Written By: Darren Morris – Corporate Finance
On February 22, 2017, the World Trade Organization (WTO) announced the end of a long story with the agreement on trade facilitation, concluded in 2013, finally able to enter into force. Criticized for its paralysis for years, finally the agreement has been ratified by a two-thirds majority of member states; thanks to the rallying of Jordan, Oman, Rwanda and Chad, this global customs agreement will finally be able to take effect.
“This is the most important reform of world trade for a generation,” said WTO Director-General Roberto Azevêdo. Consensual, the agreement is nevertheless implemented at the end of an eventful procedure. By 2014, the text had been blocked by India for months, to the point of causing worry that it would be shelved for good.
What are the goals of the agreement on trade facilitation?
Simplify and standardize customs procedures around the world, shorten delays and increase transparency are the main goals. By simplifying customs procedures around the world, global trade should be boosted. The agreement on trade facilitation is intended to tackle those multiple time-consuming and costly barriers (paperwork, opacity, queues) to the movement of goods at borders. This agreement also shows a willingness to fight corruption at the borders, a problem in many countries. Properly enforced, the purpose of the agreement is to limit to strict minimums the contacts between customer and customs, reducing the opportunities for bribes.
“The effects of this agreement on trade are potentially important because frictions are removed from the system at a limited cost,” explains Lionel Fontagné, a professor at Université Paris 1 Panthéon-Sorbonne and author of a recent note on the subject. According to WTO estimates, the cost of trade is thus expected to fall by more than 14 percent. World trade could increase by $1 trillion each year, with profits particularly high for developing countries.
For banks, the WTO role is not to be minimized.
One of its major roles is to settle conflicts when discrimination against foreign banks appears. The WTO is assessing the ways countries open their borders to foreign banks and comparing the WTO commitments of countries to their current regulatory practices towards foreign financial institutions. It checks if member countries have discriminating attitudes toward foreign banks by regulating them less favourably than domestic banks. In their studies they do indicate regularly substantial divergences between commitments and practices. The WTO is seen as being an arbiter of international trade relations.
Would the WTO’s role weaken or strengthen in the face of US President Trump’s accusations?
Donald Trump’s arrival in power in the United States threatens the whole fabric of international trade. The new White House tenant and his trade representative, Robert Lighthizer, have promised to adopt a hard line to defend American interests in the face of globalization. The Trump Administration has promised retaliation against China and Mexico. In fact, the main US criticism of the organization is related to the VAT (value-added tax) system that, according to the United States, is unfavourable to US exporters. This is because foreign countries’ producers apply VAT on their exported manufactured products, which they afterward can deduct, while US exporters do not apply VAT on their exports, only income tax. However, other experts argue that this is a complete misunderstanding of the international VAT system. Implementing a border tax on goods imported by the United States, while exempting US goods exported, would breach the equilibrium in international relations guaranteed by the WTO. The new US attitude could well increase the number of conflicts brought in front of WTO arbitration.
“The WTO regains its meaning here, not the conquering WTO seeking to increase trade liberalization, but that of the dispute settlement body whose aim is to avoid a war business,” explains Philippe Martin, a professor in the Economics Department at Sciences Po. Indeed, experts generally agree that this legal activity of enforcing international trade law has proven to be effective. Since its creation, more than 500 cases have been brought before its judges. The WTO is recognized as being able to arbitrate disputes without creating major conflicts between complainants and “condemned” countries. The WTO is responsible for preventing tensions from escalating. Therefore, contrary to the approach of putting its WTO involvement at risk, the US could use anti-dumping regulation to develop trade-protection measures—a defensive system authorized in principle but likely to trigger a series of complaints from the countries concerned.
The WTO may well be overloaded with American disputes if the United States starts to reinforce its barriers to foreign companies. And, in case the United States leaves the WTO, other member countries may feel unbound from their WTO engagement with the US.