By Harry Wu, 21st Century Business Herald, SFC
In the blink of an eye, the World Trade Organization (WTO) Appellate Body has been incapacitated for nearly six years. In 2017, the United States adopted a series of unilateralist and trade protectionist measures that eroded and damaged the WTO's basic principles, maliciously blocking appointments to the Appellate Body. On December 11, 2019, the WTO Appellate Body officially "shut down," being unable to accept new appeals after more than 20 years of operation.
The WTO needs to adapt to new realities and new trade barriers, if necessary, even without the participation of the United States, said Pascal Lamy, Former DG of WTO, President of the Paris Peace Forum and Distinguished Professor at CEIBS, in a recent interview with 21st Century Business Herald. He added that envisioning a WTO without the United States as an active member is entirely possible.
In his view, the United States has essentially withdrawn from the WTO, disrespecting the trade rules upheld over decades. Under US President Donald Trump's leadership, the US has de facto left the WTO and the other members have to move the system forward.
Looking to the future, he cautioned that in the coming years, priority should be given to avoiding large-scale wars and environmental degradation. Humanity has already caused significant damage to the planet; emissions of greenhouse gases such as carbon dioxide have led to global warming. Action is now urgent with 90% of the world's population already affected by these crises, and humanity urgently needs to work together to address this challenge.
International trade and the division of labor are beneficial to the environment
Facing the increasingly severe problem of climate change, Lamy emphasized that we need to protect the planet, have a more friendly trade environment, protect everyone from the harmful effects of a deteriorating environment, and better utilize the resources the Earth provides.
On the political level, there is currently no consensus between developed and developing countries, on where to address the issue. Therefore, Lamy believes a place or a venue is needed to resolve the tense North-South relations. There is ample reason to believe that international trade and the division of labor are beneficial to the environment.
According to Lamy, there are currently two main problems. First, while some global agreements exist, they lack enforceable regulations. The Paris Agreement covers a wide range of topics, requiring countries to agree to set aside political and other factors and act collectively. But, current actions are too heterogeneous and lack the binding force of specific regulations, making it difficult for everyone to self-disciplinedly move in a common direction. This situation can lead to trade frictions, which can become a major problem.
Second, the United States is highly uncooperative, with a series of controversial withdrawals from international agreements, which will undoubtedly weaken and slow down the proper harnessing and regulation of the internationalization process.
The good news, Lamy stated, is that some global regulations have already guided the right direction for resolving these issues. For example, the WTO has issued a series of technical regulations concerning how to resolve trade disputes. However, there are also obstacles, such as some countries adopting trade protectionism. We should adopt a more explicit and proactive approach and embrace multilateralism.
Within the framework of the United Nations Framework Convention on Climate Change (UNFCCC), some developed countries are burying their heads in the sand, unwilling to confront the issues. Some developing countries do the same in refusing to open a discussion at the WTO that could lead to a negotiation. This conundrum needs to be fixed.
Faced with these challenges, Lamy analyzes that the world needs to find a suitable venue and occasion to initiate "discussions," narrowing the focus to more specific topics. For example, Brazil is in a favorable position in many aspects and has some advantages in resolving disputes. Brazil has proposed creating a comprehensive forum on climate change and trade, emphasizing that it is a forum, not a negotiation venue, but the discussions will still be based on serious professional knowledge and an open and honest attitude. He believes this is the right path for multilateralism.
Lamy emphasizes that we must now pursue simultaneously open trade, environmental protection, and domestic economic and social development. Ultimately, this is the inevitable path for many developing countries. The current situation is complex and severe, but there are still ways to try to solve the current problems.
On the one hand, the world must protect the environment, achieve decarbonization, and stop the destruction of biodiversity. On the other hand, the world must maintain open trade as much as possible. Lamy believes that balancing environmental protection and open trade is a complex issue. But it needs to be fixed if we want to avoid one more area of tensions between countries to be added to the ones we unfortunately already have.
The world moves towards slower globalization
During the "fast globalization era" of the 1970s and 1980s and into the early 21st century, driven by shared ideas and technological innovation, international trade experienced explosive growth.
In response, Lamy stated that, on the one hand, countries reached a broad consensus on openness. Based on David Ricardo's theory of comparative advantage, there was a general agreement that trade swaps could achieve complementarity between production systems of goods and services—that is, specializing in the production of products with relative cost advantages and importing products with relative disadvantages, ultimately leading to mutual benefit. On the other hand, technological advancements significantly reduced cross-border circulation costs. From the widespread use of containers to the rapid popularization of the internet, favorable conditions were created for the efficient flow of goods, capital, information, and people, promoting the prosperity of global trade.
Today, the world faces a series of challenges. Some standardized value chains have become fragile or vulnerable, and there are differing views on the social impact of globalization in different regions. However, Lamy does not believe that globalization is retreating, and he considers that the notion of deglobalization is unfounded. He emphasized that the world is transitioning from fast globalization to slow globalization, and while the overall scale of international trade is still rising, the growth rate is slowing.
Lamy believes that the current new normal of the multilateral trading system has three main characteristics. First, the weaponization of trade, where trade policy may be used as a tool for geopolitical maneuvering.
Second, US protectionism. It is noteworthy that the US accounts for only 13% of global imports, with other countries responsible for the remaining 87%. As long as these economies are not infected by this protectionist virus, the foundation of the global trading system remains solid. The costs of high tariffs will ultimately be borne primarily by the US itself.
Third, the rise of precautionaryism. Unlike traditional protectionism aimed at protecting domestic producers, precautionary trade protection measures stem from high public concern about health and environmental risks. For example, China and Europe have established carbon pricing mechanisms to promote green transitions by increasing emission costs. However, differences in carbon price levels among countries can also affect a country's relative advantage, leading to new trade barriers.
China will play a crucial role in the next stage of globalization
Data from China's General Administration of Customs shows that in 2024, China's total import and export value reached 43.85 trillion yuan, a year-on-year increase of 5%, setting a new historical record. Exports reached 25.45 trillion yuan, a year-on-year increase of 7.1%. Imports reached 18.39 trillion yuan, a year-on-year increase of 2.3%.
Lamy stated that China is a major global trading nation. Faced with fluctuations in the international trade system, on the one hand, China needs to continue to promote and accelerate its own macroeconomic rebalancing between production and consumption. On the other hand, China should actively explore emerging markets, expand overseas investment, and optimize its trade structure. As a major participant in the previous stage of globalization, China will continue to play a vital role in the current and next stages of globalization.
Under the new normal, facing an increasingly complex international trade environment, Lamy believes that companies must strengthen their forward-looking capabilities and strategic flexibility. They must not only promptly capture trends and changes in the geopolitical, technological, and political spheres, identifying risks and opportunities from early signals, but also enhance their adaptability and improve the flexibility of their supply chains and production systems.
At the technological level, digitalization has become a new variable influencing the global trade landscape. Lamy's analysis suggests that, on the one hand, digital technology, by reducing transaction costs and breaking down physical distance barriers, has driven the growth rate of service trade to surpass that of goods trade, significantly promoting global trade development.
On the other hand, service trade is highly dependent on digital infrastructure and cross-border data transmission, but significant differences remain in the regulatory systems for data governance among countries, creating new barriers to services trade. Businesses need to continuously adjust their service models to comply with the regulatory requirements of various countries. Building an international digital governance system has become a key issue for the sustainable development of global trade.
Looking to the future, reform is urgently needed. The United States has withdrawn from the constraints of the WTO, consistently reneging on its commitments over the past six years while still participating in the organization's decision-making—a major systemic contradiction facing the WTO. Lamy believes that although the WTO now has an alternative dispute settlement mechanism, established by Europe and other members, such as China, functioning well, it still needs reform. In the future, the WTO needs to be revitalized by improving its organization and efficiency to more effectively handle the current complex new issues.
In response to the WTO's predicament, Lamy believes that the power structure between members and the Secretariat should be rebalanced. Currently, members have too much power, while the Secretariat lacks sufficient involvement in decision-making, including, for instance, with the authority to table proposals; this imbalance hinders the WTO's decision-making efficiency. This needs improvement in the future. Furthermore, trade facilitation must be promoted in areas such as trade, the environment, e-commerce, and disciplines on subsidisation. Removing illegitimate obstacles to trade remains the WTO's fundamental mission.
