Tariff trouble: Multilateralism in the time of unilateral trade actions

Economic Times

28-07-2025

iStock While many rue the powerlessness of the WTO, a germane question to ask is how come the multilateral trading system came to be seen as a villain or, worse still, a side actor in the saga of international trade.
As nations frantically pursue trade deals with the US, many governments and trade experts have raised concerns regarding unilateral tariffs potentially violating the Articles of the General Agreement on Tariffs and Trade (GATT), which serve as the foundation for the World Trade Organisation (WTO). The US government holds the view that the WTO regime has been unfair to their economy, and to redress the imbalance caused by trade helmed by WTO rules, the US needs tariff protection and fair market access to other countries. While many rue the powerlessness of the WTO, a germane question to ask is how come the multilateral trading system came to be seen as a villain or, worse still, a side actor in the saga of international trade.
Souring on rules based free trade
Any international body created by countries needs to reconcile the conflicting urges towards national sovereignty versus international welfare and fair play. In fact, before the founding of the WTO in 1995, there were fierce debates, especially in developing countries, about the potential surrender of economic sovereignty. A notable Opposition leader in India and ex-Prime Minister had stated at that time, 'It is the West's attempt to transgress on our sovereignty.' Prior to 1995 and later, the developed countries, including the US, led the charge in convincing developing countries that such surrender would lead to more trade and economic betterment. In the past decade, however, the US and some developing countries have openly expressed doubt about the benefits and efficacy of the WTO. The latest actions of the US government in imposing tariffs, based on its perception of national interest and negotiating strength, were waiting to happen. The current US administration only acted upon the thoughts that have been circulating for more than a decade. The fact that the dispute settlement understanding under the rules of the WTO is ineffective due to a defunct appellate body shows it up as an ineffectual organisation. Its claims to set and enforce a rules-based order for the world trade ring hollow. The consensus-based approach wherein even one dissenting member can defeat a proposal is another hurdle in effective multilateral action.
A bystander in world tradeIf one looks at the history of international organisations, the WTO's failures have parallels in the League of Nations, which was formed after the First World War. While the League of Nations was primarily a political body, less concerned with trade, its demise does hold lessons for all international bodies. Leaving aside the onerous terms of peace imposed on Germany after the First World War, the League collapsed as it depended upon the consensus of all members and did not have an enforcement mechanism for its decisions. While it is early to foretell a similar collapse of the WTO, there is no doubt that recent events have reduced it to a bystander in world trade.
The Future: A new multilateral trade regime
Even as countries negotiate with the US for 'tariff deals,' they should not lose sight of the need of reviving and strengthening a rules-based world trade order. In the absence of a credible rules-based world trade regime, disruptions like the current one can happen with unpredictable frequency. A breakdown in international trade law would create chaos and a decline in trade as well as global prosperity. It remains to be seen which countries in the world will take the initiative to build a new WTO and how far they would succeed in convincing the others. Over the years, the jurisprudence and institutional knowledge generated by the WTO, together with bodies like the World Customs Organisation, have served international trade well. They cannot be allowed to go in vain.
Examples are common standards on classification, valuation, origin of goods, agreement on technical barriers to trade, and agreements on subsidies and countervailing measures, to name a few. Even though they are not perfect tools, they have considerably reduced arbitrariness in trade governance across the world. The three pet peeves of some governments against the WTO seem to be a lack of a mechanism to set right trade imbalances, an inordinately long dispute resolution process, and dysfunction in its appellate body. Add to that the need for consensus in decision-making, which makes decisions on contentious issues a near impossibility. Yet another gap is the WTO's irrelevance in the global monetary system, components of which do impact global trade. Perhaps a reimagined multilateral trade organisation, which is much stronger and more agile and alive to its members' concerns than the WTO, is needed. The unilateral trade actions, reactions by some governments, and recent disruptions clearly underscore such a need. The writer is an independent trade expert.