At a European Council meeting on 26 June, German Chancellor Friedrich Merz proposed “a new kind of trade organization,” which the EU would take the lead in creating, to “gradually replace” the World Trade Organization (WTO).
Amid rising protectionism and fears of a global trade war, a functioning international trade body is essential; the WTO, which has served that function for almost 30 years, is now widely seen as ineffective after the breakdown of its multilateral dispute settlement body. In response, the EU is proposing an alternative partnership – effectively “redesigning the WTO,” said European Commission President Ursula von der Leyen, in a way that learns from the current Organization’s mistakes.
This could take the form of a partnership with Asian nations, like the 12-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The implicit proposal to exclude the US and China – the two biggest global economies, accounting for 42% of world GDP – could be controversial, but underlines just how crucial a functioning WTO is for global trade.
The WTO has become less effective over the years, especially since President Obama blocked appointments to its crucial Appellate Body in 2016 in response to what it saw as actions going against US trade interests. Every US administration since has criticised the WTO, accusing it of going against US interests; President Trump has called it “completely inadequate” and threatened to pull out multiple times during his first term.
In response, in 2020 16 WTO members set up an alternate appellate court – the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) – which the UK announced last week it would join. This is intended as an alternate channel to address disputes, but its limited scope and number of members make it far less effective than the WTO as it was originally conceived.
Especially amid the rising trade war – which could see the US impose tariffs as high as 50% on China and dozens of its biggest trading partners – it is more crucial than ever to have a functioning body to resolve trade disputes and unfair trade practices. Already, the WTO’s failing unresolved cases (such as a dispute between the EU and Indonesia over nickel exports and a range of anti-dumping cases against China) are raising tensions globally and impeding world trade.
As the EU faces high tariffs from the US and a brewing trade war with China, which could bring about even more trade restrictions, it is more important than ever that it has a functioning, impartial body to resolve disputes. A new WTO, as far-fetched as the idea sounds, could be just what world trade needs to reset and move on from rising tensions.
