The Report underlines that diversifying global value chains, reducing trade costs through digitalization, and transitioning to a low-carbon economy can create new opportunities for low- and middle-income economies. Furthermore, when trade policies are complemented by domestic measures, such as labour, education and competition policies, the gains from trade can more easily flow to workers and consumers. Enhanced WTO cooperation with other international organizations can magnify their combined action to increase inclusiveness across and within economies.

To read the report as it was published on the World Trade Organization webpage, click here.

To read the full report, click here.

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The Dangers of Trade Fragmentation

At the end of World War II, policy architects sought to reduce the incentives for armed conflict by creating a web of economic interdependencies that would render supply-chain disruptions too expensive to contemplate. By the 21st century, however, new challenges have emerged. Geopolitical tensions stoked by authoritarian countries such as China and Russia have highlighted the risk: Economic interdependence also creates vulnerabilities to autocratic regimes.

Efforts to diversify supply chains away from authoritarian regimes are rational from a national-security perspective. But the resulting protectionism and the fragmentation of trade flows can also incur risks by increasing economic costs, dampening growth prospects, reducing real incomes, and weakening international cooperation. A World Trade Organization (WTO) riven by deep geopolitical divisions has been unable to address these challenges.

A Realigned US Trade Policy

The United States can face these challenges by realigning its trade policy with two major steps.

(1) Recommit to first principles by seeking to

• treat imported goods the same as domestically produced goods,
• treat other countries as “most favored nations,” and
• find the least trade-restrictive ways to pursue domestic policy goals.

(2) Engage in plurilateral agreements to

• find agreement where unanimous consensus cannot be reached,
• eliminate tariffs and costly trade distortions,
• promote trade creation and minimize trade diversion, and
• tackle policy challenges in the energy, fisheries, and other sectors.

The Status Quo Is Stunting Economic Growth

To continue with the status quo means to accept a paralyzed WTO and a steady stream of trade initiatives that can only impair economic growth. Prioritizing pragmatic policies that promote cross-border economic cooperation can revitalize economic growth. A realignment in US trade policy around first principles and plurilateralism can provide a positive way forward and an example for other nations to follow.

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To read the Research Summary published by the Mercatus Center, click here.

To read the full Special Study, click here.

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If and when the agreement comes into force, it will represent the first set of global ground rules for digital trade.

A statement released by the three co-convenors of the so-called ‘joint statement initiative’ – Australia, Japan and Singapore – confirmed that participants had “achieved a stabilised text”.

The new agreement “recognise[s] the importance of global electronic commerce and the opportunities it creates for inclusive trade and development, and the important role of the WTO in promoting open, transparent, non-discriminatory and predictable regulatory environments in facilitating electronic commerce,” the co-convenors said.

“The agreement is set to benefit consumers and businesses involved in digital trade, especially MSMEs. It will also play a pivotal role in supporting digital transformation among participating members,” their joint statement adds.

United States wants stronger security exceptions

Nine of the 91 participants in the negotiations – including the United States – declined to be associated with the declaration.

A footnote stated that “due to ongoing domestic consultations and considerations, this statement is circulated on behalf of joint statement initiative participants, except for Brazil, Colombia, El Salvador, Guatemala, Indonesia, Paraguay, Taiwan, Türkiye and United States”.

The US government said the text released today represented “an important step forward for the WTO in a sector of growing importance to the global economy while demonstrating the supportive role that JSIs can play in revitalizing the WTO’s negotiating function”.

But it added: “As the United States has repeatedly communicated to the co-convenors and participants, the current text falls short and more work is needed, including with respect to the essential security exception”.

“We look forward to working with interested members in finding solutions to all remaining issues and moving the negotiation to a timely conclusion.”

Dissenters focus on permanent ban on import duties on e-commerce transactions

The other eight dissenters primarily have issues with the article which commits its signatories to a permanent ban on the imposition of import duties on digital transactions.

This clause is subject to a review five years after the agreement enters into force. But the text of the agreement may only be amended by unanimity: this makes a reversal of the commitment not to impose duties highly unlikely in practice.

Countries such as Indonesia, Brazil and Türkiye have repeatedly expressed concerns about being compelled to give up the option of applying import duties on digital products.

A global moratorium on the imposition of duties on digital products has been in force since 1998 and renewed at the WTO every two years.

The future of the moratorium hangs in the balance. At the MC13 ministerial conference in February, WTO members said deal will lapse in 2026 unless extended by unanimity once again.

The threat of a lapse gives added significance to a plurilateral commitment by a group of WTO members who encompass between them around 90% of global digital trade to keep digital cross-border transactions duty-free.

What’s in the agreement

The ‘Agreement on Electronic Commerce’ as it is now officially called, runs to 38 articles, plus a two-page annex on telecommunication services.

The provisions are classified under five broad themes.

Enabling electronic commerce: This section includes provisions on maintenance of an electronic transactions framework, electronic authentication and e-signatures, electronic contracts, electronic invoicing, paperless trading, the creation of ‘single windows’ for data submission, and electronic payments.

Openness and electronic commerce: This part includes an article banning customs duties on electronic transmissions, as well as provisions on open government data and access to the internet.

Trust and electronic commerce: This section includes articles on online consumer protection, unsolicited commercial messages (i.e. ‘spam’), and personal data protection.

Transparency, development and cooperation: This part contains articles on each of these three themes in turn. The article on development specifies that developing countries and LDCs may have a grace period of up to 7 years to implement provisions which they may find tricky, and that financial support should be made available to them.

Telecommunications: The agreement states that “each party shall ensure that its telecommunications regulatory authority does not hold a financial interest or maintain an operating or management role in a supplier of public telecommunications networks and services”.

The accord consists of a number of firm legal commitments interspersed with looser expressions of intent. The word ‘endeavour’ appears 32 times in the text, while the word ‘encourage’ makes 11 appearances.

In many cases – such as personal data protection – the agreement does little more than require participant countries to apply and maintain legislation to govern this topic.

Attempts to reach agreement on basic principles to govern such regimes foundered in the negotiations, given the very differing approaches taken in jurisdictions such as the EU and US.

Nevertheless, even the minimalist principles set out in the accord are viewed by most observers of being of value, given that some of the developing countries involved in the negotiations do not currently have such regimes in place.

Review within two years

The agreement is designed to grow and evolve, in recognition of the rapidly-developing digital trade environment.

Signatories are due to review of the agreement “no later than two years after the date of entry into force of this agreement, and periodically thereafter,” the text says.

“Taking into account the evolving nature of electronic commerce and digital technology, and recognizing the importance of establishing global rules for electronic commerce […] the parties recognize that further negotiations may include outstanding issues […].”

This gives the participants the option of returning to questions which were left out of the final agreement because of failure to reach consensus.

These include provisions relating to data transfers, localisation of data storage, or transfers of source code.

India likely to oppose incorporation into WTO law-book

The agreement would be governed by the general WTO dispute settlement process, which would give the non-optional elements of the accord some teeth.

But access to dispute settlement will be dependent on whether or not the agreement is ultimately incorporated into the WTO’s treaty architecture, as its proponents would like.

Earlier this week, a small group of countries led by India and South Africa blocked a second attempt to have a similar plurilateral agreement, covering investment facilitation, accepted as a full WTO agreement.

The objections of these two countries – who were not among the 91 participants in the talks – are expected to extend equally to the new e-commerce agreement.

Governments and business welcome deal

The deal has nevertheless been welcomed by governments around the world, and by business organisations.

The European Commission said it “proudly supports” what it described as “the first-ever set of global digital trade rules”, while the UK government said that “global adoption of digital customs systems, processes and documents could significantly grow the UK economy”.

The Global Services Coalition and Asia Pacific Services Coalition said that the deal “will be the defining 21st century moment for the multilateral trading system and not a minute too soon for global economic development, MSME revival and jobs growth.”

“Today’s announcement demonstrates that the WTO negotiating function can deliver through a plurilateral process,” said Annette Meijer, president of the European Services Forum.

“This deal has the potential to deliver benefits for European businesses in every sector of the economy and to reduce the cost and complexity of international commerce and support trust and security for European consumers” added Pascal Kerneis, the Forum’s managing director.

To read the full article as it was published by Borderlex, click here.

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In general, no major breakthroughs

The list of themes on the agenda of MC13 includes a wide range of issues, such as agriculture, an extension of the agreement on fisheries subsidies, trade and development, and dispute settlement reform. On most of the issues, members do not seem close to achieving an agreement. Some of the reasons for this are external to the WTO dynamics – for example, the US is one of the main proponents of dispute settlement reform, and no progress on this issue can be expected before the upcoming US elections. Difficulty in fostering convergence also relates to the fact that WTO members seem to be increasingly inhabiting different ‘filter bubbles’. They have very different assessments on where the Doha Development Round stands at the present time, and where to go from here. Diverging opinions lead to different understandings of the present situation, as well as different views on priorities and next steps. WTO members seem to be trapped in a clash of narratives, which opposes groups of countries across fault-lines, contributing to the gloomy mood in the weeks leading to MC13. Options on the table are not clear and narrow enough for Ministers to be able to bridge gaps.

The agenda item on e-commerce

In Abu Dhabi, members will discuss the continuation of discussions taking place under the Work Programme on e-commerce, and will decide on the future of the current Moratorium on Customs Duties on Electronic Transmissions. The Work Programme, launched in 1998, involves all WTO members, and aims to build understanding around the trade-related aspects of e-commerce, including the relation between e-commerce and existing WTO agreements, and its interplay with development. The Moratorium was also introduced in 1998, and exempts digital products, such as online films, music, and software from tariffs (customs duties) as they cross borders. The Moratorium has been extended roughly every two years by consensus, and the current extension will expire at MC13.

The continuation of the Work Programme could be relatively straightforward, especially considering the 2022 Ministerial decision to reinvigorate the Work Programme, and the concrete efforts made to ensure that the discussions emphasize the development dimension. However, the issue may become embroiled in the controversy surrounding the extension of the Moratorium. While some countries hope to make the moratorium permanent, others are increasingly putting its renewal into question. A vocal group of developing countries – including India, South Africa and Indonesia, among others, claims that the Moratorium is depriving developing countries of much needed revenue, citing a study that supports this position. This revenue loss could be even more significant in the future, as digitalization continues, and new technologies, such as 3D printing, develop.   

Alternatively, the Moratorium is supported by a considerable group of WTO members, including the EU and China, and by a large number of organizations in the business sector, as can be observed from a recent Global Industry Statement. Countries often cite studies produced by the OECD, WTO and St. Gallen Endowment for Prosperity Through Trade, among others, to argue that the imposition of customs duties would not only be difficult and costly to implement, but it would actually bring reduced additional revenue to developing countries. In general terms, developed and developing countries agree on the importance of increasing governmental revenue collected from e-commerce transactions, but not on the preferred instrument to do so (tariffs or domestic taxation, such as VAT).

Rendering the Moratorium permanent is not achievable in MC13. Currently, there are split views on whether the Moratorium will be extended for another couple of years or not. While some think an extension does not seem likely – especially considering the US wavering commitment to the liberalization of digital trade – others believe that the give-and-take dynamics at the WTO will once again produce compromise. All sides agree, however, that the extension is becoming harder to approve at every Ministerial, and the multilaterally-agreed Moratorium may be coming to an end. This would not mean, however, that the topic would be absent from the WTO, since a moratorium on customs duties is also being discussed in parallel by the Joint Initiative on e-commerce, an ongoing negotiating process among 90 WTO Members aiming to produce a binding agreement on e-commerce among participants.  

The side discussions at MC13: Joint Initiative on e-commerce

A statement issued by the co-conveners of the JI on e-commerce made clear that, despite best efforts made throughout 2023, a final agreement would not be concluded by MC13. The JI officially began negotiations in 2019 with an ambitious agenda, which included enabling issues, customs duties and market access, as well as a wide range of digital policy issues, such as data flows, localisation, data protection, access to the source code, cybersecurity, and spam. A preliminary agreement has been achieved in the broad areas of digital trade facilitation, open digital environment, and business and consumer trust, covering thirteen specific issues.

Henceforth, negotiators will focus on topics in which agreement could be “within reach”, according to the co-conveners, such as e-payments, development provisions, and customs duties. Nevertheless, the future of negotiations on some of the most ‘digital’ issues, such as data flows and source code, is uncertain. These issues have been very polarized from the outset, and suffered a considerable setback when the US decided to withdraw its support for these areas in order to preserve domestic policy space.

In January, the co-conveners issued a ‘Chairs’ text’ which expresses their views about where the landing zone of potential agreement could be. This text will inspire side discussions at MC13. Negotiators will seek to take advantage of the presence of high-level officials to unblock stalemates before the March round of negotiations of the JI begins.

The indirect impact of other MC13 agenda items on digital trade

At MC13 discussions on WTO reform will continue, including on whether and how to incorporate agreements produced by Joint Initiatives into the WTO legal architecture. Some actors see Joint Initiatives as key mechanisms to make progress on trade liberalization, in a context in which consensus on rule making has been harder to achieve on a multilateral basis. Others argue that Joint Initiatives go against consensus-based decision-making and weaken multilateralism at the WTO. India, South Africa, and Namibia in particular, introduced a communication questioning the legality of Joint Initiatives and their outcomes.

During MC13, the chairs of the JI on Investment Facilitation for Development (IFD) will seek the inclusion of the recently-produced agreement under Annex 4 of the Marrakesh Agreement, which deals with WTO Plurilateral Agreements. Nevertheless, such an inclusion would require a hard-to-achieve consensus among all WTO Members. In this context, the JI on IFD will be an important test-case for other JIs, including for a JI on e-commerce agreement.

Another issue under discussion during MC13 with impact not only on digital trade, but also on digital policy, more broadly, is the ‘Draft ministerial declaration on strengthening regulatory cooperation to reduce technical barriers to trade’. The Committee on Technical Barriers to Trade (TBT) has been one of the hot spots in which geoeconomics have more clearly reverberated in the work of the WTO. In recent years, the number of trade concerns related to digital issues have been rising.  

On the one hand, domestic regulations have been questioned under the TBT Agreement, notably in fields such as cybersecurity and cryptography. On the other hand, Members of the TBT committee have discussed the role of international standards in addressing (and mitigating) regulatory fragmentation in the field of emerging technologies, such as artificial intelligence. The draft declaration states that “cooperation on emerging issues – particularly in the context of international standards development and adoption – provides an opportunity to promote regulatory convergence where appropriate”. The declaration urges the the Committee to enhance its work on emerging regulatory challenges, including in the digital economy.

Looking forward: The impact of MC13 on digital trade governance

The outcomes from MC13 are not going to significantly change the e-commerce landscape. The non-renewal of the moratorium would carry an important symbolic weight, and could be a setback against the WTO’s primary goal to remove tariff barriers to trade, contributing to sapping trust in the Organization. Nevertheless, even if the Moratorium is not renewed, many countries have already committed to a moratorium on customs duties in the context of free trade agreements that they celebrated – according to the OECD 95% of digital trade chapters include such provision. Moreover, if a moratorium is agreed in the JI, at least 90 countries would abide by it at the WTO. The end of the moratorium would certainly create policy space for the countries which have not committed to the non-introduction of customs duties, but it is not clear whether and how they would make use of such space.

One of the collateral consequences of MC13 could be, therefore, to highlight once more the key importance of FTAs for the legal architecture of global digital trade. In particular, FTAs could be seen as the way to “get things done” if the opposition to JIs manages to deter the incorporation of outcomes from joint initiatives into the WTO legal architecture. This could consolidate the growing perception that the most dynamic aspects of the digital economy need to be taken elsewhere and discussed separately, notably in Digital Economy Agreements (DEAs). The WTO continues to be a custodian of the baseline agreements that serve as pillars to the global trading system. However, advancements are taking place outside the WTO framework, at different speeds and geometries, enhancing the complex tapestry of trade policy and regulation.  

Marília Maciel is the Head of Digital Commerce & Internet Policy at Diplo.

To read the full blog post published by Diplo, click here.

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After World War II the United States, several European countries, and other liberal democracies promoted a vision of international economic relations that was deeply influenced by the consequences of the failed policies of the 1920s and 30s. In place of the nationalism and protectionism that characterized much of that period, the United States and its partners developed a framework for global economic order, one that stressed the primacy of multilateralism, openness, and rules. This commitment took concrete shape in institutions like the World Bank, the International Monetary Fund, and the General Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organization (WTO) that have universal or near-universal membership, have aimed to advance greater international economic integration, and are grounded in international law.

This nearly 100-year cycle of destructive Realpolitik followed by idealist multilateralism is now mutating into a new global economic order whose contours are still being defined. One of the key drivers of this evolution is climate change. Within the next few years, the primacy of the multilateral trading system will be challenged by the imperative of combating this unprecedented planetary emergency. To manage that scenario, the principal stakeholders in the current system must begin charting a new path toward a future international climate order that guarantees both legitimacy and effectiveness.

Institutionalism and Experimentation

The narrative of the post-war period that puts the institutionalism of the World Bank, the IMF, and the WTO at its center is only part of the story. From the start, the rules of the GATT and then the WTO (Article XXIV) have also allowed for bilateral or regional agreements below the multilateral level if they fulfill certain criteria, and those arrangements should also be seen as contributing to the post-war economic order.

The most striking demonstration of this phenomenon is the European Union (EU), which began as the six-member Common Market in 1957 and has expanded to an economic superpower comprising twenty-seven states. Two more recent examples of this experimentalist approach are the North American Free Trade Agreement (NAFTA) signed by the United States, Canada, and Mexico in 1992 and the 2018 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) among eleven countries. The Transatlantic Trade and Investment Partnership (TTIP) launched by the United States and the European Union in 2013 would have been the largest such free trade agreement (FTA) had it not come to a halt in 2016 owing to differences over agriculture, government procurement, and investment.

WTO rules also permit plurilateral agreements among a coalition of its members on a given sectoral trade issue such as the 1994 Government Procurement Agreement, the 1996 Information Technology Agreement, the Environmental Goods Agreement whose negotiations stalled in 2016, or the ongoing talks aimed at achieving an agreement on electronic commerce. These agreements, sometimes known as “Joint Statement Initiatives,” can be either exclusive or open depending on whether they grant benefits only to WTO members participating in them directly or also to non-participants on a most-favored-nation (MFN, or equal treatment) basis. The Information Technology Agreement is an open plurilateral while the Government Procurement Agreement is an exclusive one.

Not only was a certain diversity of method tolerated or even encouraged by and within the principal post-war institution responsible for creating rules for trade policy. The GATT and then the WTO were never the only fora that contributed to this new cooperative international economic framework. The Organization for Economic Cooperation and Development (OECD)—which emerged from the earlier Organization for European Economic Cooperation that managed Marshall Plan aid—has also played a key role in developing principles on issues like bribery and corruption, international investment, and more recently artificial intelligence and carbon accounting.

The International Energy Agency (IEA), founded in 1974 after the first oil crisis, is one of the first examples of cooperation among like-minded countries that incorporated a geoeconomic perspective in its work by aiming to ensure that an economic and commercial tool (energy policy) would support the national security goals of its members. The G7, inaugurated in 1975 by German Chancellor Helmut Schmidt and French President Valéry Giscard d’Estaing (and which includes the EU as a member), has evolved from a focus on macroeconomic issues like exchange rates and current account balances to geoeconomic coordination, most recently demonstrated in the group’s decisions to withdraw MFN treatment in the WTO from Russia (providing the policy space for the imposition of tariffs) and to agree a price cap on its oil exports after the country invaded Ukraine in February 2022.

Multilateralism and the Question of Ends and Means

In light of this pluralist approach that the United States and its European partners have relied on to advance their prosperity in the post-war economic order, it is worth asking whether multilateralism should be viewed as a kind of steady-state object of policy or rather one means to serve transatlantic interests. Given the fact that multilateralism was the main (but not the only) driver of the liberal economic order for most of the post-World War II era, it is understandable that it could be seen as the overriding goal of policy.

But an equally strong case can be made that multilateralism was one of several methods that served a more important objective: a global economic order that reflected and advanced the liberal values of its leading proponents. These values—a balance between the imperative of stability and the desire for human progress; openness to innovation and exchange; the rule of law; high standards for workers, consumers, and the environment; the primacy of the individual over the state, and fairly regulated competition—should not be negotiable. Yet multilateralism is not the sole avenue available to guarantee that they will thrive. On the one hand, had the bilateral Transatlantic Trade and Investment Partnership between the United States and the EU succeeded, it would have been a major step forward for a high-standard global economy. On the other hand, the inability of the WTO to counter certain nonmarket economic practices of its member states—for example, its 2011 ruling on subsidies by Chinese state-owned enterprises—illustrates the challenges faced by multilateralism in promoting liberal values.

Despite the limits to multilateralism that have emerged in recent years, the Uruguay Round of trade negotiations that led to the creation of the WTO in 1994 was a major achievement in post-war global economic governance given its innovation of a legally binding dispute settlement system, and the WTO remains a key provider of international economic order today. But with a more diverse and more contentious global economy—one where China and its state capitalist economic model challenge liberal values and other countries such as India, Brazil, and Indonesia are asserting their interests more forcefully—it is natural that a less institutionalist, less monolithic approach to creating rules and norms is already gaining traction. A pragmatic conception of policymaking that first seeks to build cooperation among like-minded economies is not necessarily a sign of a retreat from the task of promoting global economic order; it can instead be a rational response to changes in the dynamics of the external environment in which policymaking must operate.

A Geoeconomic Approach to Statecraft

Under the banner of either the friendshoring or derisking of their international trade relationships, the United States and the European Union have now had four meetings of their Trade and Technology Council, a non-binding but important avenue for aligning transatlantic objectives in the global economy that was inaugurated in 2021. A year later, the United States and thirteen countries in Asia launched the Indo-Pacific Economic Forum, and both the United States and the EU are pursuing stronger links with emerging and poorer countries through finance and investment-based initiatives like Build Back Better World and Global Gateway, respectively.

This shift from a more single-minded institutional strategy to one that includes ad hoc, issue-based, and flexible coalitions reflects a broader evolution in thinking about the purpose of international trade and economic policy. New concerns like the resilience and security of supply chains, how to govern the use of artificial intelligence, and the increasing urgency to combat climate change have led to a reconsideration of the aims of policy. In a global order undergoing such mutation, economic efficiency will remain a key concern of transatlantic economic statecraft, but it will need to share the spotlight with other priorities like national security and sustainability.

To succeed in shaping this new global economic order, the United States, the EU, and other economies that share their values and interests—but also less like-minded ones that may respond to both the right incentives and inclusive rules—will need a common vision of the international economy of the future, a spirit of experimentation on the road to that goal, as well as an agility in managing short-term frictions during a period of transformation that will inevitably arise even among countries with broadly shared outlooks.

Beyond the longer-term question of institutions, agreements, and norms, there is already evidence that trade flows are being redirected to countries that share similar geopolitical interests, even if globalization—the exchange of goods, services, and capital across national borders—is not in retreat overall. From an economic efficiency perspective, it would be justified to describe this phenomenon as a case of geoeconomic fragmentation, since the reshuffling of supply chains that it involves may indeed redistribute economic growth in the short term. However, if national security and values concerns are added to the equation, a better term for these changes is “rebalancing.” Whether it is reducing asymmetric dependencies such as raw materials monopolies that could potentially be leveraged by a competitor or adversary or pursuing trade policies that combat climate change through decarbonization, a more geoeconomic approach to policymaking that integrates efficiency, security, and values is likely to be the most effective path to a sustainable economic order.

An International Climate Order

Within this emerging, more diffuse form of globalization, one issue stands out: climate change. It is a planetary emergency that will require years to overcome. As a result, any reform to the structure and rules of the international economic order over the next five to ten years should ensure that it also becomes an international climate order. Given continued rising temperatures, the status quo will not guarantee success; the question is what can and should be preserved from the established economic order and what innovations are necessary. In this process, the issue of sequencing will be key: when to emphasize the strengthening and reform of existing institutions and agreements, and when to invest in new and emerging venues for cooperation and rules-making.

While countries may have differing or even opposing national security agendas, all are affected by climate change (if not all equally). The UN International Framework Convention on Climate Change (UNFCCC) is an important multilateral process to combat global warming, but its commitments rely on the moral force of leadership, the example set by best practices, and the competitive dynamic of peer pressure since they remain voluntary. One noteworthy step taken at the Conference of Parties in the United Arab Emirates (COP 28) at the end of 2023 was the decision for the first time to devote a full day to discussions about the role of trade in promoting climate goals. By doing so, the UNFCCC has in effect broadened its consideration of how to achieve the objectives of the 2016 Paris Agreement to include trade policy measures like tariffs, standards, and subsidies.

The World Trade Organization, for its part, has recently stepped up its efforts to make trade policy a force for climate progress. One such initiative was the launching of the “Structured Discussions on Trade and Environmental Sustainability” (TESSD) in November 2020. The TESSD aims to make the WTO’s work on trade and the environment more responsive to the climate crisis, to promote sustainable global value chains, and to ensure that any future reform of WTO rules—including those governing fossil fuel subsidies—places a strong emphasis on climate goals. Additionally, in 2022, the WTO devoted its annual World Trade Report to the issue of climate change and international trade.

But the WTO faces several challenges in playing the role of fulcrum in a future international economic order that is also by necessity an international climate order.

Ambiguous Rules, Uncertain Reform

First of all, there is an inherent ambiguity in WTO rules regarding the nexus of trade and climate policies. Article XX (general exceptions) states that “nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures…necessary to protect human, animal or plant life or health” or “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.” That language would seem to provide the policy space for countries to use measures that may impact trade or economic growth in the short term as long as they promote climate goals.

But Article XX also begins with a non-discrimination caveat: “Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade…”

So far, although the WTO has ruled on broader environmental issues, no matter relating to climate policies strictly defined has been brought before the WTO dispute settlement system. Barring a reform to its rules, it is thus uncertain how the WTO would adjudicate a case that could serve to resolve the tensions inherent in Article XX. The prospects for reform, however, are also uncertain given the differing perspectives of its members even with regard to a global public good like combatting climate change. Some of these divergences relate to the interpretation of the UNFCCC’s language about “common but differentiated responsibilities” for climate action based on a country’s particular situation.

Destressing the Multilateral Trading System

This reality, however, begs the question of whether it would be advisable from the perspective of creating a future international climate order to ask the WTO under its current rules to play the role of sole arbiter of trade policy’s legitimacy as a force for a greener planet. To take two examples, both the U.S. Inflation Reduction Act (IRA) passed in 2022 and the EU Carbon Border Adjustment Mechanism (CBAM) that was introduced in 2023 could be seen as violating WTO rules in different ways and to different degrees.

The IRA’s language laying out how a consumer can qualify for an electric vehicle tax credit includes local content provisions that appear to be inconsistent with WTO Article III on national treatment on internal taxation and regulation. And although the EU has been scrupulous about designing its CBAM to conform to WTO rules, it may be open to a complaint about its adherence to the non-discrimination principle in both Article I (most-favored-nation) and Article III. This is not a hypothetical concern: India has already indicated that it may challenge the CBAM in the WTO dispute settlement system.

Were a WTO panel to rule against the IRA, the CBAM, or both, it is worth asking who would suffer a greater loss of legitimacy. Would it be the United States or the EU, who are trying to combat the existential threat of climate change through trade policy, or rather the WTO that was deeming such actions illegal? If the goal is to reform today’s international economic order so that tomorrow it also becomes an international climate order, it should not be in the U.S. or EU interest for the WTO to suffer a reputational loss on this very issue.

Part II: A Strategy for a Sustainable Global Economic Order

Any approach to building a reformed global economic order that places the imperative to protect the climate at its center needs to start with the World Trade Organization, since no other institution at the moment has the wide membership (164 countries), the policy achievements (the dispute settlement system, several plurilateral agreements, a record of work on environmental issues), and the legal basis to command the attention and instill the commitment of the leading economies. Yet, because of the tensions arising from the diversity of the WTO’s membership, the ambiguity of its rules, and the uncertain path to reform, it cannot end there. There may be no “Planet B,” but the planet requires a Plan B for global economic order.

There are three ways that the United States, the European Union, and other economies with similar interests can make good use of the WTO in the short to medium term as they seek to integrate climate objectives into the international economic order.

First, given the concerns outlined above about a potential negative decision by the dispute settlement system on the U.S. IRA, the EU CBAM, or another national climate policy measure, the United States, the EU, and a group of like-minded countries (what is sometimes known as “G7 plus”) should agree to and advocate for a moratorium on bringing any new cases before the WTO that link trade and climate policy. Such a step would help to destress the multilateral trading system at a time when it faces a challenging agenda before­ and after its February 2024 Ministerial Conference (MC13).

Second, this same G7 plus constellation of countries should pursue a concerted effort to reform the WTO’s rules so that they become more climate friendly. Resolving the ambiguity surrounding the issue of discrimination in Article XX environmental exceptions would be one significant step; so would creating more room for green subsidies and penalizing those for fossil fuels. These moves would help provide the leeway for governments both individually and collectively to experiment with new trade policy tools to promote decarbonization. They may also improve the likelihood that the dispute system’s Appellate Body—now lacking the quorum necessary to hear cases—could again become operational. While it is not the only issue at stake in dispute settlement reform (the use of the Article XXI national security exception, subsidies, and the role of state-owned enterprises are others), progress on climate could help to change its dynamics.

Third, at a later date when there may be greater clarity on rules and a more favorable political climate, a transatlantic push to restart the Environmental Goods Agreement would provide an avenue for trade liberalization to advance climate objectives. This step could be paired with the launch of negotiations toward an Environmental Services Agreement, which would be particularly beneficial to the U.S. and European economies.

Beyond Multilateralism? A Plan B for Global Economic Order

Given the constraints facing a WTO-centric approach, however, the time is ripe to conceive a Plan B for building an international climate order that draws—to various degrees—on  unilateral (or what the EU would call “autonomous”), bilateral, and plurilateral measures that would go beyond but also work in parallel to multilateralism. While it should not be excluded that the WTO will one day become the principal agent for managing a new climate order, it is important to remember the paradox that the most direct road is often not the shortest way to reach a desired destination. There will be a benefit to exploring alternative paths that may at first look like detours from multilateralism but that could in the end lead back to it.

Unilateral or Autonomous Measures: The IRA-CBAM Incompatibility

When it comes to unilateral or autonomous trade measures that can promote climate goals, the U.S. IRA and the EU CBAM are two of the most prominent. They are both effective examples of climate action, but can they contribute in a concerted way to a new international climate order? The IRA is a subsidies-based approach to decarbonization that contains certain local content provisions that may constrain trade. Yet the United States has already signed a Critical Minerals Agreement (CMA) with Japan and is negotiating one with the EU to open the IRA’s rules on consumer tax credits for electric vehicles to these large and close partner economies in a way that will benefit the climate. The United States and the EU also launched a Clean Energy Incentives Dialogue in 2023 as part of their Trade and Technology Council with the goal of coordinating climate-related subsidies in the IRA and the European Green Deal. Both of these steps demonstrate the value of using national frameworks as long as they remain open to alignment with key partners.

The goal of the EU CBAM is to incentivize trading partners to decarbonize in the six areas of economic activity that it covers (cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen) and to provide a level playing field for EU firms. Under the CBAM, goods imported to the EU in these six sectors will have to demonstrate that they are governed by similar restrictions on carbon intensity as those imposed on EU production via its Emissions Trading System. If not, they will be required to buy emissions trading certificates—which would effectively operate like a tariff—or be barred from the EU single market.

While the IRA and the CBAM are useful elements on the road to a new global economic order with climate at its center, they also have limitations. Neither of these unilateral/autonomous efforts—subsidies-based ones like the IRA or those starting from a domestic carbon price like the CBAM—will be sufficient on its own to forge the common rules and bring together the critical mass of countries for the effectiveness and legitimacy a new climate order will require.

Now, it is true that several countries or sub-federal regions have a carbon tax or emissions trading system, and some are considering a CBAM. In principle, that would suggest the EU CBAM could be the germ of a future global approach to decarbonization. However, one shortcoming of the CBAM is that none of the revenues it will generate from taxing imports are earmarked to help poorer countries, who will face serious adjustment costs to scale up to less carbon-intensive production. Without such a financing vehicle it will be difficult to rally countries outside the nucleus of the richest economies to a future international climate order. It is also true that a collection of disjointed border measures without a set of rules to govern them would almost certainly lead to inconsistencies in their application and political tensions among the countries involved.

Bilateral Approaches: The Lesson of GASSA

When it comes to bilateral efforts, the most significant example to date is the negotiations between the United States and the EU toward a Global Arrangement on Sustainable Steel and Aluminum (GASSA). The aim of GASSA is the free trade of steel and aluminum across the Atlantic accompanied by joint measures to limit or block the imports of products that are both unfairly subsidized and more carbon-intensive than equivalent U.S. and European metals. Once such an agreement is reached, the Biden administration would permanently remove the tariffs placed by President Trump on steel and aluminum from the EU in 2018 under the authority of the national security exception in Section 232 of the 1962 Trade Expansion Act. At the moment, tariffs on the EU have been only provisionally removed and a tariff-rate quota is in place that subjects EU exporters to various reporting requirements and could lead to quantitative restrictions when those exports reach a prescribed level.

The failure of the United States and the EU to reach agreement on GASSA at their summit in Washington in October 2023 points to the limits of bilateral approaches as the basis for an international climate order. One reason for the inability to conclude the deal lies with the differing U.S. and EU starting points where trade and climate policies intersect. The EU’s CBAM is a price-plus-tariff approach while the U.S. IRA is based on incentives (subsidies). While Washington has no existing mechanism that links tariffs with carbon intensity the way that GASSA would, Brussels has just launched its CBAM which does exactly that. It is unclear how the EU could maintain the integrity of its CBAM that includes iron and steel while entering into a second regime governed by GASSA that also covers steel imports. At the same time, it is unrealistic to expect other countries to simply adopt the EU CBAM given that their domestic political and economic realities will be different.

Plurilateralism: The Climate Consortium

The challenges facing the WTO as well as the constraints on unilateral/autonomous and bilateral measures to serve as the building blocks of a future international climate order suggest that a “Climate Consortium”—a binding plurilateral or coalition of the willing approach to the governance of trade and climate policy—will be most likely to achieve desired outcomes. A Climate Consortium is inspired by the idea put forward by Nobel Prize laureate William Nordhaus in a 2015 paper called “Climate Clubs: Overcoming Free-riding in International Climate Policy.” It shares certain features with the more recent version of a climate club put forward by the German government during its G7 presidency in 2022 and launched at COP 28 in Dubai in 2023 but also goes beyond it in important ways.

The advantage of a Climate Consortium lies in three important areas.

First, as the challenge of building an international climate order is too large for any single policy approach or single country to solve, there needs to be a framework that encompasses a wide variety of tools and a diversity of economies. The consortium can and should have the ambition to include at least 40-50 countries at the start from several geographies and economic conditions. It should begin its mandate with an inventory of policy options in a range of areas including a carbon price, subsidies, tariffs, carbon-intensity standards, regulations, and—crucially—financial aid to poorer countries. Without an obligatory mechanism for financial flows to such countries to help with their decarbonization efforts, the Climate Consortium could be seen as a way to protect richer countries from trade competition—particularly if it draws upon tariffs—and deprive it of the legitimacy that a more inclusive membership can provide.

Second, a Climate Consortium needs to be able to set rules for its members. Whether the legal framework for this function is an agreement (like the GATT) or an organization (like the WTO) is not of central importance; what counts is that the countries participating in it will have a way to measure performance and manage its governance. While its members should be able to choose from a menu of policy options to promote a low-carbon future, all participating countries will have to commit to binding and enforceable outcomes in the most carbon-intensive industrial sectors. Countries that do not maintain the consortium’s high standards for decarbonization would have their membership suspended.

Finally—and most controversially—under the appropriate conditions and at the right time, a Climate Consortium needs to include the ambition to develop a common external tariff on non-members (as Nordhaus proposed) that do not meet its decarbonization objectives. Such an idea would at present almost certainly be contrary to WTO rules unless the consortium also became a customs union, which may not be practicable given it is unlikely (at least at the start) to cover “substantially all the trade” among its members that those rules would require.

The issue of WTO compatibility is why sequencing is so important when it comes to a Climate Consortium. A common external tariff should be the last step, to be used only if parallel efforts to reform the WTO so it provides greater policy space for climate action do not bear fruit within a three-to-five-year period. Respect for WTO rules is important; however, given the challenges to their reform, considerable damage to the climate could occur before progress is achieved. Before the decade is out, many leading economies could be forced to choose between protecting the climate and adhering to multilateral trade rules. If that time comes, a Climate Consortium—preferably enlarged to 100 or more countries who will have seen the benefit of meeting its criteria—could at least temporarily provide an alternate forum for governing trade and climate policies and achieving an international economic order that is also a climate order.

Conclusion: Climate and Security

When the General Agreement on Tariffs and Trade was founded in 1948 to create rules for world trade and to oversee its development, it had a modest but diverse membership of twenty-three countries. The signatories included Australia, Brazil, Chile, France, India, and the United States. By 1994, when the Marrakesh Agreement was signed, its successor the World Trade Organization counted 128 members from across the globe.

While historical parallels can be treacherous, the way the GATT started from a coalition of the willing interested in liberalizing trade and grew to become the main instrument of global economic governance as the WTO has lessons for today. This is particularly true as in the late 1940s the GATT was a second-best idea that replaced the much more ambitious concept of an “International Trade Organization” outlined in the Havana Charter, but which failed to gain unanimous support. Rather than being deterred by the failure of its institutionalist ambitions, this group of like-minded countries rallied together in a spirit of experimentation to respond to the crisis of a devastated post-war global economy and moved forward with the GATT.

Thankfully, the global economy faces no such calamity today, but the world does need an innovative strategy to combat the planetary emergency of climate change. While a Climate Consortium is not a panacea, it does present the most realistic avenue for balancing the legitimacy that an inclusive approach provides with the effectiveness of like-minded membership. But it should not crowd out other promising avenues for using trade policy to reach the goal of net-zero carbon emissions by 2050 set out in the UNFCCC Paris Agreement. Competition is healthy, and several ongoing unilateral/autonomous and bilateral efforts can also serve climate objectives. The World Trade Organization, while in need of reform, remains the guardian of the current liberal economic order. The members of a Climate Consortium should sequence its development so that time and resources can be devoted to modernizing WTO rules so they unambiguously create the policy space for governments to pursue climate action.

Climate change is not only a threat to economic prosperity and public health but also to global peace and stability given the heightened risks of conflict over natural resources that it could engender. A binding, high-standard, and inclusive Climate Consortium can help to promote a more orderly and secure world for the 21^st century.

To read the full publication, click here.

To read the full publication as it is posted on the American-German Institute’s website, click here.

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Restoring a fully and properly functioning WTO dispute settlement system

Since December 2019, the Appellate Body – the second instance of the WTO’s dispute settlement body– has been paralysed, after the United States (US) repeatedly blocked the nomination of new judges to review appeals of first-instance panel reports. In line with the MC12 mandate to restore a functioning dispute settlement system by 2024, WTO members have held informal negotiations on two separate tracks: one that has led to a draft consolidated text on issues other than the appeal mechanism, and another for the debate on the appeal mechanism that as of January 2024 was still focused on ‘the identification of certain concepts that could offer a solution to this critical issue’. Speaking for the Appellate Body’s main critics, US Trade Representative Katherine Tai, at the G20 Summit in India in August 2023, stated that the ongoing new and constructive process of reforming the WTO’s dispute settlement function ‘requires a fundamental rethink’ with a view to ending ‘the practice of judicial rule making’, among other things. She emphasised that the US had tabled 30 ideas, including on the appeal mechanism. At a US think-tank event in September 2023, she specified key points of the US position, e.g. the need for appropriate alternatives to litigation (leading by example, the US recently resolved all its trade disputes with India through methods other than litigation), an end to ‘judicial overreach’, for WTO members’ policy space to be restored, to allow them to regulate on climate-change issues and non-market practices, and for members to remain free in their legitimate national-security judgements. Some commentators do not expect a breakthrough at MC13, since the 2024 deadline coincides with the US presidential election year, in which repairing a system that in the US is perceived by both Democrats and Republicans as having allowed the ‘China shock’ that eliminated millions of US jobs would politically be very challenging for the Biden administration.

Complementing the Agreement on Fisheries Subsidies

MC12 ended with the adoption of a multilateral Agreement on Fisheries Subsidies that prohibits support for illegal, unreported and unregulated (IUU) fishing, bans support for fishing overfished stocks, and ends subsidies for fishing on the unregulated high seas. WTO members have since negotiated a ‘second wave’ of disciplines eliminating fisheries subsidies that contribute to overcapacity and overfishing. In January 2024, they held a ‘Fish month’based on the latestendorsed draft text, with the aim of transmitting a clean text to ministers at MC13. Experts have stressed that WTO members continue to diverge on a wide range of topics, including on the details of exemptions for developing countries. Acceptances from two-thirds of WTO members are required for the Agreement to enter into force. By January 2024, 55 WTO members, i.e. roughly one-third of the WTO membership, had transmitted their instruments of acceptance.

Incorporating the Investment Facilitation Agreement into WTO legal architecture

In July 2023, a subset of more than 110WTO members finalised negotiations on a plurilateral Investment Facilitation Agreement aimed at eliminating red tape that hampers investment. They opted for a plurilateral negotiating format to develop new WTO rules as a way of overcoming deadlock if consensus is elusive. The talks were launched under a 2017 Joint Statement Initiative after the failure of multilateral trade negotiations on a range of topics under the 2001 Doha Development Round. The 118 countries have since sought to incorporate the agreement, whose benefits would accrue to all WTO members under the most favoured nation principle, into the WTO legal architecture as an ‘Annex4 agreement’. This requires consensus from all 164 current WTO members, some of which, including India and South Africa, are strongly opposed to such a move. They argue that only rules negotiated by all WTO members should be added to the WTO rulebook. Only 9%of WTO members have never participated in a WTO plurilateral deal.

Extending the e-commerce moratorium

Since MC2 in 1998, WTO members have regularly extended the moratorium on the imposition of customs duties to electronic transmissions as part of the work programme on e-commerce, while the definition of ‘electronic transmissions’ as well as the moratorium’s scope and impact have remained controversial. Absent an MC13 decision to extend it, the moratorium will expire automatically in March 2024. The related debate at MC13 could yet again pit developed countries such as the EU and the US, which support the moratorium, against developing countries such as India and South Africa, which call for ending it. The latter have long claimed that, adding to the growing digital divide between developed and developing countries, the moratorium prevents developing countries from taking advantage of the growing imports of electronic transmissions. However, the US has argued that, as some studies have shown, a decrease in digital trade resulting from ending the moratorium would lead to a bigger economic loss for developing countries than potential foregone customs revenue. According to a 2023 Organization for Economic Co-operation and Development (OECD) study, the cost of terminating the moratorium would be considerable. A 2023 International Monetary Fund (IMF)report emphasises other methods of revenue collection resulting from digital trade. As of December 2023, differences among WTO members on the moratorium’s future persist, ‘including the need for more discussions on its definition, scope and impact

Extending the TRIPS waiver for COVID-19 vaccines to diagnostics and therapeutics

At MC12, WTO members endorsed a five-year waiver for intellectual property (IP) protection under the WTO agreement on trade-related aspects of intellectual property rights (TRIPS),to enable developing countries to manufacture and distribute COVID-19 vaccines. WTO members also mandated a decision within six months on a potential extension of this waiver to the production and supply of COVID-19 diagnostics and therapeutics, as requested by India, South Africa and some 63other WTO members. The debate in the WTO seems to have entered an impasse. US lobby groups as well as lawmakers have pressed the Biden administration to oppose a waiver extension. The former are concerned that the extension could stifle medical research, the latter that it ‘could outsource to foreign countries advanced manufacturing and research jobs that should exist in the United States’. A 2023 US International Trade Commission report states that ‘the wide disparity among countries in their ability to access COVID-19 diagnostics and therapeutics is the result of multiple factors, including access to IP, prices and affordability, regulatory approvals, healthcare infrastructure, and the healthcare priorities of governments’. The EU’s December 2023 statement to the WTO General Council on the follow-up to MC12 issues notes’ that little progress has been made in this complex discussion and the positions of Members remain far apart’

To access information about the document and read the “At a Glance” section as it was published by European Parliamentary Research Service, click here.

To read the full document, click here.

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“Those who would gain all under heaven by tampering with it — I have seen that they do not succeed. Those that tamper with it, harm it. Those that grab at it, lose it.”

Prosaic modern economists occasionally echo him, with the unexciting but sometimes correct advice: “Don’t just do something, stand there.”

As the World Trade Organization (WTO) prepares for its 13th Ministerial Conference late in February, both the ancient sage and the modern wonks are offering very good (if also very modest) advice on the most modern of all technologies: the internet and the world’s digital economy. If the WTO members take heed, they will help growth and development in lower-income countries, and simultaneously help the Biden administration achieve its goal of a more “inclusive” trading system that does more to create opportunities for the small and the less powerful “empowering small businesses to enter the market, grow, and compete.”

THE MORATORIUM AND THE DIGITAL ECONOMY 1989-2023

The WTO’s 164 members have some significant calls to make this month, on an array of agenda topics ranging from fishery subsidies to agricultural stockpiling, intellectual property, and — not least — whether to extend their quartercentury-old pledge for “duty-free cyberspace.” This policy, more technically if clunkily termed a “moratorium on application of tariffs to crossborder electronic transmissions,” represents a 25-year-old consensus — always temporary but regularly renewed at each WTO Ministerial meeting — which helped to create and continues to underpin the modern global digital economy. If they renew it, no WTO member would need to change policy. Rather, they would simply continue to refrain from grabbing and tampering, while focusing their energy on issues in need of activist policy, from privacy protection to cybersecurity and action against disinformation. This commitment, simply by avoiding unintentional harm, would allow the digital economy to continue the natural growth that has helped hundreds of thousands of small businesses, and an uncountable but very large number of individuals, enter the global economy and find new ways to realize dreams and earn incomes.

The “moratorium,” however, is under some stress and criticism, mainly from left-populist NGOs and a few large developing-country governments. Their argument, fundamentally, is that the moratorium prevents taxation of data flows and therefore deprives developing-country governments of some tax revenue. But abandoning the moratorium would be a sad mistake, for global growth, for innovation, and for the governments who, in focusing on potential tax revenues (which, see below, are quite modest), are losing sight of their much larger growth and development opportunities. And it would be a sad mistake for the Biden administration’s hope for a more ‘inclusive’ trading system that offers more opportunity for small businesses and marginalized communities. Duty-free cyberspace remains critical to all these things, and the WTO members should enthusiastically endorse it once again. By way of context, the WTO’s “moratorium” dates to the late 1990s — the era just after the launch of the World Wide Web — and originates in prescient American thinking about the Internet’s potential future growth. Developed in that world of 150 million mostly American, European, and Japanese internet users, their hypotheses and projections look very good a quarter-century later. Here for example is that era’s U.S. Trade Representative, Charlene Barshefsky, explaining the early U.S. agenda in 1999:

“Moving on from the foundational commitment we won from the WTO members in 1998 on the principle of “dutyfree cyber-space” — that is, ensuring that electronic transmissions over the Internet remain free from tariffs — we are moving on to a longer-term work program. Its goals include ensuring that our trading partners avoid measures that unduly restrict development of electronic commerce; ensuring that WTO rules do not discriminate against new technologies and methods of trade; according to proper application of WTO rules to trade in digital products; and ensuring full protection of intellectual property rights on the Net. At the same time, we are working with individual trading partners on a series of related questions — for example, on privacy issues where we have worked closely with the European Union to create a model that both protects consumer privacy and prevents unnecessary barriers to transatlantic economic commerce.”

Her list of topics remains strikingly current. Some of the issues she cites still raise complex questions within the United States and are still politically contested both within countries and between large trading economies and technological powers. Technical debates over copyright continue to animate thinkers and lawyers in Silicon Valley and Hollywood, for example; likewise, the U.S. and the European Union still argue over privacy while working to preserve cross-Atlantic data flows. But two things seem clear.

One, the “foundational” moratorium on tariffing electronic transmissions remains at the heart of digital policy. In pleasing contrast to many trade agreements, it is a short one-sentence commitment in plain English. (Or plain French, or plain Spanish — the other two official WTO languages.) The actual texts of its first 14-word iteration, and the slightly longer renewals in 2019 and 2022, read like this:

“Members will continue their current practice of not imposing customs duties on electronic transmissions.” (Original moratorium in 1998)

“Members agree to maintain the current practice of not imposing customs duties on electronic transmissions until the 12th Ministerial Conference.” (2019 renewal)

“We agree to maintain the current practice of not imposing customs duties on electronic transmissions until MC13, which should ordinarily be held by 31 December 2023. Should MC13 be delayed beyond 31 March 2024, the moratorium will expire on that date unless Ministers or the General Council take a decision to extend.” (2022 renewal)

And two, in practical terms it continues to work. Over this quarter-century of not grabbing and not tampering:

World Internet Population Up by More Than 5 Billion: As governments have “stood there,” the world’s Internet user population has grown from 150 million to 5.5 billion, or from about 4% to 60% of humanity.

Over 1000-Fold Rise in Data Transmission: Transmissions of data over the Internet, estimated at 100 quadrillion bytes in 2000 by Cisco Systems in its fondly remembered “Visual Networking Index,” rose to 93 quintillion in 2017 — nearly 1,000-fold — before the Cisco statisticians gave up trying.

U.S. Domestic E-Commerce Up by $35 Trillion: The level of e-commerce within the United States has grown from the $700 billion Ambassador. Barshefsky noted in her speech (as estimated by the Commerce Department) to $36 trillion, a figure now about 30% greater than the U.S.’ $26 trillion GDP. Internationally no such figures exist, but the WTO’s most recent annual statistical summary, World Trade Statistics 2023, points to a single form of electronic commerce — digitally enabled trade in services — as the most dynamic element of 21st-century trade:

“Looking back through the entire pandemic period, computer services were the most dynamic sector in services trade, with global exports in 2022 worth 44% more than their value in 2019. Digitally delivered services — that is, services provided via computer networks, from streaming games to remote consulting services — are an emerging source of growth, accounting for 54% of global services exports in 2022, and 12% of total global trade in goods and services.”

New Industries Steadily Emerging: The moratorium has facilitated this by keeping the cost of data transfer low, enabling not only growth, but also the transformation of existing industries, and the creation of entirely new ones: “influencers,” social media, telemedicine, and distance education; or, alternatively, digital services integrated in manufactured goods from cars and medical technology to rice-planting machines and smartphones.

SMALL BUSINESS AND THE ‘DEMOCRATIZATION’ OF TRADE

The picture of trading firms has also changed noticeably and to the benefit of the smaller and less advantaged: digital technologies lower the costs of entry to the trading world for everyone, but disproportionately for small firms and individuals.

In-depth reviews of the challenges American SMEs (small and medium-sized enterprises) face in international trade done by the U.S. International Trade Commission in 2010 suggest obvious reasons why these businesses (and by extension individual entrepreneurs) would, relatively speaking, find special value in lowcost Internet access. They report particular challenges, for example, in finding overseas customers, navigating required customs documentation, securing payment, and managing returns. Large firms traditionally open overseas offices that settle these problems; small ones, except in special cases such as family firms with relatives in two or more countries, can’t. The smaller ones, with new access to low-cost email, data analytics, and social media, should be able to use digital technologies to (at least in part) compensate for this disadvantage.

Edward Gresser is Vice President and Director for Trade and Global Markets of the Progressive Policy Institute. Before joining PPI in October 2021, he served as Assistant U.S. Trade Representative for Trade Policy and Economics, and concurrently as Chair of the U.S. government’s interagency Trade Policy Staff Committee.

Malena Dailey is the Director of Technology Policy with the Progressive Policy Institute, where she works on issues relating to social media and the internet and technology sector.

To read the introduction as it is posted on Progressive Policy Institute’s website, click here.

To read the full report published by the Progressive Policy Institute, click here.

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Though all policy issues are vulnerable to this phenomenon, trade stands out, not only for the haphazard way that politicians explain it, but also the repeated misconceptions that have amplified a false narrative warning of the costs of openness and touting the benefits of closure. When Donald J. Trump calls the North American Free Trade Agreement “the worst deal ever negotiated,” and vows to bring jobs back home, detailed expert rebuttals struggle to contend with those punchy soundbites.

Trade has become toxic, not just on the campaign trail, but in the way that it is discussed by both Democrats and Republicans. “Traditional” US trade policy, which began to form its nearly century-old roots under the leadership of President Franklin Roosevelt and his Secretary of State, Cordell Hull, has been described by US Trade Representative Katherine Tai as “trickle-down economics,” where “maximum tariff liberalization…contributed to the hollowing out of our industrial heartland.” Her predecessor, Robert Lighthizer, calls those afflicted towns “ruins,” and has also railed against the international trading system which, through successive rounds of tariff liberalization, opened world markets to US goods and services while lifting billions of people out of poverty.

But the fact that some Americans were hurt by a failure to adjust to foreign competition has become the central grievance of the critics of modern US trade policy and has perhaps overly dominated the debate. This has clouded trade policy discussions with issues better addressed through domestic policy actions, such as workforce development and education policy.

The existence of domestic solutions has not stopped prominent officials, such as President Joe Biden’s National Security Advisor, Jake Sullivan, to question how trade fits into US international economic policy and ask “what problems is it seeking to solve?”

Instead of seeing trade openness as a source of strength, it is now framed as a source of potential weakness. Interdependence is increasingly described as a vulnerability, as countries can weaponize their trade links. However, few ever claimed that trade integration would lead to world peace—in fact, economic coercion is part and parcel of international affairs.

What matters, however, are the boundaries countries draw around what kind of behavior is acceptable and what is not. In the international trading system, the drawing of such lines used to take place at the World Trade Organization, but that institution has been weakened by the United States through its continued objections to the WTO’s appeals mechanism that has successfully, and peacefully, settled hundreds of trade disputes.

The current US approach to trade, if it can be called an approach at all, risks weakening US influence abroad and economically disadvantaging Americans at home. It rests on the false belief that retrenchment of “traditional” US trade policy—by putting America First or catering to a select group of US workers and branding such efforts as “worker-centric trade policy”—will somehow restore the United States to a position of hegemonic dominance with no peer competitor. The reality, however, is that such retrenchment comes with many significant and unforeseen costs that could weaken US leadership in the world. The United States, for the first time since its unipolar moment, is now faced with competition from all corners of the globe and a potential rival in China that could one day upend the status quo. Fears of being overtaken by China should not, however, prompt the United States to sabotage the very order it created and immensely benefited from. Instead of trade wars, what is needed, now more than ever, is to focus on what makes the United States exceptional and to secure a more open and prosperous future at home and abroad.

The problem with trade
The politics of trade have always been contentious. James Madison recognized this early, when writing in Federalist 10, “Shall domestic manufactures be encouraged, and in what degree, by restrictions on foreign manufactures? are questions which would be differently decided by the landed and the manufacturing classes, and probably by neither with a sole regard to justice and the public good.”

Lamenting the power of factions on the legislative process, Madison recognized that adjusting to “these clashing interests” is difficult and could not be done “in many cases… without taking into view indirect and remote considerations, which will rarely prevail over the immediate interest which one party may find in disregarding the rights of another or the good of the whole.” Trade policy was thus vulnerable to capture by special interests clamoring for protection, and these pressures would be difficult to overcome even by a president determined to craft policy for the benefit of the entire country.

Those clashes in US trade policy history are astutely detailed by economic historian Douglas Irwin, who chronicles the countless legislative and ideational battles that eventually led to the trade policy the United States used to lay the groundwork for the international trading system that we have today. Irwin describes the modern era of US trade policy, which begins around 1932, as driven by the objective of reciprocity, where the US government prioritized reductions in tariff and non-tariff barriers through negotiated agreements with other countries.

An important catalyst to this era were the ideas espoused by Secretary of State Cordell Hull, who foresaw the destructive powers of economic nationalism and urged “a revival of world trade” as “an essential element in the maintenance of world peace.” He went on to clarify that “by this I do not mean, of course, that flourishing international commerce is of itself a guaranty of peaceful international relations,” but “that without prosperous trade among nations any foundation for enduring peace becomes precarious and is ultimately destroyed.” Hull also well understood that trade could strengthen ties with foreign allies, not only serving to create economic opportunities, but also to reduce political tension

Those ideas have largely fallen out of favor: President Donald Trump challenged the foundations of the international trading system, and Biden continued Trump’s trade policy, in addition to taking significant actions to pave the way for a new US interest in industrial policy. In fact, though Biden offered a more positive view of the United States’ place in the world during his first presidential campaign, journalist Fareed Zakaria observes that Biden has governed as if “the country has been following the wrong course” leaving Washington “gripped by panic and self-doubt.” That panic and self-doubt has promulgated the belief that the international trading system is broken and in need of remaking. However, the budding new architects seeking to transform it have come to the job without a vision for what it should look like.

A misguided attempt to solve the problem
Both the Trump and Biden administrations have criticized past US trade policy and promised to correct the wrongs inflicted on average Americans, both real and imagined. Those efforts have led to an unprecedented number of executive actions that have put “security” above trade and sown distrust among US allies. It has also led to a troubling embrace of industrial policy, driven by a fear that China will overtake the United States in terms of economic influence, innovation, and raw power. Lighthizer argued that US trade policy should focus on “improving the lives of and opportunities available to regular working people” and “economic efficiency, low prices, and corporate profits,” while “important goals … should be secondary.”

Meanwhile, Jake Sullivan suggests modern US trade policy should move “beyond traditional trade deals to innovative new international economic partnerships focused on the core challenges of our time.” (Both statements, of course, ignore the regressive nature of the US tariff system and its disproportionately negative impact on working families). The examples Sullivan lays out are the Indo-Pacific Economic Framework for Prosperity (IPEF), the Americas Partnership for Economic Prosperity (APEP), the US-EU Trade and Technology Council (TTC), the United States-Mexico-Canada Agreement (USMCA) rapid response labor mechanism, and US talks with the European Union to create a global arrangement for steel and aluminum.

However, a closer look at what those trade policies do reveals that they are unlikely to be the foundation upon which a new consensus on trade can be built. The IPEF does not even include any trade provisions because domestic political pressure led the Biden administration to postpone the conclusion of the trade pillar as the United States heads into an election year where many Democratic congressional seats are up for grabs. The pillars it has concluded, including supply chain resilience, are likely to do little more than improve some information sharing among IPEF’s 14 members, mostly Asian economies that include some of America’s largest trading partners and strategic allies. True resilience requires strengthened trade ties, something the IPEF does not deliver.

Similarly, the APEP does not yet include any trade initiatives, though it does seek to make strategic investments in climate financing and critical technologies, such as semiconductors. The TTC appears more focused on tech than trade, and EU-US trade frictions have continued over Trump-era steel and aluminum tariffs that Biden has upheld in a slightly modified form and vehemently defended as necessary for national security. The global steel arrangement discussions were launched to resolve the impasse over tariffs and create a green steel carbon club, but these have also morphed into a convoluted negotiation primarily concerned with protecting US industry.

Finally, the USMCA rapid response labor mechanism is a one-way enforcement tool that has delivered limited benefits to the Mexican economy and done nothing to improve the conditions for workers in the United States. Despite this, Tai claims that “this is having a real impact on working peoples’ lives, not only in Mexico but also here at home, because elevating labor standards in Mexico empowers US workers by reducing unfair incentives to ship jobs overseas.” This sounds more like disincentivizing certain firm location decisions rather than empowering US workers directly. There is no guarantee, for instance, that strengthening labor standards in Mexico will encourage companies to reshore those jobs to the United States. The rhetoric is strong, but the evidence for Tai’s arguments is sorely lacking.

The common thread in this new approach to trade can best be described as asymmetry, which is in direct opposition to the principle of reciprocity. Over the last two administrations, the United States has asked its allies and trading partners to adjust to meet its immediate policy needs—real or imagined—and done little in return. Though our trading partners and allies have gone along with this American detour on trade, they have done so out of necessity, not out of desire. In fact, many still hold out hope that the United States will become a leader in trade again, rejoin the Trans-Pacific Partnership, lift its blockade on the WTO’s Appellate Body, and end the trade wars that Trump began. Current US trade policy is in many ways a blast from the past. Nowhere is this clearer than in recent enthusiasm for industrial policy, eerily similar to the Japan Panic that swept over Washington in the 1980s. Then, as in now, the United States will not beat its economic competitors by emulating their policies, but by embracing the openness—to trade, capital, and people—that has defined US economic success for decades.

What comes next
Surveys show that Washington’s political elites are out of touch with the American public. Though Americans have become more supportive of some trade restrictions, on the whole, 74% view trade as good for the US economy, 63% think trade creates good jobs in the United States, and roughly 80% see it as positive for consumers and for improving their standard of living. Americans also largely support immigration, though they have some particular reservations. Finally, the majority of Americans have more favorable views toward capitalism as opposed to socialism, though there are some notable differences between Democrats and Republicans. On most policy issues, though views have become more polarized, there does appear to be significant middle ground where Americans agree on the fundamentals.

In his first inaugural address, President Thomas Jefferson called on the country to come together, urging that “every difference of opinion is not a difference of principle.” A similar call is urgently needed today so that the United States can build a grand strategy for its international economic policy that matches its desires for global influence.

Jake Sullivan argued that “international economic policy has to adapt to the world as it is, so we can build the world that we want.” But to do that, the United States needs to build on top of the order it created—not tear it down. A return to the era of reciprocity is possible, but without a clear vision for the United States’ role in global economy and compelling incentives for our partners to go along, the new approach to trade will inevitably be a tough sell.

The result will be a weaker US economic presence abroad, rule fragmentation, and a more unstable global economy for years to come. Retrenchment should be avoided, and the United States would do well to remember that trade is not a zero-sum game where one side’s wins are another side’s losses.

Instead, trade is fundamentally about trust, openness, and reciprocity. The current international trading system has generated opportunity and economic success because of a commitment to these principles. It would be wise to return to them.

Inu Manak is a fellow for trade policy at the Council on Foreign Relations (CFR). At CFR, she researches and writes on policy issues relevant to US trade policy, including topics such trade politics and institutions, trade negotiations, and dispute settlement.

To read the full article, click here.

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From Words to Action

It is no understatement to say that the Agreement on Fisheries Subsidies adopted at the WTO’s Twelfth Ministerial Conference (MC12) is a landmark achievement. The first agreement in the WTO’s legal regime to focus on sustainability and the second multilateral agreement reached in the organization’s almost 3 decades of existence, it establishes for the first time a set of global, binding rules on the support governments provide to their fishing sector. With more than 35% of marine fish stocks considered overfished—a proportion that has grown steadily over the past 5 decades—addressing the contribution of fisheries subsidies to this pressing global environmental problem through international cooperation was long overdue.

In particular, the new disciplines prohibit the provision of fisheries subsidies in the situations where concerns about the sustainability of fishing activities are the clearest: (1) when illegal, unreported, and unregulated fishing activities have been identified; (2) when the health of fish stocks is assessed and their biomass is determined to be at alarmingly low levels; and (3) when fishing occurs in unregulated high seas fisheries, meaning that no entity has competence for managing stocks sustainably.

The new rules are thus essential tools to keep at bay the most harmful effects of fisheries subsidies, not only for the marine environment, but also for those who depend on healthy fish resources for their livelihoods and nutrition. At the moment, however, the agreement only consists of words on a few pieces of paper. Its beneficial effects will not materialize—at least not in full—until it enters into force, for which two thirds of the WTO membership (i.e., at least 109 members) must formally accept it. It is only at this stage that the new disciplines will become enforceable by, and against, members that have accepted it. At the time of writing, 52 members had submitted their instrument of acceptance to the WTO.

Meanwhile, members also need to assess what changes will be required domestically to align with the new rules and, in the case of developing country members, identify the types of international assistance they may need to implement these rules. IISD has produced a self-assessment tool they can use to do that as they prepare for implementation.

Toward Further, Broader Rules

Importantly, the agreement’s main disciplines are subsidy prohibitions that focus on specific, particularly alarming situations. But before adopting the agreement at MC12, WTO members were also considering broader rules to curb the subsidies that lead to the overexploitation of fisheries resources more generally. These rules could not be included in the agreement due to a lack of consensus, and members committed to continue negotiations and agree on these additional disciplines later—which they hope to do at the MC13.

Ongoing talks can be seen as an opportunity to better address the underlying role of subsidies in driving overcapacity in global fishing fleets and incentivizing unsustainable levels of fishing.

It is precisely these additional rules that members are now negotiating. While the agreement reached at MC12 aims to prevent the most damaging impacts of fisheries subsidies, the ongoing talks can be seen as an opportunity to better address the underlying role of subsidies in driving overcapacity in global fishing fleets and incentivizing unsustainable levels of fishing. As such, they are an opportunity to tackle more directly, and more broadly, one of the root causes of overfishing.

The further disciplines that are envisaged rely on three key elements: (1) a main prohibition of subsidies that contribute to overcapacity and overfishing, including a list of subsidy types that are presumed to do so; (2) an exception allowing subsidies to continue when members can show that they apply fisheries management measures to keep stocks healthy; and (3) special and differential treatment (SDT) for developing country members, in the form of temporary and permanent exemptions from the rule and the management exception for subsidies by these members. The proposed disciplines also include prohibiting subsidies “contingent upon or tied to” fishing beyond the subsidizing member’s waters, as well as additional transparency requirements.

For more than 3 years, negotiations on this part of the disciplines have focused on this “hybrid” approach—the combination of a general prohibition, including a list of subsidy types, with an exception based on fisheries management. Alternative approaches have (re-)appeared in numerous proposals, but none have gathered a level of support that would give them better chances of attracting consensus. The central issue is whether the balance of rights and obligations—between members that would avail themselves of the management exception and those that would avail themselves of SDT—is acceptable. As members have explored options for an outcome, three broad structural questions have shaped discussions, and they are all interrelated.

How Strict Should the Rules Be for the Big Players?

A key question in negotiations has been whether the envisaged rule would be stringent enough to meaningfully discipline the subsidies provided by the largest players in the fisheries sector—especially members with the biggest fishing fleets and those that provide the most subsidies. Looking at the subsidies that could fall in the scope of the new rules, around 72% are provided by the top 10 subsidizers, a number that increases to 86% if one considers the top 20 subsidizers.* The way the disciplines apply to those providing the most subsidies will thus be critically important to ensure the rules are effective.

A key question in negotiations has been whether the envisaged rule would be stringent enough to meaningfully discipline the subsidies provided by the largest players.

Since the hybrid approach emerged as the focus of talks in 2020, some developing country members have raised concerns about the permissiveness of the proposed rules, in particular for the largest subsidizers. Other members, including most of the biggest subsidizers, have generally argued that the proposed rules considered under this approach were stringent enough. These discussions have continued since talks resumed in 2023, with various proposals and ideas tabled by different members to somewhat raise the level of ambition in the envisaged rules, notably by making them stricter for large subsidizers.

What Should Be the Role of Fisheries Management?

Another important, and closely related, question that has generated significant debate is whether and how the rules should be linked to members’ fisheries management. It is widely recognized that, in theory, effective management of fisheries resources can help to mitigate the harmful impacts of fisheries subsidies. Influential analytical work on this topic by United Nations Environment Programme or the Organisation for Economic Co-operation and Development has emphasized that point.

Another important, and closely related, question is whether and how the rules should be linked to members’ fisheries management.

But members have shown diverging levels of comfort with the idea of relying on fisheries management as part of the application of WTO subsidy rules. Some developing country members have voiced concern that management-based rules could preserve the status quo by allowing big subsidizers to keep supporting fleets as long as some type of fisheries management measure is implemented, even if such measures are ineffective.

While the link with fisheries management is inherent to the hybrid approach that members have agreed—with varying degrees of enthusiasm—to focus on, some recent discussions have centred on how strict the sustainability and transparency requirements should be for members to use the management exception. Many members have proposed tightening these requirements, for large subsidizers in particular, but others resist the idea of making rules too stringent. The balance that members must strike here will be to ensure that any management-based exemption is strict enough to halt the continuation of unsustainable subsidization, while keeping it accessible to WTO members with different types of fisheries management and levels of capacity.

What Flexibilities Should Be Included for Developing Country Members?
A third key question that has been at the centre of discussions is what types of SDT provisions for developing country members should be part of the new rules. Demands for SDT were limited in the context of the rules included in the Agreement on Fisheries Subsidies, due to their focus on unequivocally alarming situations. But the broader nature of the new disciplines currently under negotiation has led developing country members to be more vocal in calling for exemptions from the main prohibition of subsidies that contribute to overcapacity and overfishing.

Many developing country members argue that they must protect the livelihoods and employment of poor fishing communities and develop their fishing fleets to ensure a fairer distribution of the benefits extracted from fishing among nations. Other members insist that if exemptions from the disciplines are excessively broad, they could undermine the effectiveness of the rules, to the detriment of everyone whose livelihoods rely on the sustainability of marine resources.

Among the top 20 subsidizers, 13 are developing country members and, together, they provided about 55% of global subsidies.

One complicating factor regarding SDT in the context of rules on fisheries subsidies is that some of the largest fishing nations and subsidizers in the world are developing countries. Among the top 20 subsidizers, 13 are developing country members and, together, they provided about 55% of global subsidies.** More broadly, however, many developing countries provide very limited amounts of subsidies, if any. SDT provisions thus need to take this high heterogeneity into account.

Generally, the temporary and permanent exemptions from the main prohibition that members are considering remain quite similar to those that were discussed ahead of MC12 in this area. They include a temporary exemption for subsidies that developing country members provide to fishing in their domestic exclusive economic zone (EEZ) or under the competence of a regional fisheries management organization (RFMO), as well as a permanent exemption for subsidies to artisanal fishing—“low-income, resource-poor, and livelihood” fishing, to be precise. Full exemptions from the main prohibition for least developed country (LDC) members and members that are small fishing nations (and/or small subsidizers) are also among the proposed provisions.

This combination of possible exemptions can be seen as an attempt to tailor the flexibilities to members’ different roles in global fishing and to different kinds of fishing activities. The EEZ and RFMO flexibility that covers all developing countries exempts a large share of global catch, fishing effort, and subsidies from the application of the rule, but it is only temporary. On the other hand, exemptions for small-scale fishing, small fishing nations, and LDC members apply permanently, but cover much smaller shares of global catch, effort, and subsidies.

Can WTO Members Do It Again?

WTO members have made progress in defining the broad contours of their collective answer to these questions since negotiations resumed in early 2023. But they must make decisions if they want to conclude this “second wave” of negotiations by adopting additional disciplines on subsidies that contribute to overcapacity and overfishing at MC13.

The question is whether members will show the necessary political will and flexibility to converge toward each other and find a landing zone that, by definition, will not be anybody’s ideal solution. To do that, they will need to recall what enabled conclusion of the first part of the agreement: the capital importance of this common endeavour for both the marine environment and the hundreds of millions of people worldwide whose lives directly depend on it. WTO members did it once; there is no reason they cannot do it twice.

To read the full policy analysis as it appears on International Institute for Sustainable Development’s website, click here.

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For a number of overlapping reasons, today’s industrial policy seems different from policy in the past. It is often forcefully pursued by major highincome industrial economies, including the United States, the European Union, and Japan, as opposed to emerging economies. China’s use of industrial policy is both motivating these new users—sometimes to deploy industrial policy themselves, sometimes to defend their economies from China—and driving some of the associated WTO challenges. Today’s industrial policy objective is also often less about learning for the first time how to competitively produce a good or acquire the necessary technological absorptive capacity to do so, which is what often motivated past infant industry policies for developing countries. Instead, the objective appears aimed at returning parts of a supply chain for industries ranging from semiconductors to personal protective equipment (PPE) that were once present but that have since been offshored.

Industrial policy today is also sometimes motivated by objectives other than increasing firm-level productivity or generating spillovers to other sectors and thus enhancing national economic growth. Instead, industrial policy is aimed at diversification in the name of supply chain resilience, fear over the weaponization of exports by trading partners, maintenance of technological supremacy, or the desire to offer future policymakers more control over economic activity in response to expected shocks. In the presence of cross-border supply chains, some governments are seeking to coordinate their industrial policies with key partners, as opposed to implementing everything at the national level in an attempt at reshoring. Overlaying other considerations is the existential threat of climate change, an important driver behind many modern industrial policy initiatives.

To explore these interrelated motivations for today’s industrial policy and its numerous implications for the WTO, this paper is organized as follows. The next section briefly introduces the historical economic approach to industrial policy, borrowing from Harrison and Rodríguez-Clare (2010). The starting point of this literature is typically market failures, developing countries, and how industrial policy can improve firm-level productivity growth and possibly national economic growth.

Section 3 turns to the dominant economic framework motivating the WTO. It draws on Bagwell and Staiger (1999, 2002) as well as key WTO rules and the role of enforcement. The WTO is interpreted as providing an institutional setting for large countries to coordinate policies and set rules on behavior to neutralize the international externality implications of their actions and solve a prisoner’s dilemma problem. This section also explores the economic understanding of current subsidy rules with implications for industrial policy. It describes unease with the evolution of those rules, gaps in knowledge, and important data and measurement shortcomings.

The subsequent two sections form the heart of the paper. They introduce four areas in which modern industrial policy has emerged as a major issue for the WTO. Section 4 tackles the myriad challenges introduced by China. Section 5 examines areas of supply chain resilience, supply chain responsiveness, and climate change. The four issues are not cleanly separable; the last three are independent areas of concern, but China plays a critically important role in each. The last section concludes by motivating the need for further economic research.

Chad P. Bown is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics.

To read the abstract published by the Peterson Institute for International Economics, click here.

To read the full working paper, click here.

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