Last month, WTO Director-General Roberto Azevedo resigned from his role leading the World Trade Organization (WTO) a full year before his second 4-year term was scheduled to end. Azevedo’s surprise announcement this spring underscored mounting dysfunction in the global trading system just as the massive economic toll of the COVID-19 pandemic and the challenges of developing an international response were coming into focus. A new leader—to be selected this fall—will have the high-stakes task of reforming the organization and restoring its global relevance while navigating the deteriorating relationship between the WTO’s two largest member economies.

As if to hammer this point home, days before Azevedo’s official resignation, US Trade Representative Robert Lighthizer warned that world trade may soon be governed by “pure bilateralism,” an eventuality he said the United States is prepared to accept unless the World Trade Organization undertakes urgent, fundamental reforms. President Trump has explicitly threatened more than once to pull the United States out of the WTO, a path that some members of Congress have also sought to pursue. The perspective that the WTO is in desperate need of mending, however, predates protectionist views held by the Trump administration and is shared even by US policymakers who strongly oppose a US withdrawal, as well as by many other WTO member state leaders.

 

Dueling reform priorities

The WTO has struggled to find a solution that effectively addresses the incompatibilities between free market competition and Chinese state capitalism.

The US agenda

The United States asserts that the “centrality of market orientation” is a fundamental WTO principle that all members should be required to uphold. Reforms to this end could include strengthening remedies for unfair advantages that China’s state subsidies afford and closing loopholes that allow China to designate itself a developing country and benefit from the special accommodations that come with that status. The United States has been pursuing a trilateral effort with the EU and Japan since 2017 to strongly curtail allowable subsidies and state supports, many of which have been central to China’s economic success. However, progress has been slow and any agreement reached between the three parties would still require acceptance by other WTO members including China.

The United States’ frustration with the current WTO system is most evident in its refusal since the Obama administration to approve judges to serve on the Appellate Body, a quorum of judges that preside over dispute cases between members. Of the 20 completed cases the United States has filed against China, 11 cases were won by the United States and nine were settled before a ruling was made. None were lost. Despite this track record, the United States contends that the WTO Appellate Body has habitually issued rulings that dictate the terms of international trade law well beyond the scope of what WTO member countries envisioned. Washington wants a reformed WTO to deemphasize dispute litigation and refocus members’ energies on productive negotiation.

China’s agenda

China contends that WTO reforms should be aimed at curbing unilateral sanctions, long-arm jurisdiction, and abuse of national security exceptions to trade rules. And as allies and neighbors as close to the United States as Canada can attest, China is not alone in its umbrage at being subjected to US trade measures it sees as protectionism wrapped in national security pretenses. China insists that the WTO should accommodate different economic development models, and argues rule changes that would disable critical aspects of its model are designed to undermine its competitiveness rather than make competition more fair.

When it comes to the Appellate Body, China argues that the body, along with the dispute resolution system, are critical pillars of the WTO. China has contended that the greatest and most imminent institutional risk to the dispute settlement’s effectiveness is the United States’ refusal to approve judges.

 

Decisive leadership required of the next director-general

There are five contenders for the director-general post, hailing from Nigeria, South Korea, Kenya, Saudi Arabia, and the UK. There will be two more rounds of consultations before a selection is made, with the next round set to end on October 6. Nigerian former World Bank Managing Director Ngozi Okonjo-Iweala and Kenyan former Trade Minister Amina Mohamed are viewed by many analysts as the front runners, in part because their African states are seen as less clearly aligned with either major power. This has given rise to hopes that either of the two women would be well-positioned to broker disagreements between the world’s two most powerful economies. Mohamed has something of a track record to that end. She successfully mediated differences between China and the United States during the 10th WTO ministerial meeting in 2015 to reach a major agreement abolishing certain subsidies for farm exports.

But the stakes are high. Former World Bank President Robert Zoellick and former WTO Director-General Pascal Lamy told a Washington audience on September 10 that the WTO will be irrelevant in 5 years if it does not demonstrate an ability to successfully craft and implement new rules and reforms. Key among the needed reforms, both said, are persuading China to accept new disciplines on state subsidies and persuading the United States to stop “hijacking” the dispute settlement system. But any director-general candidate who faces strong opposition from either of the two leading trade powers or does not have the right experience to manage tense political conflict is unlikely to land the job, making it hard for serious contenders to embrace  strong and meaningful reforms.

 

 

Anna Ashton, senior director of government affairs at the US-China Business Council, has previously served as a China analyst for the Department of Defense, US Chamber of Commerce, and US-China Economic and Security Review Commission. 

Allie Klein is a government affairs intern at the US-China Business Council.

Photo licensed under CC BY-SA 2.0

Posted by Anna Ashton and Allie Klein