Reluctant Interdependence: Multilateralism in a Time of Fragmentation

This short paper is designed as part of a conversation with Matthias Bauer, ECIPE, and José Ignacio Torreblanca, ECFR Madrid.

---

The road to interdependence.

At the dawn of consciousness of the existence of a wider world, millennia ago, intrepid traders travelled long distances to find necessities, starting with obsidian to make better tools, bitumen to seal their boats, and tin to create bronze.  Over time, peoples far and wide found value in exchange, spices from the Arabian peninsula, silk from China, grain and amber from lands around the Black Sea, and gold and silver from the New World. Trade provided what was necessary, what was simply useful, and what was desirable, improving the quality of life.

In our time, trade has been needed to deal with the pandemic — to assure the availability of personal protective equipment from factories in Asia and vaccines from the advanced pharmaceutical plants in the Global North. To enable advanced goods and services in the information age to function, semiconductors must be supplied from Taiwan. For batteries for electric vehicles, one means to slow the rate of increase in global warming, lithium is required from Chile.

Specialization, first scientifically observed and praised by Adam Smith, knew no borders.  The search for efficiencies drove the creation of global supply chains.  The disaggregation of production was made possible by super containerships plying the oceans and by instantaneous broadband communications via the internet. Specialization occurred not just in manufacturing but in the skill sets of groups of individuals. Designing semiconductors became disassociated from the factory floor, staffed by talent wherever it is found. “Apps”, (applications) are produced everywhere, and a wide range of services are provided without geographic limitation. Technology has come in an endless progression of waves — the industrial revolution followed by the green revolution with vast improvements in agricultural crop yields, to an information revolution that is on the cusp, most say, of unimagined breakthroughs fueled by artificial intelligence (AI), bringing further globalisation, and interdependence, much of it so subtle as to occur largely undetected.

World trade of goods today by volume is roughly 45 times the level it was in 1950, and by value has increased by almost 400 times.[1]  World trade in services has been estimated at half as much as trade in goods as is growing rapidly.[2]

The multilateral trading system in an era of anxiety

The multilateral trading system administered since 1995 by the World Trade Organization (WTO) has enabled the creation of the world economy that we have today. The system was created just after the end of the Second World War, starting with a few dozen contracting countries in 1948.  It has grown to 164 members (probably with an additional two approved by the end of next month), and most of the three dozen remaining countries are observers, working at varying paces to join the organization.  The foundational principles, enunciated by Roosevelt and Churchill as part of their war aims, were two: equality of access to markets and equality of access to supplies.  The multilateral trade agreement put into place following the war, the General Agreement on Tariffs and Trade (GATT), emphasized nondiscrimination, contractual commitments to a negotiated level of openness to trade, and transparency.  All major international trade agreements, regional and bilateral, are based on the foundation of the global trading system’s rules and are to be consistent with those rules.

Interdependence fostered by a rules-based global system has been, until relatively recently, widely considered a good thing. To be sure, the system of rules had its shortcomings, but that it, along with trade liberalization, was, overall, beneficial was never seriously questioned by most of the WTO’s members. Most extol the trading system’s virtues and are complimentary about its existence.  Increasingly, however, the conduct of too many of the participants belies the positive statements they make. The liberal international order giving rise to globalisation is increasingly giving way to national self-serving measures irrespective of the rules and with diminishing international cooperation.  Unilateral action is all too often taken.

Why the change?  Several primary causes are often noted:  the global financial crisis and slow recovery; the erosion of manufacturing in the developed economies of the West; the stagnation of wages for much of this period, and a strong sense of economic uncertainty, compounded lately by inflation. On top of these economic factors is the rekindling of geopolitical rivalry accompanying the rise of China, met with much diminished tolerance for its concentrated effect on manufacturing employment, in the United States and spreading elsewhere as well.

A natural consequence of the trade liberalization within a rules-based system was the growth of the economic interdependence of nations. The Covid-19 pandemic revealed that each national economy standing alone was vulnerable due to its dependence on others for needed supplies.  The deterioration of geopolitical relations also played a strong role.  The vulnerability of energy-dependent Europe to Russia after its invasion of Ukraine provided a strong object lesson.  Trade in a time of stress in international relations becomes a tool in the conflict, and this time was no exception with the application of allied sanctions in the West against Russia.  Separately, the term “trade coercion” gained currency as Europe felt in response that it needed to de-risk its trade relations.  China’s vulnerability to new Western sanctions in the name of national security, built on its earlier anxieties and resulted in its policy of “dual circulation”, to lessen its dependence on foreign markets and supplies.  The race for critical materials, and the dominance of China in processing them, became menacing to others as export controls were announced.  The imposition by the US and Chinese of large additional tariffs on their bilateral trade, ushering in an era of greater bilateral uncertainty, spurred commercial actors to diversify sources of supply.   Adding to the growing awareness of the vulnerability of trade were the actions taken by non-state actors, most prominently now in the Red Sea.

Interdependence, which had been seen in Panglossian terms, became something to be worried about.  There were earlier warnings of the risks of dependency when OPEC engaged in the first and second oil embargoes in the 1970s.  But the embargoes, although harmful to the world economy at large, were concentrated in time and scope.  They were transient.  It is not clear that growing uncertainty, arising in US-China trade and due to unilateral measures taken for reasons of industrial policy or reacting to climate change, is not a permanent feature of world trade.

When the United States placed limits on trade in the name of national security, the policy was described by the US National Security Advisor as building a small yard with a big fence. But other fences were being constructed, for steel and aluminum, for steel and other products that were not green enough or simply in excess supply.  De-risking, adopted in the name of national security, could be applied for reasons of economic security, or broader causes. If interdependence has its own logic, improving efficiency, so does protection, as does its Luddite cousin, precautionism, where advances in technologies prove disruptive to domestic industry.  Subsidies deployed by any country that could afford them could also be a threat to the industrial development of others.

A country’s overall level of economic activity was no longer a sufficient measure of its economic well-being.  The composition of the economy began to matter to national leaders.  Friend-shoring might be declared as policy, but on-shoring might in fact be promoted.  Rivalry might, it turned out, be to some extent among friends, not just between “strategic competitors”.

It is into this sea of concerns that the WTO, a multilateral project designed for the benefit of all, has been plunged and is expected to produce results.

What can be accomplished at the WTO?

Introductory caveat: The WTO is far from being supra-national.  It has been granted no independent agency.  It can make no rules nor enforce them.  Its Secretariat is available to quietly advise members where this is requested.  The WTO is a creature of its members. It is their joint action that has created what exists and is to create what will exist for the rules of the global trading system.  The term “WTO” is used as a shorthand here and by all, unless otherwise noted, refers less to an institution than to a collective of its members.

The three existential tests for the WTO are:

• Can the further erosion of liberalization be prevented?
• Can the WTO make new rules?
• Can the rules be enforced through WTO dispute settlement?

A) Maintaining the international rule book

Not renewing the moratorium on customs duties on electronic transmission, which is again on the agenda at the WTO Ministerial Conference in Abu Dhabi next month, can only result in curbing the growth of interdependence.

Since 1998, every two years, the WTO members have agreed to refrain from placing customs duties on “electronic transmissions”.  This is trade negotiators’ compromise language that is taken to mean not placing tariffs on e-commerce.  How much is at stake were the moratorium to end, no one fully knows.  Services supplied, over the net, for example, may often be covered by existing obligations under the General Agreement on Trade in Services (GATS), and might not be under threat. In addition, there are practical difficulties in tracking imports of digital goods in order to apply tariffs. Indonesia is bent on doing so, however, and has already produced a tariff schedule (without yet applying tariffs) to cover software and other digital goods transmitted electronically, including applications, multimedia, and driver data. It claims that during 2017-2020, developing countries and LDCs lost $56 billion in tariff revenue, citing an UNCTAD study.[3]

Digital trade is growing rapidly.  What the proponents of ending the moratorium call for is “policy space” – a euphemism for freedom to regulate, which is also the freedom to restrict.  Interdependence rests on openness.  Narrowing the current degree of openness to e commerce is a very large step to take in the movement away from globalized trade.  The US has very recently increased the likelihood of a more limited world of digital commerce, by itself seeking policy space for regulation in an about-face from its prior position that cross-border data flows must occur freely.[4]

B) Reaching new agreements within the WTO

A major necessity for the effectiveness of the global trading system is the continual updating of its rulebook as required.  This occurred in two bursts of international cooperation in last two major multilateral rounds of trade negotiations.  Unfortunately, in the WTO’s 28-year history there has been nothing, in scope and fecundity, like the Uruguay Round of Multilateral Trade Negotiations concluded in the GATT era in 1993.  This has left the global trade rules largely as they were when the WTO was founded in 1995 with few exceptions – the Information Technology Agreement providing duty-free treatment for 90% of this trade, the Trade Facilitation Agreement smoothing trade crossing borders and an incomplete Fisheries Subsidies Agreement reached in 2022.

A large part of the problem is the WTO’s practice of adopting agreements by consensus, which has been taken to mean that any country can block bringing a new agreement into the body of WTO agreements.  This has led to hostage-taking by those trading their assent for obtaining other, unrelated, objectives.  Next month, the WTO members will decide if the Investment Facilitation for Development Agreement will be adopted.  It is heavily backed by developing and least developed countries, and, for the first time, is an agreement actively supported by China. There are no substantive objections to this mild agreement which adversely affects none.  It is essential to the future of the WTO that agreements among less than all members, consistent with the objectives of the organization and open to all, be welcomed as part of the WTO agreements.  Those who are like-minded must not be blocked by nonparticipants.

Eliminating this procedural obstacle can pave the way for proactive members to reach agreements that will provide for food security, curb agricultural domestic support measures, establish rules as to how to better deal with scarcity of critical minerals, bring up to date the rules on subsidies to increase their availability to meet essential needs during a pandemic, or deal with climate change where trade can make its contribution.  That will take a change in attitude favoring closer cooperation, and renewed leadership to find a path forward.  Of course, each agreement will require critical mass, as judged by its subject matter.  The ability to reach agreement with fewer than all needing to participate, but designed to encompass all, is essential to having an effective, vibrant, global trading system.

C) Settling disputes, enforcing obligations.

The hallmark of the WTO, making it stand out among international agreements, was that its obligations would be enforceable.  An aggrieved party, upon a finding from a panel that a measure was inconsistent with a member’s obligations, and following an appeal, could be paid trade compensation (through lower tariffs) or could retaliate by raising tariffs against the trade of the offending member.  A balance of concessions was thus to be maintained, and a final resolution found to trade disputes.  This system ceased to operate in December 2019, with the United States blocking consideration of new appointments to the appellate level tribunal.

All members agreed at the last Ministerial Conference in 2022 that binding dispute settlement would be attained once again by 2024.  The time has come to redeem this pledge.  All too many times, members have skirted accepting an outcome before a panel, by preventing its decision from becoming final, and therefore being effective, by the ruse of filing an appeal to a body that has not functioned in years.  No further “appeals into the void” should be accepted.  A firm workable plan must be adopted at this Ministerial Conference to find the terms upon which all members will be willing to once again be bound by their obligations by an adjudication process acceptable to all.

To get to this point will require balance to be restored between openness and agreed means of dealing with harms caused by trade, by maintaining a balance of trade concessions. In addition, decisions with respect to essential security must be left in the hands members, as they will not yield their sovereignty on this point.  Third, the means must be found to have dispute settlement generally available despite the existence of a geopolitical rivalry, perhaps through opt-outs and separate arrangements that allow the rest of the system to function.

Conclusion

The world economy cannot function well without workable interdependence.  This requires countries to avoid backsliding from the openness they have achieved, being committed to finding common agreed solutions to current and future challenges, and not allowing disputes to go unresolved with unilateral measures taking the place of effective dispute settlement to the extent possible.

At some level, interdependence is, to an extent, unavoidable.  It is a positive for the world economy to the extent that it can be achieved. Where trust is diminished, interdependence will be more limited. It is the function of the world trading system, an essential part of a liberal world order, to provide the rules within which more openness is possible and beneficial.

European leadership is essential to the preservation and continual improvement of the world trading system.  The EU is the world’s largest trading entity.  The direction of policy in Washington and Beijing is evolving in ways that undermine their ability to currently take on the role of stewardship of the global trading system.  The mid-level countries that align themselves with the multilateral endeavor are making an increasing contribution.  It is essential to add a stronger, more confident and unified European view.  The European Project flourishes because it is part of, and an example of, what can be accomplished within a liberal global construct.  While the EU’s attention will always be perfecting its union and promoting its self-interest, that self-interest must continue to be defined by promoting the broader context of rules and openness within which it has thrived.

References

[1] Source: WTO. Trade in goods. https://www.wto.org/english/res_e/statis_e/trade_evolution_e/evolution_trade_wto_e.htm.

[2] At over $13 trillion in 2017. WTO.  www.wto.org/english/res_e/booksp_e/executive_summary_world_trade_report19_e.pdf.

[3] https://www.twn.my/title2/wto.info/2023/ti230416.htm#:~:text=%E2%80%9CWe%20agree%20to%20maintain%20the,take%20a%20decision%20to%20extend.%E2%80%9D.

[4] https://ustr.gov/about-us/policy-offices/press-office/press-releases/2023/october/ustr-statement-wto-e-commerce-negotiations#:~:text=In%20order%20to%20provide%20enough,active%20participant%20in%20those%20talks.