportation at the same time.

Most recently, the impact of Russia's war of aggression in Ukraine has shown how quickly a political shock can send commodity prices soaring and bring a market to a standstill. The war has also highlighted the geopolitical risks of dependence on an autocracy with aggressive ambitions. This has heightened concerns about future trade relations with China, an autocracy that is increasingly repressive.

The current slowdown in global trade reinforces the negative global economic outlook, as trade is an important means of absorbing shocks. Under the heading “Countering the Cost of Living Crisis,” the International Monetary Fund in its October 2022 World Economic Outlook cut the global growth outlook from 6 percent (2021) to 3.2 percent (2022) and 2.7 percent in 2023. This is the weakest growth outlook since 2001, excluding the global financial crisis and the acute phase of the pandemic.

The Troubled WTO

Despite the recurring commitment to the importance of the multilateral WTO in promoting world trade and mitigating existing supply crises, concepts such as “reshoring” or “friendshoring” are appearing with increasing frequency. These strategies aim to reduce the global division of labor in order to avert the danger of a weaponization of existing dependencies. This geoeconomic environment leads to increasingly unilateral measures to secure supply chains. As a consequence, international organizations such as the WTO, which rely on multilateral rules and the principle of non-discrimination, are losing their relevance.

WTO reform is the top priority for the EU, as the global institution is able to facilitate international trade and resolve conflicts between different states and economic systems. However, the US has been critical for some time, because the WTO has failed to integrate China —with its non-transparent and state-controlled economy—into its rulebook.

This negative attitude toward multilateral institutions such as the WTO has changed under Joe Biden's presidency. Biden is an avowed multilateralist, and US Trade Representative Katherine Tai has repeatedly declared her support for a reform of the WTO. However, de facto, US trade policy has not changed much: The US continues to criticize the current design of the dispute settlement mechanism and the insufficient rules to combat unfair trade actions by China. In order to modernize the WTO, much greater US leadership is needed than has been the case to date.

A positive impetus for the WTO was the successful conclusion of the 12th Ministerial Conference (MC12) in June 2022, which gave the organization new momentum. The main outcome was the fact that all 164 WTO member states were able to reach an agreement, thus saving the organization from the looming irrelevance. The MC12 adopted a multilateral agreement on fisheries subsidies, the first multilateral agreement to have the United Nations Sustainable Development Goals (SDGs) at its core. It came two years late (the target was 2020), but its importance cannot be overstated. The MC12 also brought a temporary extension of the e-commerce moratorium (no tariffs on digital trade) and a tentative agreement on food exports as well as a “waiver” of patent rights for vaccines.

These agreements are only the beginning; the ongoing negotiations about the details will probably lead to frictions between WTO member states: There is no work program for agricultural trade, which is particularly important for developing and emerging countries. At the same time, there are still no answers to current global problems: How to facilitate trade in health products? How to promote digital trade by means of global trade rules? And how can to combat climate change through trade? There is no sign of multilateral or plurilateral agreements on these issues.

The EU in the Leadership Position

Progress is possible through plurilateral agreements (so-called coalitions of the willing), and here the EU must take a leading role. No other global player is currently willing to do so.

General commitments to multilateralism are no longer enough. WTO members must find ways to establish trust again in order to achieve progress among the diverse WTO membership. To this end, members must agree on how to resolve trade disputes in the future, and how to create and implement modern trade rules,.

Here, the EU must do more to engage the US and also China in the WTO reform process. It should also use existing coalitions to push for further modernization. Here the “Ottawa Group” comes to mind, which includes not only the EU but also a diverse group of industrialized and emerging countries such as Australia, Canada, Brazil, Chile, Japan, and Kenya. This group should push for more trade initiatives in the WTO.

The Significance of Free Trade Agreements

Progress within the WTO remains important, but the existing rules no longer meet the requirements of modern trade. As a result, WTO member states have increasingly turned to regional and bilateral trade agreements. As of March 2022, there were 354 preferential trade agreements in force, according to the WTO. This represents 577 notifications from WTO members, counting goods, services, and also new accessions separately.

These so-called preferential agreements promote prosperity, enhance market access to global centers of growth, and help shape globalization by establishing modern trade rules.

The EU has been focusing on bilateral and regional agreements for 15 years (with the “Global Europe” strategy of 2007). In total, the EU has concluded over 40 trade agreements with more than 70 countries; these include free trade, economic partnership, and association agreements. However, with the failure of the ambitious Transatlantic Trade and Investment Partnership (TTIP), which was accompanied by protests across Europe, the support  for an active trade policy decreased.

However, in the current geoeconomic environment and against the backdrop of Russia's war of aggression, trade agreements were recognized as a way to forge alliances with like-minded partners that go beyond economic issues. Trade agreements were also seen as a way for diversification to reduce dependencies on autocracies such as China. The EU is therefore pursuing the negotiations for trade agreements with Chile, Mexico, Australia, Indonesia, and possibly Mercosur with renewed vigor.

The US has concluded free trade agreements with 20 countries. The most important agreement is the United States Mexico Canada Agreement (USMCA), the successor to NAFTA. The USMCA in particular illustrates the way the US uses its market power and the economic dependency of its trading partners Canada and Mexico to force both countries to make numerous concessions (some of which are contrary to WTO rules). While trade agreements were used strategically under former US President Barack Obama to also push back China’s influence (especially with the Trans-Pacific Partnership, TPP), the US under President Biden has focused solely on dialogue formats. The Trade and Technology Council (TTC) with the EU and the Indo-Pacific Economic Framework (IPEF) in Asia are central to this. The US pushes for  topics such as sustainable supply chains, green transformation, and digital rules, while market access—contrary to the interests of the partner countries—plays no role in the discussions.

Asia as a Global Trade Hub

Asia has become the dynamic center of trade liberalization. After relying on multilateral trade rules for a long time, the region has now turned to new mega-agreements, which are setting new standards in global trade. One example is the TTP successor, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), an agreement of 11 countries that was successfully concluded under the leadership of Japan and Australia despite the US withdrawal under President Trump. This agreement sets new standards on a number of issues, including subsidies and state-owned enterprises, corruption, and digital trade.

This makes the CPTTP, which is also open to new members, very attractive. Thus far, the United Kingdom, South Korea, China, and Taiwan have indicated their desire to join. Because progress at the WTO is so slow, the EU is often encouraged to join the agreement as a “substitute WTO with modern rules.” To date, the EU remains opposed, because of the lower level of ambition in individual chapters compared to EU agreements. In addition, the trade chapters are often heavily influenced by the US; and do not meet current EU standards.

The second mega-deal is the Regional and Comprehensive Economic Partnership (RCEP), which was negotiated between the 10 ASEAN states plus China, Japan, South Korea, Australia, and New Zealand and came into force in January 2022. Even though some the tariff reductions are not overly ambitious, including long transition periods, the agreement has one decisive advantage: The 15 RCEP member states are treated as one economic region. As long as an RCEP member uses goods from other RCEP countries, they are considered as originating in the processing country. These cumulative rules of origin facilitate the application of the agreement, especially for small and medium-sized companies. The EU should consider applying similar rules in its trade agreements in the long term.

Today, world trade is increasingly viewed from a geoeconomic and security perspective. A global division of labor is no longer seen as an advantage, but sometimes as a weakness. Under these circumstances, international organizations such as the WTO and global world trade are suffering. Following Russia's war of aggression, the EU is once again more inclined to conclude new trade agreements with like-minded trading partners, also as a way of building alliances. This is the right way forward.

But the WTO must also be recognized once again by the international community as an important forum in which countries with different economic systems work together to promote global and rules-based trade. Here, the EU must exert greater influence on the US and China to enhance their participation in the reform process.

Claudia Schmucker heads the Geoeconomics program at the German Council on Foreign Relations (DGAP).

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