• For decades, trade has been an important driver for economic growth, job creation, and wellbeing. It helped lift billions of people out of poverty, and promoted economic and in some cases political freedom.

Trade Outlook

• After a steep drop in 2020 due to the pandemic, trade in goods and services grew strongly in 2021, experiencing an increase of about 13 percent relative to the pre-pandemic level of 2019, which was a faster and stronger recovery than in the aftermath of the 2008 financial crisis.
• However, global trade is facing serious headwinds in 2022. The IMF had already downgraded its growth expectations before Russia invaded Ukraine due to persistent inflation in the US and concerns related to China’s real estate sector.
• Russia’s war on Ukraine puts additional pressure on the global economy by interrupting the supply of basic commodities, due to which the prices for food and energy will rise, pushing up inflation, and thus depressing demand. Russia will be particularly affected, but the disruptions will also be felt globally.
• UN Secretary-General Antonio Guterres warned that the conflict could cause a “hurricane of hunger and a meltdown of the global food system”. According to the Food and Agriculture Organization (FAO), the number of undernourished people could increase by eight to 13 million people during 2022-2023.
• Many countries, particularly in Europe, could slide into recession, while several may suffer from stagflation, i.e., high inflation and low economic growth with increasing unemployment. Poorer developing countries will suffer even more from high energy and food prices, and inequality is prone to increase between as well as within countries. The COVID-19 pandemic continues to take its toll, with new variants challenging the capacity of health systems worldwide.

Acceleration of Re-Regionalisation and Re-Nationalisation

• Global value chains are likely to witness an acceleration of re-regionalisation and re-nationalisation in the coming years. This is not an entirely new phenomenon.  The 1990s and early 2000s where characterised by a rapid globalisation of value chains, but it lost momentum in the second decade of the 2000s, even before the pandemic hit, due to several reasons.
• First, digitalisation is changing industrial production in a way that makes international merchandise trade more and more obsolete. New technologies such as 3D printing or selective laser melting facilitate production on-site.
• Second is the technological catch-up of large emerging economies. China, in particular, has become more technologically independent and increasingly manufactures high-tech products domestically rather than importing them.
• Third, since the 2008 financial crisis, there has been a steady flow of new protectionist measures, with the WTO registering new barriers with an annual average of 147 measures from 2012 to 2020.
• Fourth, companies have increasingly tried to reduce vulnerabilities and the exposure to global risks in the aftermath of the last financial and economic crisis. Another driving factor is the increasing frequency and severeness of natural disasters.
• Lastly, the Ukraine crisis is likely to speed up the re-regionalisation of value chains. Ukraine’s production capabilities are severely impaired, and Western countries have agreed on a set of powerful sanctions targeting Russia.

Moscow Towards Asia

• Russia’s war on Ukraine is likely to further escalate, and the Western alliance will then react with additional economic sanctions. Moscow would in this case probably restrict exports of energy resources, metals, minerals, and agricultural products to Western countries.
• It is also likely to shift its economic focus towards Asia, deepening ties with China. Beijing will continue its decoupling from the West, heavily subsidising R&D and the production of critical technologies.
• It is also likely to continue to increase its global influence by investing more in the Belt and Road Initiative. It will probably also build up a new payments system, offering an alternative to SWIFT. Conflicts in the Indo-Pacific region are prone to escalate with China becoming increasingly aggressive towards Taiwan.
• Western companies will speed up the restructuring of their value chains, while governments heavily support their economies to advance the digital revolution and the green transition and to stabilise economic growth and employment. The war will thus fundamentally alter the global economic and geopolitical order.

Health Check WTO: Multilateralism on Life Support?

• A strong, healthy WTO is needed now more than ever to help navigate governments and businesses through these troubled times. However, the organisation is in its deepest crisis since its creation. All of its pillars—trade liberalisation and rules-setting, trade policy monitoring, and dispute settlement—face huge challenges.
• As more countries have joined the WTO and tariffs have decreased considerably, multilateral liberalisation has become increasingly difficult. Since the Uruguay Round, no comprehensive trade agreement has been achieved, with the exception of the Trade Facilitation Agreement.
• The WTO’s rulebook neither fully reflects the characteristics of modern trade nor does it answer sufficiently to the world’s biggest challenges. It has little to offer regarding digital trade and is weak on industrial subsidies. There is also little in the WTO framework on labour and environmental issues.
• Additionally, existing WTO provisions are being abused, circumvented, or ignored by major trading countries. Deep divisions among the 164 members prevent the updating of existing trading rules, most of which were crafted in the 20th century.
• The world has fundamentally changed since China and Russia joined the WTO in 2001 and 2012, respectively. It is increasingly struggling with competing models of economic governance, values, and world views, and this is likely to worsen in the coming years.
• In early December 2021, more than 60 member countries successfully concluded negotiations of the WTO Joint Statement Initiative (JSI) on Services Domestic Regulation. The initiative aims at simplifying unnecessarily complicated regulations, ease procedural hurdles, and increase transparency and fairness. The participating members are to make specific commitments by the end of 2022.
• Another positive sign is the provisional compromise to waive intellectual property rights for COVID-19 vaccines between the EU, the US, India, and South Africa. However, there is still some controversy around the agreement. While some criticise that it goes too far, others are disappointed that it only covers vaccines and not treatment for COVID-19.
• Furthermore, while the compromise has been negotiated by the European Commission, the EU member states still have to consent to it. Only when the four countries have found a final compromise will it be presented to all 164 WTO members, who then need to reach consensus for the agreement to enter into force.

What the Future Holds?

WTO Becomes Irrelevant

• The number of trade conflicts increases dramatically; the WTO dispute settlement system is hardly able to keep up. Several countries appeal cases after the first panel report and consequently, these end in limbo as the appellate body remains dysfunctional.
• As plurilateral initiatives within the WTO face increasing headwinds and critical mass (a prerequisite of plurilateral agreements on trade liberalisation) cannot be reached, countries take these initiatives outside the WTO.
• While bilateral and plurilateral trade agreements have always been a feature of the global trading system, their numbers are increasing, with many being partial agreements that do not meet the criteria of the WTO and are incompatible with the rulebook.

A New Impetus for WTO

• WTO members acknowledge the seriousness of the situation and show greater willingness to compromise. MC12 takes place, and members conclude negotiations for a comprehensive agreement on fishery subsidies.
• A compromise for a TRIPS waiver for COVID-19 vaccines is presented and agreed upon. Members mandate the WTO, UN Conference on Trade and Development, and FAO to set up a working group to analyse the effects of Russia’s war on Ukraine on global agriculture markets.
• The US tables proposals for a reform of the WTO’s transparency mechanism and for trade dispute settlement, particularly the AB. This way, it initiates a real discussion on reform that can eventually lead to a revival of WTO’s third pillar. The WTO, thus, receives the long-awaited impetus to allow it to be an effective guardian of open and rules-based trade.

What Needs to be Done?

• Short and Medium Term: It is pivotal that MC12 takes place in June 2022, despite the difficulties arising to the negotiations due to the war on Ukraine.
• Export Restrictions: The pandemic showed that export restriction or bans are bad policy instruments; they fail to secure supply of critical products for the implementing country and also hurt the global economy by severely disrupting supply chains. Thus, WTO members should commit to refraining from new export barriers, particularly on energy resources, metals, minerals, and agriculture products.
• Trade and Health: WTO members should agree on strengthening the positive link between trade and health. The US, EU, India, and South Africa should present their compromise on the TRIPs waiver to the other WTO members. If consensus cannot be found, members should agree on a roadmap for further negotiations. WTO members should also revisit the plurilateral pharma agreement; an update of the products covered and a wider WTO membership will enhance its effectiveness.
• Agreement on Fisheries Subsidies: WTO members need to agree on a compromise on fishery subsidies. A failure to conclude an agreement will be detrimental from an environmental perspective and will undermine the WTO’s credibility.
• Long-Term: The WTO needs serious reform. The goal should not be re-establishing the status quo but adapting the multilateral trading system to the realities and necessities of the 21st century. If multilateral progress is not possible, willing countries should advance negotiations for plurilateral agreements within the WTO, while ensuring that these do not hurt the unity of the organisation.
• Updating the WTO Rulebook: The WTO currently offers few rules on digital trade. A comprehensive agreement on e-commerce is needed to prevent a fragmentation of world markets. The plurilateral JSI on e-commerce, which aims at setting new global rules for digital trade and removing tariff barriers, is a step in the right direction.
• In addition, WTO members should make permanent the moratorium on customs duties on electronic transmissions. The moratorium prevented the imposition of burdensome tariffs, and a termination will lead to serious new trade barriers that would also hamper trade and development.
• Negotiations on an Environmental Goods Agreement should be revived to promote the diffusion of green technologies by lowering trade barriers. In addition, WTO members should agree on a concrete roadmap to phase out fossil fuel subsidies and bar support for new coal-fired electricity generation plants while allowing carbon abatement upgrades to existing facilities.
• WTO members should also agree on a roadmap on circularity, including developing a better knowledge base on how trade interacts with the circular economy. In the long-term, WTO members should take concrete steps to facilitate trade in key areas of the circular economy.
• Reforming the WTO Dispute Settlement Mechanism: The two-tier dispute settlement mechanism has been a crown jewel of the WTO. Restoring and reforming the mechanisms must be a top priority for members. At a minimum, WTO members should engage in an open and frank discussion, where a landing zone for reform could be.

Summing up

• A strong WTO is more needed than ever. WTO members need to acknowledge that the organisation stands at a crossroad. The multiple global crises could serve as a catalyst for reform, ensuring a rules-based trading system for the future. The risk is high that, in the future, the rule of power and not the rule of law will reign in international trade. Unless WTO members stop standing by and blocking reforms, the organisation will continue to lose relevance.