There are clear signals that the current trading system represented by the WTO has lost its utility for the US and the EU. They want a new system by making the current one dysfunctional. While most of US President Donald Trump’s current actions like raising tariffs are directed against China, they violate WTO rules.

The powerful western countries have controlled the global trade in the past five centuries — by rules if possible, and by war if necessary. During 16th to 19th centuries, Britain, driven by the Industrial Revolution, colonised China, India, US, Australia and most countries in between to get raw material and push its exports. Ditto with the other major colonial powers — Spain, Portugal, and the Netherlands.

Wars were a necessary means to promote trade. Britain fought with China in 1839-42 and again in 1860 to take control of trade with China. Four Anglo-Dutch wars during this period made the British masters of the sea trade routes leading to colonies.

Trade by war continued till the end of World War II in 1945 and most colonies also became independent by this time. The victory gave the US and Britain the confidence to promote trade through rules as it was cheaper than war. They were masters of the industrial system where most products were innovated and produced efficiently. Given their dominant economic position, the rest of the world was forced to buy their products so no wars were needed. And the best way of selling the goods was to get everyone to reduce import duties.

This thinking led to the formation of the General Agreement on Tariff and Trade (GATT) in 1947. Important GATT member countries reduced import duties significantly during 1947-1986 in eight rounds of negotiations. The US and EU were in control of the rule-making.

From GATT to WTO

By late 1980s, pharmaceuticals and services industry grew in the US and the EU and needed rules to expand globally. But the GATT formulated rules for trade in goods only. To accommodate the new interests, the GATT was replaced by the WTO in 1995. The WTO covered services and intellectual property rights in addition to goods. The Dispute Settlement Mechanism was recreated as an efficient body for disputes resolution with the provision for appeal.

Believing in the theory that low import duties are essential for trade growth, the US and EU committed to almost zero bound duty for most products. This meant that in future they would not be able to increase the import duty. If they did, they would violate the WTO agreement. This overconfidence proved to be their undoing. While most developing countries can now increase import duties without violating WTO rules, the US or EU cannot, as they are committed not to.

In the 1990s, the US and EU could not foresee the rise of China, which was to soon become the manufacturing hub of the world. They got most WTO members to sign a plurilateral Agreement called the Information Technology Agreement (ITA) in 1996 in anticipation of promoting their dominance in Computer and telecom products.

Yet, most of the benefits of the ITA were cornered by China, which had emerged as the largest electronics and IT product exporter, leaving the US and the EU far behind.

China made its own rules for conducting trade. It offered free land, power, tax breaks and cheap labour to entice the MNCs. Wherever necessary, it stole intellectual property and forced technology transfer. By 2010 it became a leading supplier of computers, mobile phones, washing machines, TVs, organic chemicals, steel and items of everyday use by the common man.

It produces everything from capital-intensive products like factory machinery to labour-intensive products like shoes and umbrellas. On its part, the US extracted some concessions from China before allowing it to become a member of the WTO in 2003.

However, the US and the EU have not been able to beat China in trade. They are also bound by the commitments made under the WTO rules so they cannot raise import duties without violating WTO rules. But they do not want to meet the WTO obligations such as reducing agriculture subsidies.

Their game plan is to put the old obligations on the back-burner and push the WTO to form rules on e-commerce, an area where the US firms have a clear edge.

‘Deliver on Doha’

But many WTO member countries want them to first deliver on the agreed issues like reduction in agriculture subsidies. This time, the US and EU are unable to bully the developing countries the way they have been doing earlier. The consensus-driven decision-making process leaves no scope for unilateral pushing of the agenda.

So probably the US and the EU have decided that the WTO in its current avatar is of no use to them. One way is to weaken the WTO and Trump is doing just that. The decision to impose import duty on steel and aluminium and duty on imports worth $50 billion from China violate the commitment made at the WTO.

The US had committed to zero duty on most of steel and aluminium items at the WTO in 1995. Trump’s use of threat to national security for imposing a duty on steel and aluminium and then exempting significant suppliers such as Canada and Mexico, the EU, Brazil, Argentina, Australia and South Korea show a complete disdain for the WTO rules. The US blocking the appointment of members of the Appellate Committee has also choked the WTO system.

That there is no common ground between the developed and the developing countries was clear in the informal WTO Ministerial Meeting hosted by India in Delhi on March 20 where Ministers and high-level officials from 53 member countries voiced their opinion on how the WTO negotiations can be brought back on track.

Most developing countries want progress on the core Doha issues such as reduction of agriculture subsidy, food security and special safeguard mechanism to guard against the imports. Developed countries are not interested in these issues andare pushing for rule-making on new issues such as e-commerce and investment facilitation. They have started pursuing these issues on a plurilateral basis which is bound to weaken the multilateral WTO system.

Trade becomes the first causality if rules are weakened. India may choose to remain a keen bystander and not give in to provocations by the US or China. It could also use the time to work on strengthening its trade architecture.

The writer is an Indian Trade Service officer. The views are personal

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