WTO’s Woes

By Wei Liang

WTO’s Woes

By Wei Liang

New Brazilian director general tasked with revitalizing troubled trade institution

The author is an assistant research fellow with the China Institutes of Contemporary International Relations

The General Council of the World Trade Organization (WTO) approved the appointment of Brazilian diplomat Roberto Carvalho de Azevedo as its next director general in May, meaning that the most important multilateral institution coordinating the global economy will be again headed by someone from a developing country for at least the next four years beginning September 1.

This decision could be interpreted as a new sign that developing countries represented by emerging economies have further increased their voice in Bretton Woods Institutions, traditionally dominated by developed countries, after International Monetary Fund (IMF) structural reforms increased the quota of emerging economies and developing countries.

It also indicates that the global economic governance structure has been evolving gradually in a direction fitting to emerging powers since the outbreak of the international financial crisis in 2008. Despite traditional economic powers’ reluctance to change the international monetary, financial and trade rules under which economic crises have been recurrent, they are unable to sustain battered international financial and monetary systems by themselves. Against this backdrop, developed countries seek to continue reaping benefits from the old systems by inviting management experts from developing nations.

Business as usual

A Brazilian’s heading of the organization will provide a convenient way for emerging economies to further understand international economic rules; however, it cannot change the nature of the WTO, an economic policy coordinator that mainly serves the interests of developed countries.

Likewise, the United States is still the dominant power after the IMF reform. Though the new president of the World Bank is of Asian descent, he is still an American, and most of the bank’s funds come from the United States. That is, despite the Bretton Woods Institutions’ inclusion of elements related to emerging markets and developing countries, the institutions remain under the control of developed countries.

The role of the director general is important, but the power of the biggest stockholders cannot be overlooked. This means the coordination of competing interests in the WTO will become more difficult. Quarreling and bargaining between developed countries and developing countries will become even fiercer. In the last five years as Brazil’s permanent representative to the WTO, Azevedo has impressed the organization as a champion of the legitimate interests of Brazil. But in the future in his new post, he will have to change his style and become a professional defender of developed countries, which will make BRICS—especially the Brazilians—feel awkward and even left out.

In his acceptance speech, Azevedo pledged that he will work with all members, with unwavering and steadfast determination, to restore the WTO’s key role and preeminence it deserves. Ironically, his words also proved that the decline of the WTO has already become an officially recognized fact. In less than 20 years, the once promising international economic organization covering 97 percent of global trade has been embedded with conflicts of interests among members, protracted negotiations and aimless institutional development. The Doha Round talks have nearly become a synonym for“mission impossible.”

Launched in November 2001, the Doha Round involves negotiations on agriculture, non-agricultural market access, services, WTO rules, intellectual property, dispute settlement, trade and environment as well as trade and development.

Besides the common problems of multilateral negotiations, the stagnation of the Doha Round is mainly due to negotiating rules so complex that even issues on which members can reach consensus in advance are held up. Moreover, in keeping with the WTO’s multilateral negotiation principles, only after one round of negotiations concludes, can a new round be started. Therefore, a small problem blocking negotiations can become a critical factor resulting in the delay of the whole process and the development of the organization. Members express disappointment in the organization, while the WTO’s authority in trade conflict arbitration is also weakening.

The way forward

The necessity and authority of the WTO and its director general are on the decline, which will force Azevedo to make a sober judgment in terms of what the WTO should do.

Generally speaking, there are two ways ahead: The first is to follow the conservative road that continues to promote the Doha Round, trying to solve the conflicts gradually and reach a timely agreement. However, the experience of the last decade shows that it would be a thankless job and the remaining influence of the WTO would fade away, too.

The second way is to make a fresh start and deepen reform, removing those structural defects that hinder multilateral negotiations. To lower the transaction cost of international trade, the transaction cost of negotiations should be reduced first.

However, it should be noted that the established rules blocking negotiations are, to an extent, a line of defense to protect the vested interests of developed countries in the WTO. The reform would essentially hurt their core economic and even political interests, so it will require huge courage and wisdom. Worse still, it may spark systemic risks.

ONWARD: Brazilian diplomat Roberto Carvalho de Azevedo at the WTO headquarters in Geneva, Switzerland, on May 14 after being appointed the next WTO director general

The once-in-a-century international financial crisis and sovereign debt crisis have severely hit developed economies, spurring various kinds of protectionism. Opposing protectionism is clearly the correct way to promote the fast and stable recovery of the world economy. But protectionism always accompanies economic crises as an instinctive reaction of a country. While protectionism is the norm in global trade, free trade is needed, which demands great efforts as well as economic compromises.

With the rise and maturity of emerging markets and developing countries in international trade, the traditional institutional advantages of developed countries are declining. The situation has given rise to a variety of trans-regional economic and financial cooperation efforts since the outbreak of the 2008 international financial crisis, which not only show the demand of developed countries for new international rules but also reflect the defects of the current set of WTO standards.

Currently, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) are the two main cooperation systems in the fields of investment, trade and finance that the United States participates in and tries to lead. The two systems, together with the U.S.-South Korean Free Trade Area, reflect the non-geopolitical characteristics of financial and business cooperation in the post-financial crisis era. What’s more, the TPP and the TTIP have eliminated the WTO’s longstanding practice of seeking a package deal of agreements, which could enable them to grow by leaps and bounds. However, the rapid development of the two systems could also pose a threat to the survival and development of the WTO.

Therefore, Azevedo has to make his judgment on the WTO’s position after he takes office, specifically in terms of what the relationship between the WTO and new economic organizations should be. Evidently, functions of the TTP, the TTIP and the WTO overlap somewhat. Given the vigor of the former two systems, the WTO is hard pressed to catch up with them.

It is clear that the TPP and the TTIP supplement each other well with the aim to cover the whole world. As such, the WTO’s space for maneuvering is much smaller, and it must compete with them. If Azevedo could position the WTO as the rule maker of global trade, arbitrator of trade conflicts and supervisor of all economic, trade and financial cooperation activities, the WTO could gain more of an edge in the larger picture. This demands that the WTO regain vitality and rise out of difficulties, which will be a big test of the wisdom and international communication skills of the new director general.

While protectionism is the norm in global trade, free trade is needed, which demands great efforts as well as economic compromises

yanwei@bjreview.com