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Pitfalls in the global trade system call for bold reforms

The World Trade Organization headquarters are seen in Geneva on April 12, 2018.
The World Trade Organization headquarters in Geneva. Photo: Fabrice Coffrini/AFP via Getty Images

The global trade system created in the aftermath of World War II has expanded economic prosperity, lifted millions out of poverty and contributed to global stability. But it hasn't kept up with the emergence of new major trading countries, advances in technology or new types of trade barriers.

The big picture: A growing number of people around the world, particularly in the U.S. and Europe, feel disenfranchised by the current order, which they hold responsible for widening income inequality and a decline in well-paying jobs. Reforms are needed if the rules-based trading system is to remain viable and relevant.

The Trump administration advocates a fundamental overhaul, while others prefer adjustments on the margins, leaving the system largely intact. Here are five suggestions for a third path that would capture the benefits of the current rules-based trade system while addressing its greatest shortcomings:

  1. Shape rules for state-led economies. Instead of pushing for the dismantling of China’s state-led economic system, negotiations should ensure that its businesses, products and services don’t distort international trade or harm others. The EU, Japan and the U.S. made a good start in their May Joint Statement, a basis for working with China and other key partners.
  2. Look to the future. Emerging technologies — additive manufacturing, robotics, AI and new types of vehicles — will call into question many of the current system's basic tenets, such as the traditional distinction between goods and services found in most trade agreements and the rules for determining product origins. As the Fourth Industrial Revolution advances, the WTO should task senior trade experts with recommending updates to spur negotiation.
  3. Opt out of the most-favored-nation (MFN) obligation. This rule applies the outcome of any given trade negotiation to all economies, regardless of their participation. While MFN may have made sense in the past, today it allows some countries to “free ride” on the work of others without making any concessions themselves, which hinders new market-opening agreements between specific countries. The ability to opt out of MFN could prove a particular boon to the automotive, medical technology and environmental technology industries.
  4. Reform the WTO’s dispute settlement system. It's not viable as it stands, especially in light of the U.S.' blocking the appointment of new appellate body judges. Without an effective dispute settlement system, countries will be increasingly encouraged to take matters into their own hands.
  5. Convene joint meetings of the WTO and International Labor Organization (ILO). Addressing workforce issues will help stave off calls for protectionism. WTO-ILO meetings would allow member countries to share their experiences educating and training their workforces for the next generation and to build effective social safety nets for those left behind.

The bottom line: With tariff wars front and center, and the rules-based system under attack, making only minor reforms would be short-sighted. The best course is for countries to work on robust and inclusive initiatives that reflect new realities, fix the system's problems and prepare it for the next century.

Wendy Cutler is vice president at the Asia Society Policy Institute.

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