The Rise and Fall of the WTO

By Everett Eissenstat

Regardless of who is victorious in the upcoming presidential election, it is safe to say that U.S. leadership in promoting open markets and tariff liberalization is, for the time being, a thing of the past. The concept of free trade is now roundly rejected by both presidential candidates and their political parties, but the trend actually began years ago. During the 2016 election season, criticism of open markets and trade agreements was a central theme of Donald Trump’s campaign and, to a lesser extent, Hillary Clinton’s as well. Both candidates vowed to withdraw from or renegotiate several long-standing international trade pacts, including the Trans-Pacific Partnership (TPP) and the North American Free Trade Agreement (NAFTA). After his election in 2016, Trump acted on those promises, withdrawing from TPP and renegotiating NAFTA.

It was widely hoped that, upon his election, President Biden might reject his predecessor’s unilateral tariff measures and embrace open markets and multilateralism. Instead, he not only maintained unilateral tariffs on Chinese goods over his four years in office but increased them, in addition to taking several other measures to constrain international trade.

Today, in large part due to the inability of trade agreements and institutions, particularly the World Trade Organization (WTO), to manage China’s economic rise and unfair trade practices, little appetite seems to exist among policy leaders to engage in any real trade liberalization. Neither President Trump nor Vice President Harris is likely to remove current tariffs on Chinese exports. In fact, Trump has vowed to increase them. Both candidates and both parties also increasingly raise national security concerns over trade in advanced technology and support nearshoring or reshoring supply chains—positions that are popular with many Americans. Thus, regardless of who wins this election, we are likely to see continued use of unilateral tariffs and other economic tools to block Chinese imports, especially those related to sensitive technologies, as well as a variety of industrial policies to boost domestic manufacturing.

The problem is that China—through subsidies, economic coercion, forced technology transfers and other unfair trading practices—is the dominant player in many critical sectors of the global market. From solar technology to the critical minerals needed for electric vehicles to advanced pharmaceutical ingredients, many crucial roads lead through China. For Western economies keen on retaining access to these technologies for both economic and national security reasons, the current trajectory is not sustainable.

Steps must be taken to reshape trade patterns—and right now, among many nations, those steps are being taken unilaterally rather than multilaterally through the WTO, as might have been the case 20 or more years ago.

Because the WTO has failed to keep pace with the changing trade dynamic, world leaders must now seek new ways to enable the benefits of economic growth that come from more open trade while countering the unfair practices of countries such as China. Squaring this circle will not be easy, and doing so will require an understanding of the mistakes of the past just as much as a sound set of policies to help the global trading system move forward into the future.

International Trade in the 20th Century

The bipartisan rejection of globalism and free international trade is no recent phenomenon. It is due in large part to the failure in recent decades of global trade institutions such as the WTO to effectively manage and discipline the economic rise of China and its state-driven economic model.

To understand why this occurred, it helps to take a look back nearly 80 years, to the creation and development of the American-led global trade order. Following the economic chaos and destruction of the Great Depression and World War II, world leaders sought to establish new trade rules based on interdependence, transparency and predictability. They believed that a prosperous world of countries that traded with one another would be less likely to go to war. They therefore established the General Agreement on Tariffs and Trade (GATT), an international organization that aimed to reduce tariffs, establish clear and predictable trade rules and curtail restrictive business practices, all with a goal of increasing international interdependence and spurring global economic growth.

Under the GATT, nations agreed to minimize barriers to international trade by eliminating or reducing quotas, tariffs and subsidies. And it was a success: Over time, GATT negotiations lowered tariffs on industrial goods from 40% of their market value in 1947 to less than 5% in 1993. Nations that joined the GATT became part of the established international trading order and experienced substantial increases in trade. 

Despite this success, though, the GATT had a number of serious flaws. Many countries benefited from GATT rules to gain greater access to global markets without committing themselves to additional market-opening measures. As a result, some nations “freeloaded” off the GATT system. The GATT had no effective way to resolve disputes among members. Additionally, during the nearly half-century of its existence, GATT negotiators were unable to make real market-opening progress in important economic sectors such as services and intellectual property.

To resolve these problems, world leaders in 1995 replaced the GATT with the WTO, which was designed to be a more effective international trade institution. Under the WTO, all topics under negotiation would be agreed to as a package rather than on a case-by-case basis, thereby eliminating freeloading. In the early days of GATT, members could pick and choose what agreements to be part of; under the WTO, members had to agree to follow the rules in order to receive the benefits. The WTO also created stronger dispute settlement mechanisms by imposing stricter deadlines for countries to meet their obligations and making it easier for other nations to obtain legal authorization to retaliate for noncompliance. The WTO also tackled growing areas of trade such as services and intellectual property. 

While these reforms were welcome, they also had unintended consequences. Negotiations required consensus, so virtually any country or group of countries could block agreement on one issue or another. As a result, tackling tough trade issues like agriculture, labor, the environment, investment and state-owned enterprises became increasingly difficult, if not impossible. Meanwhile, stronger and more effective dispute settlement procedures led to a dramatic increase in WTO enforcement cases, many targeted at the United States because of its ability to use its countervailing duty and antidumping laws to counteract unfair trade and protect its largely open market. Discontentment with the WTO continued to grow, with many in the U.S. believing the organization was unfairly biased against them.

Enter China

Meanwhile, the global economy was changing and the WTO was changing with it. State-controlled economies, including the People’s Republic of China and the nations of the former Soviet Union, were shedding decades of centralized economic governance. The WTO embraced and encouraged these changes, negotiating accession agreements with more than 20 postcommunist countries. The common belief and hope was that the WTO system could lock in and propel future market-oriented reforms. Meanwhile, some nations, including China, entered the WTO system as “developing economies,” enabling them to reap the full benefits of WTO membership while undertaking only some of the obligations that were required of more developed economies. As China’s economy and manufacturing prowess grew, its self-designation became more troubling.

And, while China initially embraced some market-oriented reforms, its leaders were loath to give up the economic levers that enabled continued one-party political control. To the contrary, state intervention in the Chinese economy grew, including the use of large subsidies to support specific industries and companies. The Chinese government also forced Western powers to share their technological innovations in exchange for access to China’s growing market, and intellectual property theft increased. These practices, combined with lax labor and environmental standards and enforcement, propelled China’s industrialization and cemented its status as the world’s leading manufacturer, with massive effects on the global economy. In particular, the U.S. lost about 5.8 million manufacturing jobs between 2000 and 2010.

To combat what it saw as China’s unfair trade practices, the United States pushed for stronger WTO rules on subsidies and state-owned enterprises, particularly targeting China’s industrial practices. At the same time, the U.S. secured greater market liberalization for its exports and used bilateral or plurilateral trade agreements outside the WTO to raise intellectual property, labor and environmental standards. (The countries that signed on to these plurilateral agreements are willing to go farther on trade liberalization outside the WTO system.) In fact, between 2001 and 2011 the United States made 12 new trade agreements with 18 countries, increasingly turning away from reliance on the WTO to advance its own interests.

Eventually, in 2016 the U.S. agreed to create the TPP, an agreement among 12 Pacific Rim countries specifically designed to counter China’s economic rise. Unfortunately, it was too little, too late. That same year, during the presidential campaign, both major-party candidates for president came out against TPP and free trade in general, arguing that most trade agreements don’t do enough to protect American industry and workers. From that moment on, political support for open markets in the U.S. was gone.

Law of the Jungle?

World leaders often complain about current U.S. trade and industrial policies while reminiscing fondly about America’s past support for free trade. But while they may not like it, they must come to terms with this new reality that, given what both Trump and Harris have said on the subject, the United States is not going to return to its past pro-free trade positions anytime soon. And without new tools to effectively eliminate or counteract unfair Chinese practices, the United States, and a small group of like-minded nations, will continue to act unilaterally to protect their own economic interests. Likewise, the WTO will continue to fade into irrelevance as the United States pursues its core economic and national security objectives independently, or with a small group of like-minded countries.

Over time an increasingly fragmented economic order will emerge and solidify, operating outside the norms of the WTO. Nations will drift toward trading blocs based upon their pursuit of economic nationalism and self-interest. Global economic growth and productivity will likely diminish, especially for smaller, more vulnerable economies that do not have the financial power to subsidize their own industries or the economic clout to force a shift in supply chains. In this new economic order, rules of the game will constantly change, and might will make right.

There may still be time to alter course. But to succeed, world leaders and stakeholders must stop pining for the past and accept responsibility for creating new trade rules by demonstrating the type of vision and creativity we saw at the close of World War II. Common approaches among allied nations designed to counteract China’s unfair trading practices in areas such as export controls, investment screening, labor practices and transnational subsidization are a good place to start.

We are already seeing the EU and Canada follow U.S. imposition of tariffs on Chinese electric vehicles with tariffs of their own, but more can be done. For example, on transnational subsidization, the U.S., Canada and Mexico could revise the U.S.-Mexico-Canada Agreement (USMCA) to more effectively thwart China’s ability to use the agreement to dump subsidized products into North American markets via Mexico. USMCA parties could also build upon the agreement and devise more effective, coordinated approaches to stopping products made with forced labor from entering the North American supply chains. The EU, Canada, Australia and the U.K. could more closely align their export control policies to keep sensitive technologies within a community of trusted security partners. Similarly, nations could work together to develop rules to counteract China’s manipulation of global metal markets and create more resilient critical mineral supply chains. Over time, these new trade instruments and rules could become the cornerstone for the next generation of multilateral trade agreements.

But the U.S. and its trading partners must act fast. Unless real progress is made among like-minded countries in reshaping global trade, the rules will continue to be written by nations unilaterally creating a fragmented trading system characterized by conflict and slower growth, with potentially dire consequences for the next generation.