Advancing WTO Reform: Key Steps for Enhancing the Multilateral Trading System

By Bernard Hoekman, Kenji Takamiya

The rise of trade distorting measures adopted unilaterally by countries signals the need for reform of World Trade Organization rules and procedures.

The multilateral trading system under the WTO’s auspices faces major challenges. One prominent feature of today’s state of global commerce is a rise of the industrial policy. According to the Global Trade Alert data, subsidies account for a majority of trade-distorting measures introduced since the global financial crisis, and use of subsidies has expanded in recent years.

Another noteworthy phenomenon is increasing use of trade policies to pursue non-economic objectives, such as national security, response to climate change or protecting human, animal, or plant life or health. Many of the quantitative restrictions on international trade reported to the WTO are motivated by such rationales.

Many trade distorting measures tend to be adopted unilaterally. While WTO members in principle can use the dispute settlement mechanism to contest measures deemed to violate multilateral commitments, the WTO Appellate Body—the highest platform for litigation—is not presently functioning due to an impasse in making new appointments. In any event, rulings on disputes related to national security are likely to be rejected by the losing party.

Trade negotiations under the old GATT system prior to the Uruguay Round were mostly on border measures, including tariffs and quantitative restrictions. In conjunction with expansion of global value chains, the attention of policymakers and stakeholders has shifted to trade costs arising from regulatory heterogeneity across countries. As a result, the trade policy agenda increasingly encompasses “behind-the-border” policies of domestic regulations.

While reciprocal and non-discriminatory reduction or elimination of border measures unambiguously benefit all countries involved, it is not guaranteed that harmonization of behind-the-border regulations aimed at addressing market failure will do the same. Each domestic regulation must be looked at individually to weigh its costs and benefits on a case-by-case basis. Plus, it is harder to agree on these rules multilaterally because local authorities may hesitate to change their own regulations as a quid pro quo for market access concessions.

Expansion of the WTO membership also adds to complexity of consensus-based decision-making. Unlike in the old GATT system where a relatively small number of like-minded contracting parties acted as key decision-makers, today’s 164 WTO members have diverse preference and priorities.

 As a response to the difficulty of reaching consensus among the expanded membership, WTO members have resorted to bilateral and regional preferential trade agreements to deepen market integration, as well as trade arrangements that are issue specific. These may lead to fragmentation of the global trade regime. At the same time, plurilateral agreements that center on adoption of good regulatory practices and measures to lower trade costs provide a pathway for the WTO to leverage the interest that many countries have in international cooperation on new issue areas. 

Substantive deliberation and policy dialogue among WTO members is a necessary first step to re-establish trust.

In responding to the challenging trading landscape, the multilateral trading system needs to be reformed to improve both rule-making and dispute settlement processes.  Many major economies within the WTO membership are in the Asia-Pacific region, and thus can make valuable contributions to WTO reform discussions.

In the area of rule-making, open and non-discriminatory plurilateral agreements should be used more actively, as these are better options than concerted unilateralism in providing legal and institutional anchor, transparency, and access to support by the WTO Secretariat.

To address non-economic objectives more effectively, the current clauses on general and security exceptions in the WTO should be revisited. Disciplines on subsidies should be refined to consider their underlying goals, effects and effectiveness, recognizing that industrial policy has a role to play in the transformation to a greener and more inclusive economy.

The existing dispute settlement mechanism may not always be suitable for behind-the-border measures.  Peer review and identification of good practices at the relevant WTO committees or use of alternative dispute settlement procedures may do more to bring about constructive solutions.

More broadly, substantive deliberation and policy dialogue among WTO members is a necessary first step to re-establish trust. These should be supported by greater willingness to compile data on policies and to undertake analysis of the effects of policies on trading partners and the multilateral trading system.

Agreement by WTO Ministers to use the Trade Policy Review Mechanism not just to ensure transparency but as a vehicle to analyze the spillover effects of national trade-related policies would help to inform the type of deliberation that arguably is needed to build a common understanding of the effects of policies.  

There has been widespread gloom among WTO‘s stakeholders regarding the state of the multilateral trading system. Nevertheless, the members recently produced a number of tangible outcomes, most notably a new multilateral Agreement on Fisheries Subsidies, a plurilateral agreement on Services Domestic Regulation and a draft Agreement of Investment Facilitation for Development. Hopefully, these provide a foundation for members to work together towards meaningful WTO reform.