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Can Europe Prevent The Paralysis Of The Multilateral Trading System?

Analysis 7 October 2019
Can Europe Prevent The Paralysis Of The Multilateral Trading System?

In response to rising protectionism worldwide, several countries, spearheaded by Germany and France, have recently launched the ‘Alliance for Multilateralism’ at the UN General Assembly. This is the latest signal showing that European countries continue to be committed to the global multilateral system and in particular the global trading system as represented by the World Trade Organization (WTO).

But what more can Europe do to translate this commitment into concrete action? It is time for the European Union (EU) to switch into ’Brexit mode’ and throw its united weight behind its professed intention to save the rules-based global order.

The challenge is formidable and urgent. While WTO reform has been on the agenda for a number of years, a crucial element of the system – the Appellate Body of the WTO – might well cease to function by 11 December.

This body is responsible for arbitrating appeals in trade disputes, relying on appointed judges to decide in an objective and transparent manner. In trade disputes both sides typically have a justification for their actions, so without such independent arbitration, the ability to resolve these kinds of disagreements will diminish substantively.

This mechanism is under threat as the Trump administration has been blocking new appointments to the Appellate Body since 2017, claiming that its judges have been overstepping their authority and interfering in US laws. Usually, there are seven judges, but now only three are left – the minimum required for hearing an appeal.

The already weakened institution is expected to become completely dysfunctional on 11 December 2019, when the terms of two of the remaining judges are ending. This will paralyse the WTO’s dispute settlement system, and effectively leave the multilateral system without a proper enforcement mechanism.

Reforming the WTO

The EU has already made several attempts to initiate reform of the WTO. In 2018, the European Council asked the Commission to propose a comprehensive approach to improving, together with like-minded partners, the functioning of the WTO in crucial areas, including dispute settlement and the Appellate Body. The Commission’s subsequent proposals on WTO reforms advocated more transparency and a review of the Appellate Body’s procedures.

The EU has been key in leading an ‘alliance of multilateralists’ aiming to reorganise and safeguard the WTO, which includes countries such as Australia, Canada and Japan. In his recent European Parliament hearing, EU Trade Commissioner-designate, Phil Hogan reiterated that WTO reform is essential.

But there are no signs that the Trump administration will change its mind. In addition, it is not enough to convince the US; there is also a need to bring emerging economies on board, including especially China, given its weight in global trade. Unless the EU manages to find and agree on (interim) solutions to this crisis, the collapse of the multilateral trading system looms, which would have a disproportionately negative impact for export-oriented, import-dependent and rules-based economies – such as the EU.

It would also put into question the future of multilateralism itself, ushering in a return of pure power and zero sum-based politics in which Europe would lose out.

What next?

The EU must continue to build and extend the multilateral alliance while exploring under what circumstances the US could give up their opposition. While it is important to convince China, this needs to be done under the premise that the country abides fully by the rules of the global trading system, and addresses concerns about unfair trading and competition practices. This could help make the US understand that it is better to solve its disagreements through the WTO, without incurring the costs of trade conflicts.

Will this be enough to avert the crisis? Probably not in the short term. It is unlikely that the US will fundamentally change its stance before the 2020 presidential election. But having these negotiations now might create the preconditions for an agreement on how to restart the reform process when politics allow for it in future. 

A second-best solution

At the same time, the goal should be to create a bridge, i.e. transitional arrangements, for the intervening period. The EU has already committed to reaching out to other WTO members to work on an interim solution. EU proposals now need to become more concrete, devising a way to find an agreement among a ‘coalition of the willing’ on a (temporary) alternative dispute settlement system, and putting this in place as quickly as possible.

If this alternative system is to work, participants will need to abide by the rulings of a parallel body voluntarily. This will entail real commitment: the EU must concede on trade disputes in case it loses in this parallel body, even if others are not even part of the system; this is the real cost of supporting multilateralism.

The verdict in the Airbus case serves as an important reminder that trade disputes do not always end up being settled in favour of the EU. Such an alternative system needs the acceptance and participation of as many countries as possible, covering as much of global trade as possible. Not only will this reduce compliance costs, but it will also make the system work more effectively. The goal must always be the return to the WTO system as soon as the impasse there is resolved.

Getting into Brexit mode

Europe needs to lead the way. But how? While there has been some action, overall, it is surprising how little understanding there is of the severity of the challenge and the urgent need for action outside a small circle of those concerned with trade.

It is interesting to draw a parallel to Brexit. While everyone is concerned about what will happen on 31 October, very few people are worried about what will happen on 11 December. But Brexit might also serve as an example of how to try to tackle this crisis: let us use what we learned from the Brexit process to make EU action more coherent and effective, getting all member states involved fully.

Going into ‘Brexit mode’ entails appointing a ‘Special Envoy’ (the outgoing Commissioner, Cecilia Malmström, could be a potential candidate), backed by a Task Force integrated with DG Trade, with a negotiation mandate agreed by the EU27, involving other, like-minded European countries if possible, including the UK.

This Special Envoy, equipped with a strong mandate, should continuously report back to the highest level, working according to a clear timetable and towards clearly defined final objectives: to negotiate WTO reforms and, if the Appellate Body ceases to function, find alternative arrangements for the interim period.

Will it work? The Brexit mode has worked very well, but it is no guarantee for success in this crisis given the structural differences – including the fact that the Union has far less negotiating power globally than in the EU-UK relationship. But if the EU is serious about defending the global multilateral system, this challenge cannot be ducked. Employing the Brexit mode is the best chance to make it work.

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