The world trading system needs a more assertive European Union

The world trading system needs a more assertive European Union

Alan Wm. Wolff (PIIE)

March 15, 2023 2:00 PM
Photo Credit: REUTERS/Yves Herman
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A team of experts in the European Union (EU) is engaged in a fresh effort at “strategic foresight.” The idea is to identify the challenges the EU is likely to face in the year 2040. Probable candidates for this list will be climate change, food insecurity in the Global South, the periodic return of pandemics, an increasing number of conflicts in particularly poor countries, and continuing US-China rivalry.

Trade will have a key role to play in addressing each of these challenges.

Trade in carbon-intensive goods will have to be more sustainable, while trade in food will have to be unimpeded to flow seamlessly to alleviate critical food shortages due to an increase in the number and seriousness of droughts, floods, soil degradation and pests. To meet any future pandemic, essential goods and medicines will have to move expeditiously from where they are produced to where they are needed. Conflict-affected countries will need to be integrated into the world economy through trade to raise standards of living, giving them a better chance at achieving and maintaining peace. There will have to be greater convergence around the central assumption of the world trading system that goods will be bought and sold based on market forces and not state intervention.

Global trading rules will need to be updated if positive outcomes are to be achieved.

The forum for multilateral trade cooperation is the World Trade Organization (WTO). Unfortunately, it is not functioning as intended:

Progress on reaching new multilateral trade agreements-no matter how important the subject-is stymied.
Too many trade disputes remain unsettled, rendering enforcement of current obligations impossible.
Transparency, including the reporting of trade measures, is falling short.
The role assigned to the Director-General and the Secretariat is circumscribed and inadequate to help remedy these shortcomings.
What is the use of having foresight into an immensely challenging future without making strenuous efforts to achieve better outcomes while there is still time? The three largest trading members of the WTO are China, the EU, and the US-with total 2021 trade respectively, of $6,047 billion, $5,086 billion (not including intra-EU trade), and $4,687 billion. Of these, only the EU currently has the values, the economic interest, and the potential to lead in reforming the multilateral trading system. The US and China appear to be uninterested in improving the system. The middle-sized industrialized countries feel that they do not have the weight to drive the process. And too many developing economies have marginalized their ability to influence the course of events by insisting on a “restitution agenda,” feeling that the current arrangements do not sufficiently focus on development.

Historically, Europe could rely on the US as the guarantor and chief champion of the multilateral trading system. It was a valuable, if often testy, partnership. Europe (the EU and its predecessor arrangements) and the US were the driving force for the first non-tariff agreements adopted by the trading system in the 1970s; picking up an idea put forward by Canada, Europe was instrumental in the creation of the WTO in the 1990s, as part of which the US and the EU pressed for binding dispute settlement to make trade agreement obligations enforceable. The US and Europe then forced all the members of the trading system to accept this new broader pro-trade order by cancelling the prior multilateral arrangements.

The US is no longer acting as a partner and guarantor of the trading system. Lacking cooperation to move the trading system forward, the EU has turned inward to advance its policy of “strategic autonomy,” while filling out its vast portfolio of bilateral trade agreements that limit their benefits to signatories. At the WTO, it has not taken the place of the US in driving the multilateral trade agenda, shying away from proposing the most aggressive reforms.

What is needed now from the EU is more thought leadership combined with a more muscular approach to achieve root and branch reform.

For the pandemic, the EU proposed measures that would facilitate access to needed supplies but then saw its trade initiative diluted and finally discarded. It needs to both be more aggressive on the substance of its proposal for trade and health and insist on getting to a meaningful agreement. In 2022, it ended up playing defense to protect innovation.
For WTO dispute settlement, the EU has put in place an alternative mechanism that preserved much of the prior arrangement, an insufficiently bold design that the US clearly would never accept. The EU should now propose more far-reaching reforms, taking into account the US objections that the EU sees as reasonable. The new alternative dispute settlement mechanism should be designed to command support from most WTO members, while preparing the ground for the US to join it.
To restore the negotiating function of the WTO, the EU should go beyond proposing modest changes to the way the WTO operates. It must insist that like-minded countries can negotiate agreements to be administered by the WTO (where these are consistent with the organization’s objectives) with no possibility of a veto from those that will not join. The only cure for a dearth of negotiated outcomes at the WTO is to have some. Early candidates would be trade and health, trade and climate, and a digital economy agreement.
The US has been invoking national security as an all-purpose justification for its WTO-inconsistent measures. The EU should propose a solution to the issue that both preserves national sovereignty and the reciprocal nature of the WTO’s agreements. The proposal would acknowledge that no WTO dispute settlement can determine for a member what is in its national security interest. However, when a member claimed this exception and put into place a restrictive trade measure, other WTO members would have an automatic right to respond to the extent necessary to rebalance the level of trade concessions.
The EU must not only clearly identify the trading world that it wishes to have in the future-universal, open, nondiscriminatory, and rules-based. It must also be sufficiently assertive to help make achieving it a reality. The EU would need to enlist the middle powers, countries like Canada, Australia, and Switzerland, and work hard to bring along emerging economies such as Brazil, Indonesia, and Nigeria, future population centers, and any WTO members who would choose to join it in furthering this objective. If the EU and its allies create momentum toward solutions, China and the US would likely join new WTO agreements where common challenges require common solutions.

It is not enough to identify possible futures. The EU should provide the vision and muscle to rebuild the trading system so that it can meet the coming global challenges and invite others including the US to join it, daring them to stay on the sidelines.

This publication does not include a replication package.


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