A global trading system without the Russian Federation (and other autocratic states?) – what the fallout from the Russian invasion of Ukraine may mean for global trade

The unprovoked invasion by the Russian Federation into Ukraine has led to the largest group of financial and economic sanctions by a large portion of the global community in modern times. Canada has withdrawn most favored nation treatment from Russia, a move that is being followed by the EU, United States and others. Russia has been excluded from the Developed Countries Coordinating Group within the WTO, and G-7 countries (and the EU) are working to ensure that multilateral organizations like the IMF and World Bank and the European Bank for Reconstruction and Development cannot be used by Russia for loans. There are calls in some countries (e.g., the United States) to work to remove Russia from the WTO.

On March 11, 2022 two staunch supporters of the global trading system penned an article that appeared in The National Interest that raise a number of important questions including the following one —

“As the collective will grows to confront the destabilizing authoritarianism of Russia, as well as one of its strongest backers, China, what should become of the institutions that enabled their rapid integration into the post-Cold War world economy?” Rufus Yerxa and Wendy Cutler, No Longer Business as Usual at the World Trade Organization, March 11, 2022, https://nationalinterest.org/feature/no-longer-business-usual-world-trade-organization-201149. Amb. Yerxa is a former Deputy Director-General of the WTO and former Deputy U.S. Trade Representative and U.S. Ambassador to the GATT. Ms. Cutler is a former Acting Deputy U.S. Trade Representative who was deepely involved in the Trans Pacific Partnership negotiations for the United States and is the Vice President and Managing Director of the Asia Society Policy Institute. Both are lifelong supporters of a global trading system and the rule of law. The answer to the question posed appears in the next to last paragraph of the article.

“Indeed, the current crisis may lead the United States and like-minded members to chart a new trade future outside of the WTO framework, not necessarily abandoning the WTO entirely, but creating a new multilateral structure with deeper commitments among countries dedicated to free-market democracy. This may be the only leverage available to change the status quo.”

The article is surprising considering the authors but reflects the evolving concerns of many former trade negotiators that the global trading system is not functioning well because of the non-market economic system of some (particularly China) and now the unacceptable actions of the autocratic state of the Russian Federation. For example, in 2020 I reviewed an article by a former director general for trade for the European Commission that argued for the need for countries to leave the WTO and set up a separate multilateral trading system to exclude China since China was not moving to a market economy. July 25, 2020:  A new WTO without China?  The July 20, 2020 Les Echos opinion piece by Mogens Peter Carl, a former EC Director General for Trade and then Environment, https://currentthoughtsontrade.com/2020/07/25/a-new-wto-without-china-the-july-20-2020-les-echos-opinion-piece-by-mogens-peter-carl-a-former-ec-director-general-for-trade-and-then-environment/.

Many commentators, including me, have written on the need for a new trading order among countries with similar economic systems. See, e.g., March 31, 2021:  “Blowing up the trading system” — Clyde Prestowitz’s suggested way for the world to move forward in light of China’s economic system, https://currentthoughtsontrade.com/2021/03/31/blowing-up-the-trading-system-clyde-prestowitzs-suggested-way-for-the-world-to-move-forward-in-light-of-chinas-economic-system/; January 16, 2022:  Is it time for a new approach to bilateral trade with China?, https://currentthoughtsontrade.com/2022/01/16/is-it-time-for-a-new-approach-to-bilateral-trade-with-china/.

One possible approach to a parallel system with more ambitious and current rules among largely market economies would be an expansion of the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) to include the United States and European Union (neither of which has a current application — the U.S. having withdrawn under the Trump Administration) with acceptance of current applicants other than China. A former European Commissioner for Trade advocated the EU and US joining the CPTPP in an article for the Peterson Institute for International Economics in January this year. See Cecilia Malmstrom (PIIE), The EU should use its trade power strategically, January 4, 2022, https://www.piie.com/blogs/realtime-economic-issues-watch/eu-should-use-its-trade-power-strategically (“The European Union should also seek to enter the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and convince the United States to do the same. The European Union already has agreements with most members of the CPTPP, but an FTA would signal the European Union’s readiness to strengthen global trading rules with its partners.”). Considering China’s record at the WTO and its coercive practices against some of the CPTPP members, it is hard to understand how the CPTPP members can accept China as a member in the coming years.

While neither the United States nor the European Union are looking to abandon the WTO, the Russian invasion of Ukraine is creating enormous tensions for many Members in dealing with the Russian Federation within the WTO, and there have been growing concerns about the inability of the WTO system to address the massive distortions to global trade created by the Chinese economic system. Reform at the WTO is difficult and typically requires consensus of existing Members. This presumably dooms reforms needed to bring China’s system into alignment with WTO principles including market orientation. While Members can decide to suspend most favored nation treatment, there is no obvious path to removing Russia as a member. Thus, continued challenges at the WTO are likely to continue in the months and years ahead.

The article last week from Amb. Yerxa and Ms. Cutler points to the growing concern about the survivability of the current system with rogue states like the Russian Federation and non-market economic actors like China. As the article concludes, “Responsible global leaders now confront a troubling reality: the old notion that countries who trade together are less likely to go to war has been laid to rest on Ukrainian soil. It can no longer be business as usual at the WTO.” What the current war in Ukraine means for the WTO remains unclear. The coming months will likely provide answers to the continued relevance of the WTO and the need for a separate system for democratic, market economies.

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