The Future of Global Trade

When Ralph Ossa began researching global trade and in particular the benefits of trade agreements, the topic was quite niche. His calculations of the impact of a global trade war on the world’s economy seemed more like a theoretical exploration than a prediction of realistic scenarios. Today, his findings underline the seriousness of the situation and are regularly referred to in foreign trade policy debates. In our interview, he explains the global trade situation, clears up a few misunderstandings about the role of the World Trade Organization (WTO) and outlines a future ready version of the WTO.  

Interview with Ralph Ossa

Are we in the midst of a global trade war?

I would not say that we find ourselves in a global trade war at this moment, but we are definitely in a trade war between the USA and China. In April of this year, the Trump administration imposed substantial tariffs on imports worth around USD 50 billion from China. The Chinese reacted with retaliatory measures of the same amount and set an escalation spiral into motion.

In mid-September, the USA levied customs duties on further imports worth USD 200 billion. Now about half of all imports from China are subject to tariffs of 10%, and the US is threatening to raise these up to 25% as from January 2019. China responded immediately and levied additional duties on goods worth 60 billion US dollars.

Currently, 12% of all imports into the USA are subject to increased tariffs. Now, a quarter of the products subject to tariffs are consumer goods; originally, these only made up 1%. Consumers in the USA are now really feeling the effects of these taxes.

The global situation is quite worrying, especially the US tariffs on automobile imports. The introduction of such tariffs would most likely lead to a trade war between the US and the EU.

What does this mean for Switzerland?

For the time being, Switzerland is only affected secondarily. The USA has indeed introduced high tariffs on steel and aluminum imports, including those from Switzerland. This is a problem for Swiss steel exporters. However, although trade relations with the USA are important for Switzerland, the EU remains the most important trading partner by far.

The increased tariffs on exports to the USA have led to a redirection of third country steel exports into the EU, putting pressure on steel producers within the EU. The EU has responded by introducing provisional protective measures and quota-based tariffs. If the volume of steel imports rises above the average of the last three years, 25% customs duties will be levied on the additional imports. Swiss steel producers could very well be affected by this.

On which basis has the US raised these tariffs against China?

On the one hand, the US argues, and quite rightly so, that the Chinese do not respect the agreements regarding the protection of intellectual property. When China joined the WTO, it made commitments on this matter, which it is now not honoring. The Americans, as well as the Europeans and the Japanese, are rightly concerned about this. In addition, the United States argues that it has a national security interest in relation to steel and aluminum imports. In my opinion, this is a pretense argument, which the Americans have also put forward in the context of planned car imports. 

Why does the WTO not intervene?

The WTO was never intended to take on the role of policing global trade and has no power to intervene of its own accord. It is an institution offering a framework within which members agree on shared rules and proceedings. If a member does not abide by the agreements, the WTO allows the other members to respond with countermeasures through its Dispute Settlement Body (DSB). Therefore, if the US accuses China of infringing intellectual property rights, the right way would be to appeal to the DSB. But, under Presindent Trump, the US is bypassing the WTO by unilaterally imposing retaliatory tariffs on imports from China.

The WTO seems to be a rather fragile institution

That is partly true. To benefit from the WTO’s advantages,  all of its members need to abide by the joint agreements. It’s a classic example of a prisoner’s dilemma.

The WTO and the global trade system has been such a success because the member states determine which trade and cooperation opportunities they want to seize. The WTO is not a superordinate body that decides how they should cooperate and on which issues members have to agree. However, in order for the solutions to be sustainable, the WTO depends on the cooperation of all its members.

The national security interest, with which the US justifies its actions towards China, puts the WTO in a Catch-22: if it judges the US rationale to be illegitimate, the US President will probably not accept the ruling and, in a worst case scenario, will leave the WTO.  Alternatively, if the WTO recognizes such a national security interest, it could set a precedent for countries to invoke some flimsy security interest to introduce new tariffs. This would definitely weaken the WTO.

Is the WTO doomed?

I would not go as far as that. The WTO is committed to two main aims: the promotion of trade liberalization and the prevention of trade wars. For example, in 2008, in the context of the global financial crisis, there was reasonable concern that, just as in the 1930s, there would be a trade war because of the recession. The WTO played a key role in preventing such a scenario. 

As far as trade liberalization is concerned, the world trade system (WTO and its predecessor, the GATT) has been a great success. Tariffs have fallen massively since 1947, with a large part of the liberalization and tariff reductions already being introduced before 1995, when the GATT governed world trade. Since establishing the WTO, there has been little room for maneuver on tariff reductions, and thus less progress.

The situation is somewhat fragile today. If the WTO is unable to prevent this imminent trade war, it risks losing its raison d'être.  The WTO offers a significant value, but only as long as its members are aware that it is in their interest to abide by the agreements reached jointly.

How can the WTO move forward?

First and foremost, it must regain its control. For that to happen, America needs to return to the spirit of cooperation. I cannot see that happening in the immediate future, but I am optimistic for the mid-term. The US will realize that a trade war is not in their interest and that there was a good reason why they played a leading role establishing world trade system in 1947.

In addition, it is important for the future of the WTO that it plays a central, shaping role in the non-tariff aspects of trade liberalization. Originally, trade policy was customs policy. Today we have more or less eliminated tariffs. Now we are talking about reducing non-tariff barriers. This "deep integration" covers all aspects of trade policy that have nothing to do with monetary tariffs: Regulations, investor protection, government procurement, investments, intellectual property and tax policy. Deep integration is the future of trade policy, and to remain relevant in this future, the WTO must play an active role in supporting all efforts to further liberalize trade.

It could expand its role as a coordinating infrastructure for global trade liberalization to the area of e.g. international regulation. However, to do so, the WTO must depart from the multilateral approach, i.e. that all countries must agree on a point. It is unlikely, for example, that Switzerland and India will ever agree on common environmental standards, but it is quite likely that Switzerland and New Zealand could agree. The WTO can act as an existing organizational framework and allow plurilateral agreements. Plurilateral agreements are agreements that are concluded between a larger subgroup of trading partners. However, they are then open to all other members on the same terms. In this way, they are neither bilateral agreements or free trade agreements that are discriminatory and therefore contrary to the spirit of the WTO, nor do these agreements require the agreement of all WTO members. This allows some WTO member states to agree on integration measures without completely undermining the multilateral and communal core of the WTO.

We currently have a large number of free trade agreements among WTO members. Such free trade agreements do not meet the requirement of non-discrimination and should, according to the founding ideas of the WTO, only be reverted to in exceptional cases. A further disadvantage of these numerous free trade agreements is that they are not based on common WTO mechanisms. Each has its own procedures and generates its own administrative load. Plurilateral treaties would be uniform and coherent - in the treaties as well as in arbitration proceedings. Such standardization would also make it easier for companies, because they would not have to navigate through different procedures.

Will the WTO survive the current turbulences?

I think so, yes. We are heading towards a constitutional moment in which far-reaching global political decisions are made. In the mid-term, WTO members will realize how important the achievements of trade liberalization are for their economies and the prosperity of their people. Even if it does not yet look that way today: I am convinced that the US, too, will return to cooperation. A reformed WTO in the above-mentioned sense could then play a decisive role in furthering trade liberalization and global deep economic integration.