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The free trade system thrust into chaos

Published: 01 Dec. 2024, 19:55 Updated: 01 Dec. 2024, 22:31

Kim Doo-sik
The author is CEO of the Tech & Trade Institute and a lawyer.

Donald Trump’s return to the White House after four years portends a ruthless implementation of the ‘America First’ policy, as implied by his nominations of hard-line trade protectionists and hardcore loyalists for key Cabinet posts during his second term. The maverick’s re-election will surely thrust the world economy back into the chaos and confrontation before World War II. With his dreadful comeback, the free trade system — the backbone of the global economic order over the past three decades — will likely be pushed to the sidelines.

The multilateral free trade system led by the World Trade Organization (WTO) has so far contributed to the prosperity of the global economy. Many countries escaped poverty through trade. According to the WTO’s World Trade Report 2024, the average per capita income of countries around the world increased by 65 percent from $7,050 to $11,570 between1995 and 2023. The per capita income of middle- and low-income countries nearly tripled from $1,835 to $5,337. Korea also owes its elevation to the world’s sixth largest exporter in 2022 to the free trade system.

But the WTO’s leverage began to weaken after clashing with the United States under President Trump. The multilateral trade system now faces an existential threat. During Trump’s first term, U.S. Trade Representative Robert Lighthizer collided with the WTO on nearly every issue. He claimed that the WTO had ruined the United States. Washington started to undermine the WTO’s dispute settlement function by blocking the appointments of its Appellate Body members — and even imposed tariffs that violated the WTO rules.

The protectionist trade policy to be pushed during Trump’s second term is even harsher than in his first term. On top of the 10 to 20 percent universal tariff, Trump warned he would impose all conceivable tariffs, including a 60 percent tariff on Chinese goods and a 200 percent tariff on Mexican cars. Moreover, Trump will likely deprive China of its “most favored nation” status. Since the status is a cornerstone of the multilateral trade system, scrapping the special treatment of China signifies a denial of the existence of the WTO trade system itself.

Trump’s deep-rooted hostility toward the WTO originates from his perception that the United States is a victim of free trade. He believes the country suffers a massive trade deficit due to free trade. As of 2023, the U.S. trade deficit was $773.4 billion. The amount decreased from 2022, but is still large. Moreover, several regions and classes have suffered critical damage from free trade, as seen in the reduced income of U.S. manufacturing workers affected by competition with China and dwindled exports from “Rust Belt” states like Illinois, Michigan and Wisconsin. These palpable factors set the basis for Trump’s protectionism and his denial of the free trade system.

Another reason for Trump’s entrenched antipathy toward the WTO is his anger at the institution’s lethargic response to China’s anti-market practices and rule violations. After China joined the WTO in 2001, the West, including the United States, expected it to become a member of the market economy. But China took control of global supply chains by providing huge subsidies to local companies and maintaining state capitalist policies. Though the WTO couldn’t rein in China’s repeated off-track practices, China’s voice grew stronger under the multilateral system. That forced Trump to start to undermine the function of the WTO amid geopolitical competition with China.

Under such hostile circumstances, the WTO’s free trade system cannot play its past dominant a role in the global economy. Even without the checks from the United States, the free trade system had its own limits and contradictions. As a result, the influence of the WTO had been waning.

First of all, the WTO’s negotiating function already reached its limits. If it can resolve new global economic challenges through its new norms, the WTO can prove its raison d’être. However, except for its recent successes in limited areas — such as the waiver of patent rights for Covid-19 vaccines — the WTO has failed to strike more meaningful trade agreements, as effectively evidenced by the botched Doha Round after 14 years of negotiations since 2001 to make globalization more inclusive by lowering trade barriers. More recently, the WTO Agreement on Fisheries Subsidies just collapsed in February due to India’s opposition after seeking to regulate each country’s fisheries subsidies that can threaten the survival of developing countries heavily reliant on fishing.

Even the so-called “multilateral agreement” among WTO member countries — which was proposed to overcome the limitations of the WTO’s unanimity rule — is set to fall through. The Investment Facilitation for Development (IFD) Agreement recently agreed on by 128 WTO members was not adopted as a WTO agreement due to oppositions from India, South Africa and Turkey, who don’t accept the concept of a “multipartite agreement” within the WTO. It won’t be easy to draw a unanimous agreement among 166 WTO members with drastically different ideologies and interests. A trade system that fails to create new norms in tandem with changing times will be pushed out of the center of the global economy.

Another problem with the WTO is its paralyzed dispute settlement function. In the past, thanks to the “rules-based,” predictable and open multilateral system, each country could access the global market based on mutually-benefiting trade rules — and even feeble countries could be protected from powerful countries’ unilateral trade policies thanks to the WTO’s strong law enforcement. But if the WTO’s dispute resolution function — the key to maintaining the rules-based free trade system — doesn’t work, the rules themselves can't be enforced.

Nevertheless, the WTO’s dispute settlement procedure has lost the power to enforce such rules on its member countries due to the ongoing crisis with its Appellate Body. For example, even if a country loses at the panel stage — equivalent to the first trial in a civil case — the country still can effectively neutralize the panel’s decision simply by filing an appeal, as there’s no judge in the Appellate Body, which is equal to the second trial. Such appeals are dubbed “appeals into the void.”

Currently, two-thirds of all judgments made by the WTO panel land at the novel appeals. A country that uses the most appeals into the void is the United States, which accounts for 38 percent of all appeals. Korea is also a victim of such appeals. In 2021, the U.S. government nullified the WTO panel’s ruling by filing a vain appeal against a ruling to correct the anti-dumping and countervailing duties the United States imposed on Korean steel and transformers by using the so-called “adverse facts available.” Other countries also follow the United States’ lead to abuse pointless appeals. For instance, Indonesia not only invalidated the panel’s ruling to lift its ban on nickel exports by filing a “vain appeal,” but also extended the ban to other minerals. India even filed a vain appeal to neutralize the panel’s ruling that its subsidies for the Special Economic Zone violated WTO rules. Ironically, it was the United States that won the case over the Indian subsidies.

WTO member countries had discussions to restore the dispute settlement function. But the United States wouldn’t agree to reinstate it because Washington doesn’t want its mighty protectionist measures to be referred to the binding dispute settlement procedure. In the end, the WTO’s free trade system is destined to become just a nominal economic order without enforcement power.

The weakened trade system will be dealt a fatal blow by Trump’s return. Most countries won’t consider WTO rules an effective tool for addressing their trade disputes — and more countries will surely judge and act based on their own short-term interests rather than respecting the rules-based trade order.

That means a dramatic shift from rules-based settlements of trade disputes to resolutions based on international power dynamics — and from judicial solutions to solutions based on negotiations between parties directly involved. Settling Korea’s trade disputes has become more complicated than ever.

Translation by the Korea JoongAng Daily staff.