Why Nations Prefer FTAs Over Multilateral Trade Deals At WTO

1995 saw the contemplation of a new globalised order dependent on free trade between countries. The idea was to bind every nation through a web of trade to eliminate the chances of another Cold War-like situation that had kept world leaders on tenterhooks for almost four decades. 

Successor to the General Agreement on Tariffs and Trade (GATT), a small group of 23 nations founded in 1948, the World Trade Organization (WTO) was given a grand structure to govern and promote free trade among its 164 member states. However, akin to how Capitalism has struggled to stand on its feet since the 2008 financial crisis, WTO appears to be losing its relevance among member nations. 

The WTO's existential crisis was aggravated when former US President Donald Trump criticised it for being unable to confront China's trade distortion in the international markets. His successor, Joe Biden, has not done anything different to restore the command of the global institution that was once the epitome of an interdependent world. With the Russia-Ukraine war threatening the supremacy of West-driven Capitalism, is it time to bid goodbye to the dream of borderless trade and WTO?

To discuss the challenges faced by the WTO in getting its members to abide by international laws, Outlook Business spoke with Lorand Bartels, who teaches International Law at the University Of Cambridge. Bartels also practices law as a Counsel at Freshfields, one of the oldest law firms in the world.  Edited excerpts:

Q) The WTO was envisaged to support free trade worldwide to facilitate a global economic order where countries will benefit from their comparative advantage to produce products of their strength. However, over the last decade, the US and the EU have accused it of not helping the cause. This has resulted in a lack of trust among nations in WTO's role. What's your take on the issue? 

The WTO – including the WTO Director-General – does not have much power. It is a 'member-driven organisation'. If there is a lack of trust between WTO members, there is not much the WTO or its DG can do about it. 

Q) The US has blocked the appointment of judges to the WTO Appellate Body since 2019. What does it mean for WTO's future and its relevance? Has this affected its image and powers?

Yes, this is a real problem for the WTO, which has three functions. These include negotiating agreements on trade liberalisation, administering trade agreements, and settling disputes about those agreements. Not having a final court of appeal is damaging. 

But worse is that, because of the way WTO's dispute settlement system is set up, every WTO Member has a right to appeal before a WTO panel ruling is binding. Some WTO Members have taken the opportunity to 'appeal into the void'. That way, they prevent negative panel rulings from taking legal effect. This, inevitably, reduces WTO's prestige and contributes to unilateralism, which is in part what it was designed to stop. 

Q) With countries like the US giving an open call to their MNCs to 'Make in America', is the idea of WTO dead, finally?

No, I don't think so. There are protectionist tendencies in most countries, especially in government procurement. WTO rules, in fact, do not adequately cover most government procurement. The US's actions are not a great signal, but I would not say that this has killed the idea of the WTO. 

Q) Many countries now prefer getting into trade agreement negotiations, keeping in mind the nations' interests involved, rather than a free market involving all the nations who are part of the WTO. Have FTAs gained currency because of a lack of trust in WTO negotiations?

Definitely, there have only been a few successful WTO negotiations on select issues since WTO's establishment in 1995. It isn't easy to find an agreement between 164 WTO members (which is only 137 members because the EU negotiates as a bloc). This is the main reason for the proliferation of FTAs in the last 25 years. 

However, FTAs also create their own dynamic because the only way for a country to recover lost market access when a trading partner joins an FTA is to sign its own FTA with its former trading partner.

Q) The Doha Round was disappointing, with developed nations accusing developing nations of not doing enough to contribute to a free-trade ecosystem and visa-versa. Do you think the accusation was a way to move out of the responsibilities of providing fair play to the developing countries under the WTO regime?

It is tough to know what 'fair play' means in this context. Some developing countries' hesitations were due to protectionist pressures at home. Some might have been due to justified fears of liberalisation coming too quickly. However, some were also likely due to resistance to free trade in principle. 

But developed countries were, in many cases, behaving similarly. For example, both the US and the EU were reluctant to liberalise their agricultural sectors. Ultimately, many more prominent players were unwilling to make the concessions necessary for a multilateral agreement.

Q) A major criticism of WTO has been its inbuilt mechanism to ignore the domestic industries favouring cash-rich multinational companies that can pour in billions of dollars to capture the local market. What's your take on the issue? Is this one reason why countries find it difficult to negotiate trade deals through WTO?

I think this is putting it a bit strongly. The WTO is based on the principle of fair competition because this is economically efficient locally and globally, and because this benefits consumers. But the WTO allows countries to protect themselves from unfair competition, including subsidies or unfair dumping of products in other country's markets. 

Most governments agree with this balance, which is why there are so many FTAs. Liberalisation still happens. But many governments have difficulties in liberalising particular sectors, and it is easier to exclude these sectors in FTAs than it is at the WTO.