The World Is Abandoning the WTO

For over 75 years, the multilateral trading system has helped ensure stability and order in the global economy. The General Agreement on Tariffs and Trade and its successor, the World Trade Organization (WTO), brought states together to cooperate in lowering tariffs and other trade barriers, promoting global economic integration and establishing rules to govern trade. This system has proved extraordinarily effective and fostered an era of unprecedented global prosperity.

But now this liberal trading order is in crisis. International cooperation on trade has largely broken down. The United States, the longtime champion of open markets, has abandoned its commitment to free trade, multilateral cooperation, and respect for the rule of law. By imposing tariffs and providing massive subsidies across multiple industrial sectors, Washington has openly violated the WTO’s rules and principles. China has likewise distorted and increasingly weaponized trade through its own use of subsidies and economic coercion. To avoid punishment for its violations, the United States has also paralyzed the existing system’s enforcement mechanism, thus risking the complete unraveling of the trading order.

Despite the efforts of many states to keep multilateralism alive and to preserve the rules-based trading order, others—including several major emerging economies such as India and Indonesia—have undermined those efforts by blocking trade negotiations and impeding the enforcement of global trade rules. Without effective rulemaking and enforcement, the trading system could descend into anarchy—replacing the order and stability that has been the foundation of global prosperity and peace over the past 75 years with chaos and conflict.

GONE FISHIN’

The WTO’s central purpose is to make and enforce the rules governing international trade, primarily by facilitating negotiations between its members. But over the last 15 years, WTO negotiations have frequently resulted in stalemate, evident most notably in the failed Doha Round of talks that began in 2001 to lower trade barriers around the world. Those negotiations collapsed largely because of conflict between China and the United States, with Beijing refusing to reduce its tariffs in areas such as agriculture, chemicals, and industrial machinery without greater cuts to U.S. farm subsidies. Resuscitating WTO negotiations is essential to maintaining international cooperation on trade and to ensuring that global rules on trade keep pace with the evolving challenges facing the global economy. A critical test of the international community’s resolve to restore global trade rulemaking will be the current WTO negotiations on fishing subsidies.

Subsidies provided by national governments to fisheries have led to a crisis of overfishing. Ninety percent of global fish stocks are already fully exploited, overexploited, or depleted. Because many developing countries depend heavily on fishing for food security, livelihoods, and exports, they are acutely vulnerable to plummeting fish stocks and have, therefore, advocated for tight rules on subsidies. A WTO agreement to restrict these harmful subsidies would thus represent a win for trade, development, and the environment.

Countries no longer see the WTO as an effective means to enforce their rights in the international trading system.

In 2022, the WTO reached a preliminary agreement to prohibit subsidies for illegal, unreported, and unregulated fishing, fishing of depleted stocks, and fishing on the unregulated high seas. But these account for only a tiny fraction of all the harmful subsidies for fisheries. The real work of tackling the subsidies that encourage overcapacity and overfishing—too many vessels catching too many fish—was left for a high-level WTO meeting in February 2024. This meeting almost produced a landmark pact to restrict such subsidies, but India blocked the agreement by insisting on sweeping exemptions that would have rendered it largely meaningless. India was the only country opposed to the deal, but since WTO rules require consensus, the negotiations collapsed.

Given the challenge of securing consensus, states have sought to revive the WTO’s negotiation function through plurilateral agreements, which are optional and apply only to the subsets of WTO members that choose to sign on to them, instead of the traditional multilateral agreements that bind the entire membership. One such agreement, signed in 2024 by 128 states, aimed to better facilitate foreign direct investment by, for example, streamlining bureaucratic authorization processes for investors.

The agreement is expected to generate substantial global economic gains, the majority of which will accrue to low- and middle-income countries. Proponents see it as an important means for developing countries to claim a greater share of global foreign direct investment and to address the significant investment gaps in those countries. To take effect, however, the agreement must be adopted into the WTO’s legal architecture—a feat that requires the consent of the entire membership. This final part of the process has been blocked by three countries—India, South Africa, and Turkey—that object on principle to the notion of plurilateral (rather than multilateral) agreements within the WTO.

The ability of just a few states to block these and other negotiating efforts has generated intense frustration among member states. In contrast to the North-South fault line that often characterized the politics of global trade in the past, in both the cases of fishery subsidies and the agreement pertaining to foreign investment, developing countries have been pitted against one another. In unusually candid remarks, WTO Director General Ngozi Okonjo-Iweala condemned states that had adopted what she dubbed a “lose-lose” negotiating stance and thereby, she said, damaged the organization by preventing agreement.

INTO THE VOID

The greatest and most immediate threat to the liberal trading order comes from the weakening of the WTO’s dispute-settlement mechanism. The WTO’s system for adjudicating trade disputes is essential for enforcing global trade rules, and it has had very high rates of compliance. If a state is found to be in violation of WTO rules, it is required to stop the offending measure or provide proportionate compensation; if it fails to do so, affected states are legally authorized to retaliate.

But in recent years, the United States has taken deliberate steps to disable the WTO’s dispute-settlement mechanism so that Washington can pursue policies that violate WTO rules with impunity. Since U.S. President Donald Trump’s administration, the United States has blocked all judicial appointments to the WTO’s Appellate Body, a group of seven judges that hears appeals regarding WTO rulings made about disputes. With no judges to hear appeals, this body has been unable to function since 2019. As a result, any country on the punitive end of a WTO ruling can simply appeal it and delay its enforcement indefinitely. This has come to be known as appealing “into the void.” Without a functional dispute system to ensure the enforcement of the WTO’s rules, the entire trading system is in danger of collapse.

The United States is the single biggest source of appeals into the void, accounting for 38 percent. Despite its purported commitment to international cooperation and the rule of law, the Biden administration has continued to blatantly violate WTO rules while refusing to restore the Appellate Body, which enables Washington to block rulings against its WTO-illegal tariffs and subsidies by appealing into the void.

Once ignited, the flames of economic nationalism are difficult to contain.

But many other countries are increasingly following the United States’ lead, taking advantage of the absent Appellate Body to openly defy WTO rules. Indonesia, for example, has imposed a ban on the export of raw nickel, a key component in stainless steel and electric vehicle batteries. The ban hurts foreign firms and industries by illegally cutting off their supply of nickel ore. Indonesia controls more than half of the world’s supply of nickel and, by banning nickel exports, aims to force companies that process nickel to relocate to the country. In 2022, the EU successfully challenged Indonesia’s ban at the WTO. The WTO dispute panel ordered Indonesia to remove its export restrictions, but Indonesia appealed into the void to block the ruling. Rather than revoking its export ban, Indonesia is now expanding it to other unprocessed minerals.

India has taken similar steps. Seeking to emulate China’s development model, India put in place an extensive system of subsidies tied to “special economic zones” to promote its exports. As a result, U.S. steel and pharmaceutical industries became swamped by a flood of cheap, subsidized imports from India. The United States launched a case at the WTO challenging the subsidies and won. The panel ruled that India’s subsidies violated WTO rules and must be removed. Washington initially celebrated the ruling as “a resounding victory for the United States,” saying the WTO’s enforcement tools would ensure a level playing field for American workers. But India deprived the ruling of any legal force shortly after by simply appealing into the void.

These are not isolated cases: two-thirds of WTO rulings are now being appealed into the void. Countries are also taking fewer cases to the WTO in the first place. The number of disputes initiated at the WTO has dropped to about one-third of what it was before the Appellate Body collapsed. This precipitous drop in the number of disputes taken to the WTO comes even as more states adopt protectionist trade measures contrary to WTO rules. Countries no longer see the WTO as an effective means to enforce their rights in the international trading system. With this breakdown in the WTO’s enforcement mechanism, rule violation will only spread.

In an attempt to maintain a functional dispute-settlement mechanism and ensure that WTO rules remain enforceable, a group of states led by the EU launched the Multi-Party Interim Appeal Arbitration Arrangement, which began hearing cases in 2022. The MPIA replicates the role of the Appellate Body, but it applies only to participating states. To date, only 53 countries (including the 27 member states of the EU) have agreed to participate. The majority of the WTO’s 166 members remain outside the new mechanism and, therefore, free to violate the rules. But if the United States were to unblock the appointing of judges to the Appellate Body, the WTO’s enforcement mechanism would immediately be fully restored.

SYSTEM BREAKDOWN

The crisis in the liberal trading order now goes far beyond competition between the United States and China. The two countries’ disregard for long-established norms and institutions has weakened the incentives for other states to abide by and maintain that order. A growing number of countries are taking a zero-sum approach to trade, putting their own short-term gains ahead of common long-term interests—namely that of preserving a stable, rules-based trading order. Although many states seek to salvage and defend the system, many others are undermining it by thwarting WTO negotiations, violating global trade rules with impunity, and impeding efforts to restore dispute settlement and enforcement.

The United States’ assault on the WTO Appellate Body has put the global trading system on a new and dangerous path. Without the WTO’s guardrails, there is little in place to check states’ protectionist impulses. The potential consequences are already evident: competitive spirals of state subsidies, tariff wars, and other policies that will raise costs, fuel inflation, and lead to ballooning government deficits. This will leave nearly everyone––consumers, taxpayers, workers, and businesses—worse off and create profound economic dislocation and disruption. Tensions and conflict between states, even erstwhile allies, will only escalate.

Once ignited, the flames of economic nationalism are difficult to contain. The world risks returning to the trading environments of the 1930s and 1940s, when a widespread turn to protectionism led to a dramatic contraction of world trade that exacerbated the Great Depression and helped precipitate World War II. Such chaos is precisely what the existing rules-based liberal trading order was designed to prevent.

The increasing number of countries defying WTO rules may reach a tipping point where the multilateral trading system collapses altogether. The reversal of global economic integration would bring with it growing lawlessness, conflict, and disorder in the global economy and the international system at large. If this reversal comes to bear—if the world fails to recover its respect for rules on trade—the resulting order will not be a peaceful one.

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