Reforms against decay


25 years after its foundation, the World Trade Organization (WTO) is in a crisis. To prevent a collapse, and thus a loss of prosperity worldwide, it needs reform.

01/08/2020 · Wirtschafts- und Sozialwissenschaften, Raumwissenschaften · Institut für Weltwirtschaft · News · Forschungsergebnis

The WTO has provided the international community with very large welfare gains, and bilateral trade agreements cannot replace its multinational system. The collapse of the WTO would therefore lead directly to a loss of prosperity worldwide. To prevent this, IfW President Felbermayr makes four concrete reform proposals.

"The conceptual basis for the founding of the WTO 25 years ago is based on a brief historical exceptional situation in which nationalism was believed to have been overcome. Today one must assume that key players such as China or the USA will continue to fight for the supremacy of their economic and political system in the foreseeable future," says Gabriel Felbermayr, President of the Kiel Institute for the World Economy.

In a Kiel Focus ("25 years of the WTO—Causes of Decay and Reform Proposals for the Future"), he therefore advises the WTO on the following reform measures:

  1. An immediate threat to the credibility of the WTO is the US blockade of the appointment of judges to the WTO Appellate Body. It must therefore reorganize its arbitration proceedings with the highest priority in order to remain able to act and should in future simply dispense with an appeal body. It is not unusual for dispute resolution systems not to provide for an appeal body, even in long-standing practice between investors and states.
  2. The member states should actively prepare for a further disintegration of the WTO, for example due to a withdrawal of the USA. What is needed is a Plan B, a legal system that will replace the WTO in a worst-case scenario. Such a move would also put pressure on the US to be more constructive in seeking solutions and accepting reforms rather than paralysing the whole system.
  3.  At the same time, the WTO must take into account the systemic differences between its members. This could be organized through a club system. A core of democratic market economies with broadly compatible value systems further deepens economic integration, restricts the use of trade policy Instruments, and transfers sovereignty to joint dispute settlement bodies. Countries whose economic systems are not compatible with such a world trade regime would not benefit from all liberalizations, but are also subject to less strict rules.
  4. The WTO should continue to support the conclusion of bilateral trade agreements more strongly. These cannot replace a multilateral system, but offer legal certainty in times when the world trade order is being renegotiated. They can be building blocks for a multilateral solution at a later stage.

Felbermayr: "The WTO laid the groundwork for its current crisis when it was founded 25 years ago. 164, extremely heterogeneous member states, from some of the most terrible autocracies in the world to model democracies, all endowed with an equal right of veto. In addition, there is systemic competition between the US and China, which takes the free trade premise of the WTO ad absurdum, because both countries are no longer out to create new, common prosperity through free trade, but to prevent the systemic opponent from gaining prosperity and thus power. That is why the WTO, as we have known it so far, has survived. It must now reinvent itself, only in this way can the world community be spared a step back into poorer times."

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