On February 18, 2021, the European Commission (the Commission) published its Communication on an Open, Sustainable and Assertive Trade Policy which we previously analyzed in our blog post. Below, we look into the Communication’s Annex on Reforming the WTO: Towards a Sustainable and Effective Multilateral Trading System.
The Commission in its Trade Policy Review listed reforming the World Trade Organization (WTO) as a clear European Union (EU) priority. The Commission notes in the Annex that “Not only is trade vital for our economy; promoting rules-based international cooperation is the very essence of the European project. The EU must therefore play a leading role in creating momentum for meaningful WTO reform.” Achieving this goal clearly will require engagement with other WTO members. In particular, the Commission calls on the United States’ support to unblock the current Appellate Body impasse and to cooperate closely on reforming all aspects of the WTO. The Commission will also organize consultations with China and India to better align their WTO commitments with the size of their respective economies.
To reform the WTO, the EU proposes to pursue the following four main actions:
1. Restore a fully functioning dispute settlement system with a reformed Appellate Body as a matter of priority.
The Commission notes that this is the “most urgent reform”. Concretely, the EU proposes to identify common ground to restore a functioning dispute settlement system, including fulfilling currently empty seats on the WTO Appellate Body. Further, the EU sets out its position on the following key issues:
- the role of the Appellate Body should be strictly limited to addressing legal issues raised on appeal to the extent this is necessary to resolve a dispute;
- mandatory timelines should be strictly respected both at the Panel and Appellate Body stage of disputes, and measures adopted to make this possible; and
- the negative consensus rule should be maintained along with the Appellate Body’s independence and the central role of dispute settlement in order to provide security and predictability to the multilateral trading system.
2. Restore the WTO’s effectiveness and credibility as a forum for negotiating trade rules and liberalization.
The Commission notes that at the heart of the WTO crisis “lies the failure of its negotiating function”.
To overcome the current impasse in this regard, the Commission first suggests modernizing WTO rules to bring them in line with trade realities of the 21st century.
In particular, the Commission proposes that Members:
- continue negotiating new rules on digital trade, services and investment. These are deemed essential to adapt the rules to the digital transformation, and reflect the growing importance of services;
- create stricter rules on industrial subsidies as an essential step to countering competition distortions. An important objective in this regard is to significantly increase transparency and identify additional categories of prohibited subsidies, including those presumed to be injurious, and those supporting legitimate public goals while having minimal distortive impact on trade;
- create rules to regulate state-owned enterprises;
- further reflect on the potential role of new WTO rules to ensure the principle of competitive neutrality and promote a level playing field (for instance, addressing forced technology transfers to a government or competitor);
- update market access commitments and address imbalances between members’ access; and
- unblock agricultural negotiations (although the Commission notes that reviving negotiations on agricultural market access, such as in relation to tariff reductions, seems unlikely for the time being).
Beyond this, the Commission further asserts that it will reflect on how to create an “easier path” to integrate open plurilateral agreements in the WTO. The Commission notes in this regard that such provisions already exist, in particular Article X:9, but have never been used as the consensus threshold has never been met.
3. Enhance the WTO’s contribution to sustainable development, thereby restoring a common sense of purpose in the organization.
The Commission notes that while the vast majority of members remain committed to the idea of multilateralism, WTO membership has become increasingly divided over what it expects from the organization. This, in turn, has made it “extremely difficult to find a way forward for any initiative”. As part of addressing this lack of direction and increasing sustainable commitments, the Commission commits to:
- conclude the fisheries subsidies negotiations. This would be the first multilateral agreement with the implementation of Sustainable Development Goals at its core;
- present an initiative on trade and climate, as a follow up to a non-paper. The Commission envisages greening aid for trade; increasing transparency, analyzing information exchange as a first step to develop disciplines on fossil fuel subsidies; and strengthening the WTO’s institutional framework dealing with environment issues;
- continue working with other WTO members in pursuit of parallel environmental initiatives relating to the circular economy, including on plastics;
- foster analysis and exchange of experiences on how trade policies can contribute to social development, and how stronger protection of workers’ rights benefits growth and development;
- pursue a leading role in ensuring that gender is mainstreamed in trade policy; and
- continue working on the trade and health initiative with the Ottawa Group to ensure the trading system is responsive to the challenges raised by the pandemic, such as on export restrictions and trade facilitating measures.
4. Improve the functioning of the WTO.
Lastly, the Commission suggests improving monitoring of Members’ trade policies at the committee level, and taking stock of WTO bodies’ activities to identify which need more resources, and which have potentially become redundant. Further, it refers to a proposal it has been working on to improve transparency and compliance with notification obligations in the area of trade in goods. It suggests putting in place incentives and administrative measures to prevent significant delays in submitting notifications.
Through the Commission’s Annex, the EU has set itself an ambitious agenda, backed up by a comprehensive and detailed plan, for overcoming the current WTO crisis and updating the organization’s functioning to match today’s economic and trade realities. The election of former Nigerian Finance Minister Ngozi Okonjo-Iweala as the WTO’s Director General, whom the EU supported, is a promising initial contribution to such reforms.
However, to achieve substantial progress in WTO reforms, transatlantic cooperation will be key: the EU will need to find a close partner in the United States. In this regard, early signals from the Biden Administration, supporting the WTO in principle and multilateralism more broadly, again is a positive starting-point.
Yet as often with international negotiations, the devil is in the details.
On substantive issues regarding the Appellate Body, the EU and the United States remain far apart. Although the Commission considers reforming the Appellate Body to be the most urgent item for reform, diverging EU and US views on to the way forward will inevitably make restoring a fully functioning WTO dispute settlement system a difficult task.
Indications that this gap will be difficult to bridge include the fact that the United States has up to now rejected and criticized the EU vision of an appellate entity as embodied in the Multi-Party Interim Appeal Arbitration Arrangement (MPIA). The United States also rejected and criticized Appellate Body reform proposals the EU made as early as November 2018. Meanwhile, the EU has hitherto refused to engage with US criticisms of the Appellate Body, on the grounds that this would amount to a pointless re-litigation of past disagreements. It remains to be seen whether the restatement of EU policy seen here will be seen as sufficient “movement”.
On new WTO negotiated outcomes and sustainable development, negotiations on fisheries subsidies have progressed very slowly. Many hurdles remain to be overcome.
Regarding new WTO negotiated outcomes and digital trade, services and investment, India and South Africa circulated a communication on the same day as the Commission published its Trade Policy Communication and Annex on WTO reform. In this communication, India and South Africa voiced significant concerns over integrating within the multilateral framework outcomes achieved under the so-called “Joint Statement Initiatives” (e.g. e-commerce, investment facilitation, domestic regulation), whose negotiating format they consider to be WTO-inconsistent. Their position is symptomatic of the unease felt by some Members towards these negotiations. It also underlines the delicate task that Members face when attempting to finalize ongoing negotiations on digital trade, services and investment, which the Commission identifies as one of its priorities.
Crucially, the Commission in its proposals adopts a strong stance towards China, more so than in the past. The Commission indeed explicitly singles out China, noting that Beijing should no longer claim special and differential treatment in any ongoing negotiation. The EU more specifically suggests adopting a new approach to the special and differential treatment regime pointing to an agreement-by-agreement basis, and greater differentiation between developing countries.
Regarding new WTO negotiated outcomes and further engagement with China, it does not help that China considers the negotiation of stricter rules on industrial subsidies to be essentially a non-starter. Attempts at negotiating new rules to regulate State-owned enterprises likely will reinforce the impression that China is being singled out. China’s agreement will be harder to secure if it considers that it has little to gain and a lot to lose from new multilaterally negotiated rules.
The next WTO Ministerial Conference (MC12), scheduled for November 29, 2021, will be an important milestone in WTO reform. The stakes are definitely high ahead of MC12, which some observers have labeled as a “make or break event”. The world at large will be watching, as discussions among Members ramp up in the course of the year. The EU has now shared its views. The response of other WTO Members (especially the United States and China) will be crucial. Ahead of the meeting, the EU should seek to agree on a firm and united position to strongly convey asks and obtain commitments from China; find common ground with the United States; and push sustainability as a priority in line with the objectives of the European Green Deal.