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POSITION | EXTERNAL ECONOMIC POLICY | GLOBAL TRADE

Urgent Need for WTO Reform Strengthening the World Trade Organization (WTO) and Reinvigorating and Rebalancing the Multilateral Trading System

December 2021 Current Crisis of the WTO The World Trade Organization (WTO) is the guardian of global trade. It allows its members to agree upon and enforce transparent and reliable trade rules worldwide. However, the system is under threat by rising protectionism, disagreement regarding the way forward and discontent about its effectiveness. The WTO needs urgent reform or new conceptualization in all three pillars: otherwise, its relevance is put at risk. The 12th Ministerial Conference (postponed from December 2021) is thus of utmost importance to deliver on key multilateral and plurilateral outcomes to demonstrate that the WTO is still reliable and functional.

63 %

… of WTO Members classified as least-developed countries (LDCs) which turned in notifications more than 50% of the time.

100 %

... of WTO members classified as OECD members which turned in notifications more than 50% of the time.

This analysis was made on the basis of WTO notifications related to agriculture, Covid-19, the environment, import licensing, subsidies and countervailing measures, technical barriers to trade, sanitary and phytosanitary measures, and quantitative restrictions. This

Urgent Need for WTO Reform

BDI Recommendations: Rebalancing the Multilateral Trading System Fight Unfair Competition Caused by Subsidies and State-Owned Enterprises (SOEs) and Address Trade-Distortive Practices to Pursue a Level Playing Field Urgently reform and retool the Agreement on Subsidies and Countervailing Measures (SCM). The terms SOEs, public body, state-controlled enterprises and serious prejudice must be clearly defined in this context. German industry supports the Trilateral Initiative proposals to expand the list of unconditionally prohibited subsidies (e.g. to unlimited guarantees and subsidies to insolvent or ailing enterprises) and adverse subsidies (e.g. to those that prop up zombie enterprises and create massive manufacturing capacity). Benchmarks need to be transparent and accountable and create legal certainty. Market distortion and overcapacity through government subsidization should be avoided in all cases. The WTO Secretariat requires further resources and capacity to capture the relevant data, when necessary in collaboration with the OECD, to offer a clear picture of distortive subsidies within the membership. Introduce effective rules against forced technology transfer, localization requirements, cyberenabled theft and joint-venture requirements. Enhance Transparency and Compliance with Notification Rules Strengthen the enforcement of notification requirements and the role of the WTO Secretariat in addressing shortcomings by members as well as discrepancies between industrialized and developing country members. Here, more effective support programs, processes, and incentives are vital, including reporting on non-compliance and sanctions (such as naming and shaming, withdrawal of members’ rights, additional budget contributions). BDI supports the 2018 proposal by the EU, Japan and the U.S. to strengthen notification requirements with a particular focus on developing countries. Introduce a New Approach for Flexibilities in WTO Agreements Members should undertake commitments according to their economic weight, capacities, and competitiveness. Regularly update status or level of commitment of members according to objective criteria (e.g. shares of global trade, OECD membership, output measured in terms of added value). Apart from LDCs, flexibility should be allowed strictly on a needs basis. Core elements of an agreement should be ultimately applied by all signatories.

Urgent Need for WTO Reform

Embrace the Flexibility Allowed by Plurilateral Agreements and Bring These Forward German industry supports wholeheartedly the so-called Joint Statement Initiatives (JSI) on ecommerce, services domestic regulation, investment facilitation, trade and gender, and MSMEs. It embraces more flexible approaches, including plurilateral ones, to make progress and bring the WTO into the 21st century in terms of modern rulemaking. A clear framework is needed within the WTO besides Article X:9 to integrate plurilateral agreements and to encourage and facilitate maximum membership within them. It is important also to encourage developing and emerging economies, as well as China, Russia, and India, for example, to join the Government Procurement Agreement (GPA).

BDI Recommendations in Advance of MC12 (1) The multilateral agreement on fisheries, the first multilateral consensus in several years and an important contribution to the UN Sustainable Development Goals, (2) the JSI on services domestic regulation, a key step towards embracing the growth of services trade, and (3) the JSI on e-commerce should be concluded by the Ministerial Conference. The moratorium on customs duties on electronic transmissions should be made permanent, as new trade barriers and burdensome tariffs have negative effects on the further growth of digital trade. The dispute settlement impasse must be overcome with key progress at the Ministerial to allow critical disputes to be filed effectively and swiftly, as well as to provide the WTO with a fully functional second instance. A work plan should be agreed, if not at MC12 then shortly thereafter, addressing three critical issues: long-term reform of dispute settlement, special and differential treatment, and industrial subsidies. Work should commence at MC12 on a plurilateral level on rules on competitive neutrality that includes SCM reform and the phasing out of government-driven competitive distortions in international trade. The TRIPS system serves as our best assurance for rapid responses to future pandemic. Therefore, WTO work on trade and health must now focus on removing trade barriers and creating the necessary framework to significantly improve the availability of vaccines globally, rather than weakening patent protection.

Urgent Need for WTO Reform

Dispute Settlement under Pressure Dispute Settlement Cases at the WTO (1995 – October 2021)

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60 50 40 30 20 10 0

Source: WTO, Chronological List of Dispute Cases, https://www.wto.org/english/tratop_e/dispu_e/dispu_status_e.htm; BDI Analysis.

The dispute settlement system assures that disputes can be solved in a peaceful, structured and, by and large, not politicized manner. It is key to enforce the WTO rules and members’ obligations. The rising number of trade conflicts has led to a steep increase in dispute settlement cases. 2018 marked the year with the highest number of complaints at the WTO since 1998. However, this number has fallen since the paralysis of the Appellate Body, with only 5 new cases filed in 2020. The United States blocked the nomination of new Appellate Body members, paralyzing the important second instance of the dispute settlement system in December 2019. This has harmed the credibility of the whole WTO system. Reforming the Dispute Settlement System Unblock the Appellate Body (AB) by introducing immediate, procedural changes to address U.S. concerns (transitional rules for outgoing AB members, length of proceedings, focus of findings, issue of precedent). As long as there is no solution on the AB, the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) should see appeals through as soon as possible to offer the stopgap solution as conceptualized by the EU. The MPIA should continue to be only viewed temporarily the end goal should remain a functional second instance at multilateral level. In a second step, more substantial reforms of the dispute settlement system should be negotiated and introduced, e.g. to address the alleged AB overreach, to introduce more efficient procedures, and to increase the resources of the dispute settlement system. All reform efforts must preserve the judicial independence, the arbitration, and the binding nature of rulings.

BDI supports the proposals for modernization made by the EU in February 2021 (Trade Policy Review) and September 2018 (WTO Modernization), as well as the subsequent initiatives on transparency and reform of the dispute settlement, including the MPIA.

Urgent Need for WTO Reform

Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Editors Katherine Tepper Senior Manager, External Economic Policy T: +49 30 2028-1499 k.tepper@bdi.eu Matthias Krämer Head of Department, External Economic Policy T: +49 30 2028-1562 m.kraemer@bdi.eu

BDI Document Number: D 1477