The not-so-quiet demise of the WTO

Dieter Adam, 21 December 2022

“New Zealand also remains a staunch advocate for the rules-based multilateral trading system, with the World Trade Organisation Director General Dr Okonjo-Iweala saying during her visit last month that: “New Zealand is a small country, but it punches above its weight consistently and is listened to.”” So says Jacinda Ardern in the NZ Herald on Dec. 9, 2022

‘Rules-based’ has become a widely-used adjective in speeches of the leaders of countries that see them-selves as part of the group of countries led by the USA (‘The West’). The ‘keeper’ of these rules, and international arbiter over their (non)-compliance, is the World Trade organisation [WTO], who describes its role thus: “The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to ensure that trade flows as smoothly, predictably, and freely as possible.” That sounds simple, and in principle it is. In practice, it is all but.

The WTO replaced GATT, the General Agreement on Tariffs and Trade, signed in 1947 by 23 count­ries as a treaty minimising barriers to international trade by eliminating or reducing quotas, tariffs, and subsidies. It was intended to boost economic recovery after World War II. On Jan. 1, 1995, the WTO replaced GATT as an organisation on a much wider basis, now comprised of 164 countries. Its foundation is a set of (theoretically) internationally binding agreements, most of which are the result of the 1986–94 Uruguay Round negotiations, signed at the Marrakesh ministerial meeting in April 1994. There are about 60 agreements and decisions totalling 550 pages.

The challenges lie in the interpretation of these agreements in a given dispute, and the length of the process before a binding ruling has been made. The case of NZ apple exports to Australia is a good example. Australia had banned those exports for years, citing biosecurity concerns. New Zealand took the case to the WTO in August 2007. In November 2010, the WTO found that Australia’s biosecurity concerns didn’t warrant the total ban on the importation of apples from New Zealand – a decision both parties appealed on technical grounds. The original decision of the WTO essentially stood, however, and in August 2011 Australia agreed to amending its biosecurity rules. The new rules were still stringent enough to make it commercially unattractive for New Zealand apple export­ers to target the Australian market, and both State and other actors in Australia took further mea­sures to ‘discourage’ such imports, with the net effect that of the 400,477 t of NZ apple exports in 2020 (a doubling of the 2010 figure), only 2% ended up in the Pacific region, which includes Aus­tralia. So, taking a case to the WTO often takes a lot of time, and money, and winning in the formal process doesn’t necessarily result in commercial success.

Another example, on a much bigger scale, is the ongoing scrap between the USA and the EU about illegal subsidies for their civilian aircraft industries, essentially Boing and Airbus. That dispute started in 2004, and went to and fro, with WTO rulings in favour of both sides at different times. Ruling on a US sanctions request, the WTO in October 2019 allowed the US to impose tariffs on up to $7.5 billion worth of EU goods, and in 2020 the WTO has allowed the EU to impose tariffs worth $4 billion on US goods. In June 2021, and in a bilateral deal, both sides agreed on a five-year truce, during which neither side will impose the tariffs allowed under various WTO rulings – watch this space.

There are plenty of other examples where involving WTO processes didn’t really provide any tangi­ble commercial benefits to the party claiming injury, but at least in principle the existence of these processes is seen to act as a deterrent to overly blatant trade distortion. A more detailed account of disputes taken to the WTO can be found here and here.

How equitable the system is, is another question. A study in 2017 showed that the United States and the European Union are by far the biggest users of the system, both as complainants, and as respon­dents, almost 4-5 times more than the next biggest users, Canada, China, India and Brazil. Not only that, but both are also the most frequent ‘sinners’ in terms of being the target of successful complaints on trade violations and suspension requests, i.e. requests to the WTO by the complainant to take retaliatory measures where the offending country doesn’t comply with a WTO ruling against it. It isn’t surprising, then, that the USA has recently taken measures aiming at rendering the WTO ineffective. A good assessment of the situation, penned by an American economist, can be found here.

What does all of this mean for New Zealand manufacturers? What we are watching right now is a disintegration of global trade relationships, driven by economic hardship and a corresponding strengthening of existing ‘blocks’ of countries bound by common ideology and economic interest – and the formation of new alliances. In its most extreme form, ‘trade wars’ are fought using sanct­ions, of which there are far more than most people are aware; for the USA, detailed information is available here. These sanctions often target goods and services of strategic importance, and in many cases New Zealand manufacturers, while highly export-dependent, aren’t caught in that category, or aren’t exporting into markets targeted by these sanctions.

A less obvious, and less hostile, form of trade distortion exists in the form of subsidies countries provide to domestic manufacturers – the Boing vs Airbus spat being a prominent example. While less obvious, these subsidies can be equally damaging in the long run. Australia, for example, is the #1 destination for New Zealand’s manufactured goods by a long shot. Now, in theory and according to the free-trade agreement struck between the two countries in 1983 (ANZCERTA, or CER), there should be no subsidies to industry that could result in unilateral benefits to either country.

Our Ministry of Foreign Affairs and Trade tells us that “There are no export subsidies or export incentives on goods traded in the area. Both countries have further restricted their ability to adopt industry assistance measures with adverse effects on competition in the area.” And its Australian counterpart confirms that ANCERTA “minimises market distortions in trade in goods, including through domestic industry assistance and export subsidies and incentives.”

The reality is slightly different. Support for the manufacturing sector exists in both countries through R&D tax credits and R&D grants, although even on pro-rata bases these tend to be quite a bit higher in Australia than here, especially when central government and State funding are included. Where the distortion is becoming more obvious is in direct payments to industry. Under it’s A$1.5 on Modern Manufacturing Strategy, the previous Australian government set up an A$800m fund to support business-to-business collaboration in the six manufacturing areas identified as national priorities. That fund is now exhausted, and the new Labour government has announced that “ The Australian Government has committed to creating a new A$1 billion investment fund to support advanced manufacturing.” – not to mention Manufacturing Grants in individual States.

Compare that with the New Zealand government’s announcement of an investment of $30m over two years as part of its – yet to be confirmed – Advanced Manufacturing Industry Transformation Plan. It will be interesting – if not frightening – to see how the trade in manufactured goods between the two nations – and competition in third countries targeted by competing manufacturers from both countries – can be maintained free of distortion in the face of such an imbalance of subsidies.