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11 August 2021

World trade during COVID pandemic, trade protectionism and deadlock in the multilateral trading system: Quo vadis?

Source: Ukrainian Law Firms 2021

The COVID pandemic has hit the economies of many countries around the globe. According to the IMF’s estimates, as of January 2021 the global economy contracted by 3.5 per cent in 20201. One of the first victims of the crisis was International Trade. In April 2020, the WTO forecast that world trade would fall by between 13 and 32 per cent in 20202. Luckily, the worst-case scenario did not occur. Moreover, the decline in 2020 was even less severe than projected under the optimistic scenario. In October 2020, the WTO estimated a 9.2 per cent decline in the volume of world merchandise trade for 2020, followed by a 7.2 per cent rise in 20213. Thus, the global recovery seems more robust than it was feared, but the current situation has still impeded trade in goods and services quite severely.

Trade in goods

With the start of the COVID pandemic, many countries introduced export prohibitions or restrictions to mitigate critical shortages of these products at national level. The products covered by the export restrictions mostly included medical supplies (face masks and shields), pharmaceuticals, medical equipment and some foodstuffs4. Export bans are generally not allowed by WTO-covered agreements. However, the measures adopted during the COVID pandemic may be carved out from the general rule. In particular, WTO members can introduce export prohibitions or restrictions on a temporary basis ‘to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting [Member]’ (Article XI:2(a) of the GATT 1994). Nevertheless, one of the main challenges for business from the very beginning of the COVID pandemic was the lack of transparency and high degree of uncertainty: export restrictions were being implemented by governments on a daily basis, and in many cases it was unclear which country introduced which measures5. At the moment, the situation is more stable and, according to WTO estimates, around 40 per cent of COVID restrictive measures had been removed by mid-October 20206. At the same time, as observed by the WTO Secretariat, one of the highest risks for the global economy after the pandemic would be a descent into protectionism7.

Trade in services

Trade in services has been also affected by the COVID pandemic. According to estimates by the WTO Secretariat, the decline in trade in services has been at least as strong as the fall in merchandise trade8. For instance, trade in services remained depressed, down 17 per cent year on year in September 2020 after registering declines of 23 per cent in July and 22 per cent in August compared to the same months in the previous year9. The impact varies across different services sectors and modes of supply. The most affected services sectors are those that depend on physical proximity between suppliers and consumers (such as tourism, artistic, recreational, transportation, construction services, etc.)10. Tourism is the most affected sector due to lockdown measures and travel restrictions, and the contraction for 2020 is expected to be around 70 per cent11. At the same time, various services sectors (including retail, health, education, business services) have reoriented to the online format and remained unaffected by the COVID pandemic or even seen increases.

Support measures in response to the pandemic

According to WTO estimates, in response to the pandemic, governments implemented an unprecedented number of general economic support measures (over 1000 in total), collectively worth several trillion US dollars. The number and variety  of  COVID-support  measures  is  greater  than  was  implemented during the 2008-09 global financial crisis. For example, in response to the pandemic, the US Congress adopted the COVID-19 Aid, Relief and Economic Security Act, which is ‘a USD 2.1 trillion fiscal stimulus package, inter  alia, providing loans businesses, direct payments to lower and middle-income individual taxpayers, unemployment insurance, and tax deferrals’12. As notified by various governments to the WTO, these measures are of a temporary nature and were designed to prepare the ground for the post-pandemic economic recovery13.

The sectors covered by the support measures include the most heavily-affected sectors of the economy, like health, aviation, tourism, catering, cleaning and security, agriculture, fisheries, etc14.

Potentially, some COVID-support measures may be qualified as subsidies under WTO law. In the event that a subsidy causes adverse effects to the interests of other WTO Members (as the case may be here if we take into account the number and variety of measures), it is ‘actionable’ (i.e. challengeable before the WTO Dispute Settlement Body) and must be withdrawn or its adverse effects removed. Moreover, the affected domestic industry could initiate anti-subsidy investigations and request the application of countervailing measures.

As to Ukraine, no COVID support measures were communicated to the WTO as of the time of writing (March 2021)15.

The trade protectionism and multilateral trading system

It should be noted that a slowdown in world trade was evident even before the COVID pandemic began. In 2019, due to rising trade tensions and weakening economic growth, the volume of world merchandise  trade  declined  for  the  first  time  since  the  financial  crisis  of  2008-200916. At that time, businesses around the globe were already facing an unprecedented and turbulent trade environment, as more and more governments were introducing various protectionist measures to close their internal markets and decrease import flows (such as active use of trade remedies and invocation of national security exceptions as justification of import restrictions).

The same is relevant for the WTO. The crisis of the multilateral trading system began well ahead of  the  COVID  pandemic.  US trade policy under the Trump Administration was the major trigger. Starting from mid-2017, the US has been blocking the appointment of Appellate Body members. Due to the position taken by the US, all seven seats of the Appellate Body remain vacant at the moment.

WTO disputes are settled through adjudication, involving examination of a case by panels and, if applicable, by the Appellate Body. Since the effective paralysis of the appellate stage, the key problem is not the absence of the Appellate Body per se. The danger is that the  ‘losing’  party  is  now  able  to  ‘appeal  into  the  void’  —  to  the  nonexisting Appellate Body and, thus, easily block the adoption of the panel’s report. No adoption means no enforcement. Thus, by appealing against a panel report, the ‘losing’ party may escape from a binding ruling and, as a result, the authorization to adopt countermeasures against it. At the moment of writing, 18 appeals remain pending: 10 appeals were pending in December 2019 when the Appellate Body became non-operational and 8 appeals were ‘appealed into the void’ by March 202117.

Quo vadis?

Notwithstanding the above, there is a little progress in the mitigation of the current crisis in the multilateral trading system.

In April 2020, WTO Members agreed on a Multi-Party Interim Appeal Arbitration Arrangement under Article 25 of the DSU(MPIA) in order to secure an appeal mechanism among the parties to this arrangement. Ukraine is among MPIA Members. The MPIA is an alternative dispute resolution mechanism. MPIA parties committed not to appeal panel reports to the nonoperational Appellate Body, but to resort to appellate arbitration under the special procedure18. Though more needs to be done and the MPIA mechanism cannot be an equivalent to the function of the Appellate Body, WTO dispute settlement is functioning. There are also hopes that the situation will change with the Joe Biden Administration, and that WTO Members will unblock the functioning of the Appellate Body.

Despite the fact that the Appellate Body became non-operational, governments still bring disputes before the WTO as there is no alternative. Some disputes have even been initiated between non-MPIA Members. In this context, the experience of the old GATT system in the resolution of trade disputes could be of guidance. The old GATT system, operating for almost 50 years, envisaged the possibility of the responding party blocking the outcome of the dispute. However, this occurred rarely due to political reasons. Currently, the situation is similar. Even though there is a risk of an appeal into the void, there are also political considerations that could prevent governments from doing so. Moreover, even an unadopted report can be used by the winning party as a negotiating tool.

The US had been also blocking the selection of the WTO DirectorGeneral. However, after the recent US elections, consensus to appoint the new head of the WTO was eventually reached in February 2021. After accession to office on 1 March, newly-elected Director-General Ngozi Okonjo-Iweala called on WTO Members to ‘do things differently’ in order to achieve necessary reforms so as to ‘keep the WTO relevant’19. Reform of the WTO is undoubtedly needed. The WTO rules were negotiated in 1980s, and they must be adapted to the economic realities of the 21st century. There are hopes that with the coming of the new Director-General the negotiation process will be accelerated and the WTO will once again become ‘a vital component of healthy global economic governance’20.

 

1 https://www.imf.org/en/Publications/WEO/Issues/2021/01/26/2021-world-economic-outlookupdate

2 https://www.wto.org/english/news_e/pres20_e/pr855_e.htm

3 https://www.wto.org/english/news_e/pres20_e/pr862_e.htm

4 https://www.wto.org/english/tratop_e/covid19_e/export_prohibitions_report_e.pdf

5 https://www.wto.org/english/tratop_e/covid19_e/export_prohibitions_report_e.pdf

6 Overview of Developments in the International Trading Environment, Annual Report by the DirectorGeneral (Mid-October 2019 to mid-October 2020), WT/TPR/OV/23, available at:  https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/TPR/OV23.pdf&Open=True

7 https://www.wto.org/english/news_e/pres20_e/pr862_e.htm

8 Ibid.

9 https://www.wto.org/english/news_e/news20_e/stat_04dec20_e.htm?fbclid=IwAR1d-_LnxvcJtzP54lKgnfsltZGWnNqcIJz7uqLxFpl5G3nz8JfpUTbbG_o

10 Overview of Developments in the International Trading Environment, Annual Report by the DirectorGeneral (Mid-October 2019 to mid-October 2020), WT/TPR/OV/23, available at: https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/TPR/OV23.pdf&Open=True

11 Ibid.

12 Overview of Developments in the International Trading Environment, Annual Report by the DirectorGeneral (Mid-October 2019 to mid-October 2020), WT/TPR/OV/23, available at: https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/TPR/OV23.pdf&Open=True

13 Ibid.

14 Ibid.

15 The list of COVID-support measures communicated to the WTO is available at:

https://www.wto.org/english/tratop_e/covid19_e/trade_related_support_measures_e.htm

16 https://www.wto.org/english/res_e/statis_e/wts2020_e/wts2020chapter03_e.pdf

17 https://www.wto.org/english/tratop_e/dispu_e/appellate_body_e.htm

18 https://trade.ec.europa.eu/doclib/docs/2020/april/tradoc_158731.pdf

19 https://www.wto.org/english/news_e/spno_e/spno1_e.htm

20 European Commission, ‘EU Trade Policy Review — An Open, Sustainable and Assertive Trade Policy, Annex I “Reforming the WTO: Towards a Sustainable and Effective Multilateral Trading System”’ 1 https://trade.ec.europa.eu/doclib/docs/2021/february/tradoc_159439.pdf

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