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The director-general of the World Trade Organization has warned that bilateral tariff deals between the US and other countries could damage a core principle of trade equality.
In an interview with the Financial Times at the end of a visit to Tokyo this week, WTO chief Ngozi Okonjo-Iweala said global trade was in a “crisis” despite the recent de-escalation of a tariff war between the US and China.
Japanese officials have privately expressed concern that a hastily negotiated US-UK trade agreement sealed this month could encourage countries to consider expediency driven bilateral deals that challenge the “most favoured nation” equality principle underpinning the WTO system.
Asked if a pattern of such deals would damage that principle, Okonjo-Iweala said that there was such a risk.
“That is why we’ve said to WTO members who are making these negotiations bilaterally that they should aim to be as WTO-consistent as possible,” she said, adding that despite recent tensions, 74 per cent of the world’s goods trade was still conducted on MFN terms.
Under the MFN concept, countries must offer the same tariff rates to all countries unless they are reduced via a bilateral trade deal that covers “substantially all trade” — which the UK-US pact does not.
Okonjo-Iweala said that although tensions between the US and China appeared to have eased since Beijing and Washington agreed a tariff truce at the weekend, the preceding spectacle of the world’s two largest economies imposing tit-for-tat tariffs in excess of 100 per cent would reverberate across the global economy.
“When you see this decoupling, and if countries start to align with one side or another, that’s fragmentation. And we have shown that that could lead to a 7 per cent drop in real global GDP in the longer term, which is worse than the hit on global GDP during the 2008-09 financial crisis,” she said.
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The WTO should accept that large disruptive forces had hit world trade and should look at the reasons, including interrogating why the US had acted as it had and what aspects of the trading system needed to change, Okonjo-Iweala said.
“We must not waste this crisis,” she said.
“One of the silver linings in this whole crisis is that [WTO] members have come repeatedly to say how much they now value the system, . . . and had actually taken it for granted,” Okonjo-Iweala said. “You know sometimes like the air you breathe. You go to the store, you find the things you want, but now they’ve come to value the system.”
