The World Trade Organization was created with fanfare 30 years ago to complete a triad of global economic institutions (along with the International Monetary Fund and the World Bank) envisioned by postwar internationalists. Yet within a few years of its founding – long before the first election of the protectionist-minded Donald Trump – the organization was aging badly. The next four years may well determine if it survives as a working entity at all.

This pronouncement might sound a bit dramatic. But some drama is appropriate in describing the rapid erosion of the WTO, and with it the rules-based international trading system. The breakdown is evident in three ways: the failure of the WTO to conclude new agreements to advance economic integration, the downfall of the WTO’s dispute settlement system, and the blatant violation of WTO rules by leading trading nations. Simply put, signatories to the WTO agreement now just do what they want regardless of the rules. If the international trading system can be viewed as a dynamic balance between rules-based and power-based approaches, the past decade has seen a decided tilt toward the latter.

The circumstances that have led to the WTO’s breakdown reflect a complex pattern of geopolitical strains. At the top of the list is the increasingly open rivalry between the United States and China on a host of fronts. But even if the two superpowers just decided to beat their swords into plowshares, other sources of conflict would remain. Among them: an inclination to bypass or ignore the WTO rules by individual countries in order to promote the green transition or to gain technological advantage, and the rise of economic nationalists who give short shrift to the idea of mutual gains from trade.

To be sure, the responsibility for some of the damage to the system lies within the WTO itself – in particular, in the organization’s inability to deal with behind-the-border actions that can greatly influence trade flows, along with a few unfortunate decisions by WTO adjudicating bodies that have undermined its own authority. However one parses responsibility, though, there’s no doubt that the WTO-led march toward ever-more-open trade is over. To understand how we got here and why, it’s worth a brief trip down memory lane.

The Origin Story

Why do we need any multilateral trade agreement or international organization to oversee the trading system? With rare exceptions, international trade is beneficial to the participating countries. But enterprises investing billions in global markets need certainty that the rules of the competition won’t favor one country over another and won’t shift rapidly with the tides of geopolitics.

The importance of trade to collective prosperity (especially for smaller, less diversified economies) and the necessity of playing by mutually agreed upon rules was made abundantly clear in the 1930s. The impulse to protect domestic producers during the Great Depression produced tit-for-tat trade barriers, undermining the efficiency that comes from specialization and driving lagging economies ever deeper into depression. Fortunately, internationalist- minded policymakers and businesses in the United States, who effectively ruled the global economy after the destruction of Europe and much of Asia in World War II, were determined to prevent a return to beggar-thy-neighbor policies and to establish a new global economic order more resistant to shocks.

At the Bretton Woods conference in New Hampshire in 1944, the UK and other allied countries followed Washington’s lead, creating the International Monetary Fund to function as an international lender of last resort and the World Bank to mobilize funds for reconstruction and development. Then in 1947 the market-oriented democracies (again under Washington’s leadership) created the General Agreement on Tariffs and Trade (GATT) to establish transparent rules for trade and to gradually reduce tariffs. The rules would provide much-needed stability to global trade policy, and the initial negotiations led to a sizeable reduction (approximately one-fifth) in trade-inhibiting tariffs.

A cornerstone of the new system was the principle of nondiscrimination. Every signatory to the GATT was entitled to the same tariff treatment as every other – in the jargon of the day, most-favored-nation treatment. In essence, the GATT framers imposed on all participants the obligation to treat all imports that had paid their ticket to entry (tariff) as if they were domestic goods. This obligation also ensured that the value of negotiated tariff reductions would not be eroded through subsequently imposed behind-the-border measures – say, discriminatory health and safety inspections.

Other rules dealt with “contingent protection” – exceptions to anti-discrimination regulations. GATT members could raise their agreed tariffs only if they could show that the foreign producer in question (a) had been subsidized at home or (b) had “dumped” its goods – that is, charged a lower price in foreign markets than at home – or (c) had flooded the market with surges of exports.

Now, the GATT was an initial step in what was supposed to be a larger project, the International Trade Organization. The ITO was probably too ambitious an undertaking. It dealt with a wide range of other issues – commodity price stabilization, economic development, employment regulation, competition policy and more – with vague commitments to win broad acceptance. The ITO negotiations were concluded, but the Truman administration soon scuttled the venture in anticipation of Congressional opposition.

In retrospect, this was likely a fortuitous development. The sprawling ITO agenda and large membership would likely have impaired the effective functioning of the institution, and in the process threatened the GATT’s ambitious plans to dismantle the barriers to trade that had slowed recovery from the Great Depression.

The GATT did survive as a small, focused operation that conducted successive negotiating rounds to whittle away at tariffs. The initial “Geneva Round” in 1947 was followed by a few rounds of lesser importance. The GATT gained momentum again with the Kennedy Round of the 1960s, which provided the first serious dent in the principle of most-favored-nation by opening the door to special treatment for developing countries, and the Tokyo Round of the 1970s, which among other things tackled protectionism in behind-the-border policies.

The process of dismantling the trade barriers erected during the 1930s was slow. But negotiations did succeed in reducing tariffs in Western Europe and North America from an average of about 20 percent in the 1950s to about 5 percent by the 1980s. And there is every reason to believe that these tariff reductions contributed to the expansion of trade, fueling rapid recovery from World War II in much of the world.

The Uruguay Round

The Uruguay Round of trade negotiations, which began in 1986 and concluded eight years later, was even more important than its predecessors. The negotiations created the WTO, which was designed to remedy the shortcomings of the GATT system – among them, the nonparticipation of many countries, the incomplete coverage of tradable products and services, the weakness of the rules governing dispute resolution.

Previous GATT rounds were mainly negotiated among the United States, the European Economic Community (precursor to the EU), and to a lesser extent, Japan. For the most part, developing countries were not participants in the tariff bargaining and were exempt from many of the rules. Yet by the 1970s developing countries were increasingly important participants in world trade and could not stand apart from the rules and the lower tariffs that others had agreed to. Consequently, the Uruguay Round included many developing countries – in particular, India and Brazil – as equals.

Another limitation of previous negotiations was their focus on tariffs on manufactured goods to the neglect of other areas of trade. The Uruguay Round remedied this by addressing trade in textiles and apparel (eventually dismantling global export quotas established in the Multi-Fiber Arrangement of 1974), limiting trade-distorting subsidies in agriculture, and beginning the process of establishing rules for trade in services.

The agreement on the protection of trade-related aspects of intellectual property (aka TRIPS) was particularly controversial, as the interests of developed and developing countries were at odds. The final compromise reflected the views of countries other than the usual suspects (the U.S. and EU) to include India and Brazil. New rules regarding the use of protectionist measures in self-declared emergencies were successfully negotiated. They banned measures such as voluntary export restraints, which developing and newly industrialized countries opposed.

A further shortcoming of GATT was its lack of a binding dispute settlement system. If a dispute were to arise over the application of rules, countries could refuse to participate in the proceedings with no consequence. Under the new system created during the Uruguay round, a trade complaint would automatically trigger the establishment of a panel that would decide whether the alleged offending country was deemed in compliance. The ruling could be appealed but was otherwise binding on the participants.

This marked a big improvement over the old GATT system, which allowed miscreants to block enforcement of rulings against them. In addition, the Uruguay Round largely ditched the Tokyo Round approach of “GATT à la carte,” in which countries could pick and choose among GATT obligations, in favor of a “single-undertaking,” in which countries had to adopt the whole package. Finally, the GATT was formally replaced by the WTO, which oversaw legacy GATT provisions along with new agreements (services, agriculture, intellectual property, etc.) and the dispute settlement system.

A lot more than nomenclature changed here: the scope and seriousness of the commitments were much greater under the WTO. And the benefits of being part of this system seemed so great that almost every trading country, including China, wanted to join. (The WTO now has 166 members.)

Cracks Emerge

The WTO continued from where the GATT left off, and world trade flourished in the 1990s and into the 2000s. A recent meta-analysis concluded that the WTO has increased trade by somewhere between 38 and 54 percent, although the effects vary a lot among sectors and countries. Without doubt, rising trade has contributed to income growth and the rapid fall in extreme poverty worldwide.

It shouldn’t be surprising, then, that the WTO was viewed as a great success in its first decade. Although it did not reach any new agreements of importance, global trade was growing and the dispute settlement system seemed to work extremely well. Countries routinely brought cases and waited for outcomes rather than retaliating unilaterally against perceived rulebreakers. Countries generally complied with WTO rulings when they lost cases, and adherence to WTO rules was considered the norm. Indeed, the dispute settlement mechanism worked so well in defusing trade disputes that it was hailed as the “crown jewel” of the world trading system.

Yet some observers, and even some of the original negotiators, worried that countries had tried to accomplish too much in creating the WTO. While appreciating that the organization was a much stronger system than the rigid – overly fixated on rules and judicial solutions to trade disputes, tackling too many thorny issues (particularly intellectual property) where an international consensus was elusive, and so forth. By the same token, they were worried that the organization was simply too large to adapt to change quickly.

The first indication that not all was well was the failure of new WTO negotiations. In 2001 the Doha Development Round was launched with an ambitious agenda focused on the concerns of developing countries. But after more than a decade of chatter, it led nowhere. The biggest point of contention was agricultural subsidies. And while technically the round is still alive, no one seriously thinks a constructive conclusion is possible. Major trade negotiation rounds may be a thing of the past.

In fact, in the 30 years since its creation, the WTO has yet to reach a single important agreement that all countries accepted. There have been some accords among subsets of members. But the WTO has failed to reach a consensus even on such a basic (and relatively small) issue as fishery subsidies. There are just too many countries around the table and the issues are too contentious to expect universal agreement.

But don’t lose sight of the reality that even if the WTO has not managed forward progress, the dispute system did keep existing agreements intact. Many – though hardly all – conflicts were resolved by dispute panels.

The first problem was that in many cases, the panel reports that set forth the issues of the case were not persuasive. Negotiating texts are by definition compromises that leave some wiggle room for interpretation. The texts do not always demand firm commitments and often lack clarity as to what the negotiators were actually aiming at. Instead, in an effort to avoid deadlock, they often rely on “strategic ambiguity.”

WTO panelists would sometimes go beyond the letter of the agreement. Scholarly venues, like the American Law Institute’s annual forum, often pointed to the lack of transparent methodology in reaching decisions. Unhappy stakeholders sometimes flat-out accused panels of inventing obligations.

Notably, the United States was one of the first countries to complain that its antidumping laws were subject to unfair scrutiny and often struck down on technicalities. In the absence of specific language in the rules supporting one side or another, WTO panels could have sent particularly thorny questions related to dumping back to the negotiators. They did not.

This assertion of power did not go down well with the trade bureaucracy in Washington. Even the Obama administration, which put a premium on multilateral cooperation, became increasingly frustrated with the WTO and blocked the appointment of a new member to the Appellate Body, which reviews panel decisions. The first Trump administration generalized this practice, effectively putting the entire dispute settlement system on hold. As the Appellate Body withered from seven members to two (less than the requisite quorum), losing parties at the panel-stage could always “appeal into the void” and thus deprive panel reports of any binding legal significance.

Yet another complaint often heard (primarily) in the United States by the mid-2010s was that China was not adhering to either the spirit or the letter of its WTO commitments. Some openly regretted the admission of China to the WTO without putting in place clearer safeguards against abuse. Whether due to currency manipulation, aggressive industrial policies that created hidden subsidies through the banking system, or forced technology transfer from foreign investors, there was a sense that China was not playing by the same rules as other WTO members.

So between lack of substantial negotiating success over the past 30 years and ongoing clashes over the judicial functions of the WTO, nobody was happy with the institution by 2017 when President Trump began his first term. Trump subsequently imposed tariffs on various Chinese goods, as well as on imported steel made in much of the world, ostensibly on grounds of national security. Not only did Washington thereby flout the WTO rules, Trump did not hide his contempt for the organization, openly wondering whether the United States should withdraw from the agreement.

Trump did not withdraw during his first term. And President Biden certainly adopted less adversarial rhetoric. But the Biden administration did not make a serious effort to redress the crisis created by the lack of a quorum in the WTO’s Appellate Body that has paralyzed the organization.

Does the WTO have a Future?

The WTO’s current woes may lie as much with the structure of the system created back in 1995 as with the loss of its champions among both Republicans and Democrats. Several analysts, including Claude Barfield (American Enterprise Institute), Richard Baldwin (Graduate Institute, Geneva) and the late Sylvia Ostry (a Canadian trade negotiator), have argued in different ways that the WTO suffers from a trilemma: it has three objectives, but only two of the three are attainable simultaneously. The objectives: uniform rules, strong dispute settlement capacity and governance by consensus. But if the goal is to have uniform rules and strong enforcement, it will be difficult to gain consensus. If we prize consensus, we can either have uniform rules with loose enforcement or strong enforcement with looser rules. In other words, the WTO was set up to fail.

As if the structural problems were not enough, the WTO was created in a world enjoying relatively benign geopolitics – a world that no longer exists. In the early 1990s with the end of the Cold War, the “Washington Consensus” of rules-based markets and limited government intervention was … well, the consensus. The world was in a unipolar moment: the United States was the unchallenged superpower, while China was preoccupied with economic growth and Russia was trying to stay in one piece.

But after the China Shock – the explosive growth of Chinese exports that led to regional and sectoral dislocation in the U.S. – and the global financial crisis of the mid-2000s, the economic relationship between the United States and China began to sour. After consolidating power, Xi Jinping reverted to a system of greater state control and economic policy subordinated to nationalist goals. Diplomatic tensions largely remained below the surface until the Trump administration started a trade war with China, imposing tariffs and effectively declaring that the WTO was unworkable as long as China was a member.

So this is where we are: structural problems compounded by new geopolitical realities have rendered the WTO impotent. And it is very difficult to imagine a path forward while the geopolitical competition between the U.S. and China simmers on. Even if the world’s two largest economies do decide to cooperate on some fronts, it is unlikely they will see eye to eye on trade. The assumption that accession to the WTO would inexorably draw China into the community of marketbased economies no longer seems convincing.

In any event, the structural problem alluded to earlier would still be with us even if China decided to play nice. With the return of multipolar geopolitics, no one country can finesse the trilemma by offering leadership that other countries feel compelled to follow, and it will be very difficult to achieve consensus among so many countries with disparate interests.

But even if the WTO formally went out of the business of trying to further integrate the global economy, perhaps the rules-based dispute settlement system could be resurrected. This would require reforms, though, and none of the key member-countries seem especially motivated to change the system in ways others would find acceptable. In any case, what would be the purpose of a functioning dispute settlement system without a consensus on the goals of the organization?

The GATT worked well as a community of like-minded countries (market-oriented democracies) under U.S. leadership. The WTO worked well in the brief unipolar moment (roughly 1995-2005) when the United States was dominant and geopolitics was in abeyance. Those conditions no longer exist.

Reality Bites

With Trump again in the White House, the outlook for the WTO (which was hardly good under Biden) is dire. Indeed, it makes sense to start asking what would happen to trade if the United States dropped out.

If the WTO is (formally or informally) put out of its misery, countries seeking trade order will have to do so on a plurilateral basis. One model: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which was deep-sixed by Trump in 2017 apparently because it had been negotiated by the Obama administration. With no overarching system in place, stable rules for trade would have to be hammered out among competing trade blocs.

Such a change would result in some fundamental shifts in international flows of goods, services and investment, but it would not necessarily nullify all the gains from decades of rules-based trade. Many businesses need access to international markets to survive, let alone thrive, and that domestic pressure would almost certainly prevent a race toward an autarkic bottom. But these changes would certainly reduce global income, and arguably most important, undermine the prospects for breakout growth in low- and middle-income countries.

Alas, we are not far from this point. The WTO does not legislate rules anymore, and its capacity to adjudicate with the rules nominally in place is limited. For now, there are only modest signs of the negative impact of deglobalization initiatives. For now …

Perhaps the best outcome for the WTO, then, is to stay away from the front lines, preserving some of the dispute settlement capacity for countries (and multinational businesses) that put stability over the short-term gains from defying the rules. There’s precedent here: in 1990, when the Uruguay Round trade liberalization negotiations deadlocked, economist Lester Thurow famously declared that the GATT (and any multilateral rule-based system) was dead. In fact, the GATT was simply resting, and the WTO soon replaced it.