Deglobalization and Future of the World Trade Organization

– Aastha Asthana

Progressive liberalisation of international trade, one of the stated objectives of the World Trade Organization [“WTO”], has been at a standstill for over two decades. Illustratively, since the Doha Negotiation Round, efforts towards liberalisation, either through lowering of trade barriers or introduction of newer subject matters within the WTO framework, have largely been unsuccessful. At the time, absence of multilateral consensus on liberalisation was attributed to the conflicting interests of the developed and the developing world. This trend got further aggravated after the 2008 Global Financial Crisis, with rising nationalistic sentiments and corresponding protectionist economic policies across the world. Consequently, this materialised in the form of rising barriers to trade, both tariff and non-tariff, with a focus on domestic production, creation of jobs and tightening of immigration laws. Scholars have opined that this stagnancy might persist for long, with indications of further slowdown in liberalisation in the foreseeable future. Against this backdrop, it is imperative to understand the consequences of two recent factors. Both of which, are likely to deal an even bigger blow to globalisation and in turn, to progressive liberalisation.

China & the West vis-à-vis Increasing Protectionism

The first factor, and perhaps the most significant challenge to progressive liberalisation and WTO’s regime has come in the form of heightened tensions between China and developed economies in the recent past. The ‘West’ has opined that China’s trade policy is fundamentally irreconcilable with their trade interests, and “lacks of economic reciprocity”. They argue that China’s legal system ensures that international players do not receive the benefits that Chinese entities enjoy in other economies under the WTO framework. This has previously spurred a feeling of raging discontentment amongst members, which resultantly came to head with the US suggesting that it might withdraw from the multilateral stage altogether. This has been in addition to the US being engaged in a highly disruptive trade war with China over several months. Other consequent responses have included tightening of trade policies and increasing barriers to Chinese investment. This is evidenced by Germany’s Parliament vetoing the Chinese takeover of a German firm, for the very first time; and France and Germany coming together to structure a joint plan for industrial policy in Europe, to enable ‘local’ companies to compete with ‘foreign’ rivals. Moreover, this has been supplemented by the EU presently mulling over its new framework on State aid.

While countries grow increasingly sceptical of Chinese inward trade and investments, this trend is by no means limited only to China, and represents a growing sentiment of rising protectionism. Another significant manifestation of this trend has been the rising reliance on ‘national security’ reasons for taking actions inconsistent with general WTO rules. Despite this, China’s significance as the next emerging trading superpower remains undisputable and understandably, no country would be willing to absolutely boycott trade with China. This makes it necessary that the disruptions caused in global trade are settled through the creation of new rules at the multilateral level (agreeable to all parties), since the alternative might simply mean further protectionism.

COVID-19 & the Global South

The second factor, which has considerably disrupted the globalised world order is the COVID-19 pandemic. With countries blaming free flow of goods and people as one of the factors which has exacerbated the devastating effects of the disease, there has been a renewed call for replacing globally dispersed supply chains with ‘top-to-bottom’ domestic production. In particular, the demand for medical supplies and other essential commodities at a time of shortages has lifted confidence from the globalised model, triggering a conversation around rethinking trade policies. Whether these political sentiments can override the economic advantages of globalised free trade is a conversation to be had in these times. Reliant on foreign investment and access to foreign markets for achieving high rates of economic growth, developing countries face the threat of being disproportionately affected in a deglobalized world. Thus, it is important to understand the threat of these rising economic inequalities; how they might be dealt with; and what options does the Global South have.

In the aforementioned backdrop, there are a few issues specific to deglobalization that cannot be overlooked.

1. Peak Globalization & Inflation

It is highly likely that the World has already witnessed “peak globalization.” Deglobalization and the fracturing of global economic integration is certainly going to be one of the dominant themes for trade related discussions in the coming year and maybe for years to come, due to its far-reaching repercussions, especially because it is quite likely to be inflationary at the margin. Since peak globalization is an additional cost, it will either eat into profit margins or corporations will pass it on by way of higher pricing. Either way, imports and exports are set to be fundamentally impacted by this change. What still needs to be examined is how exactly this impacts the multilateral trade system and global trade competitiveness.

1. The US-China Trade War: Future of Multilateral Trade under a Bipolar World Order

In March 2020, US imposed tariffs on more than $360bn (£268bn) of Chinese goods, and China retaliated with tariffs on more than $110bn of US products. During his tenure, Trump’s tariff policy aimed to encourage consumers to buy American products by making imported goods more expensive, in order to punish China for its unfair trading practices and intellectual property theft. This strategic competition between the US and China has been responsible for driving the global order towards bipolarity. Resultantly, the present US – China trade conflict foreshadows the emergence of an unstable global order in the coming decade.

• Non-reciprocity in Chinese Trade Policy: Concerns of the Developed World

China has benefitted immensely from globalization, leveraging its accession to the WTO to become a workshop for the world and a huge domestic market coveted by foreign firms. However, under the current State capitalism model; unchecked subsidies and privileges awarded to State-owned enterprises; insufficient protection of intellectual property; foreign investment restrictions; forced technology transfers; and cyber protectionism – all raise alarming concerns about the Chinese government’s non-reciprocative trade policy. Consequently, this raises a vital concern about how the developed world will deal with China in the near future, and whether the Chinese policy of non-reciprocity will backfire.

1. COVID-19 & Reorganization of Global Supply Chains

In 2020 – 2021, we witnessed the retreat of the world economy from global economic integration, due to COVID-19. Accordingly, in an environment where alliances were uncertain and international cooperation was absent, most countries began reconsidering their economic interdependence. These steps, which continue to be in force today, threaten to reverse the economic growth delivered by globalisation. Even worse, new restrictions on trade could proliferate and inflict damage that could take decades to reverse, and worsen deglobalization.

1. WTO DSB: Are Reforms Required for its Continued Relevance?

The Appellate Body of the WTO is effectively not subject to any checks and balances, because of the inability of WTO members to exercise their collective authority to interpret the meaning of their WTO commitments. Almost 2-years ago, the then US administration, driven by scepticism about multilateralism, binding dispute settlement, and by a growing strategic and economic rivalry with China, elevated its longstanding concerns about WTO’s dispute settlement to new heights. While other WTO members blocked US’ efforts to negotiate more member control, the US increasingly turned to unpopular unilateral mechanisms, culminating in the block on new appointments, as part of its more disruptive trade policy. Assuming the US will eventually return to a rule-based trade, restoring the WTO dispute settlement system to full capacity and enhancing its legitimacy will likely require some changes. What will these changes be, will make for a thought-provoking discussion.

1. China & the Increasing Reliance on the National Security Exception by WTO Members

For over a decade, several concerns have been raised about Huawei, a Chinese tech-company. Specifically, the US and the United Kingdom [“UK”] apprehend that the Chinese will exploit Huawei to gain access to Western telecom networks. Interestingly, intelligence communities in the US have even testified publicly about this risk, although there is no evidence that any equipment sold to Western countries has been tampered with. This is what is said to have spurred off the China–US tech-cold war, and also added to the ongoing trade war between the two. Similarly, several issues have been raised about Chinese investments by an increasing number of member countries, to invoke the national security exception.

Conclusion

Evidently, in the recent past, developed countries have tightened their foreign investment regimes, and have begun to scrutinise these investments at the highest levels possible, for legal and political reasons. While one apparent aspect of this has been national security, what loomed largely in the background has been the big-scale protectionism by developed nations in the form of non-tariff barriers, stringent government regulations and heavy import duties. At this critical juncture, the possible revival of the WTO’s functionality with the appointment of a new Director General, coupled with a promising US administration – has offered scope for a fresh analysis of the legality of all such measures, and their possible reconsideration.

Through this brief write-up, the author has aimed to summarise several pressing issues that stand to impact the WTO’s contemporary global standing. Undeniably, it will be interesting to note the changes in the WTO’s relationship with the world superpowers, in a post-pandemic world. What will also be noteworthy alongside, is the force of powers like India, China, and Japan towards impacting this relationship.

Aastha Asthana is a law student at National Law University, Jodhpur.