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Jürgen Matthes in CESifo Forum Externe Veröffentlichung 30. April 2021 How to Unlock the WTO Blockage and Why China Holds the Key

The WTO has been getting into an ever-deeper crisis in recent years, even though it had been a success story at its outset in 1995 and for several years afterward, IW expert Jürgen Matthes lines out.

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How to Unlock the WTO Blockage and Why China Holds the Key
Jürgen Matthes in CESifo Forum Externe Veröffentlichung 30. April 2021

How to Unlock the WTO Blockage and Why China Holds the Key

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Institut der deutschen Wirtschaft (IW) Institut der deutschen Wirtschaft (IW)

The WTO has been getting into an ever-deeper crisis in recent years, even though it had been a success story at its outset in 1995 and for several years afterward, IW expert Jürgen Matthes lines out.

And still in 2001, despite the upcoming anti-globalization criticism, the start of the Doha Round in 2001—shortly after the 9/11 terror attacks—it was understood as a strong signal for multilateral cooperation toward further trade liberalization. At the end of 2001, admitting China to the WTO was considered an important milestone as well. However, for several reasons, the Doha Round got stuck (Matthes 2006)—among them many countries’ fear of rising competition from fast-growing China. In consequence, the trade liberalization function of the WTO proved to have lost its power. In broad terms, the WTO’s function of monitoring new trade barriers functions well despite some room for improvement, as was the case in and after the global financial crisis in 2008/9 and during the coronavirus crisis.

However, the WTO’s liberalization function, probably its most important objective, has also been dealt a serious blow. The Appellate Body (AB), the second stage of its dispute settlement system, has been out of order since December 2019 because the US has continually blocked the nomination of new trade experts as members of the AB.

There are very fundamental disagreements behind the WTO crisis, including globalization skepticism, rising state influence and protectionist industrial policies. Moreover, there is a deep divide and distrust between emerging and developing countries on the one hand and industrialized countries on the other about opening up markets for agricultural goods (desired by the first group and resented by the second) and opening up markets for industrial goods and services (desired by the second group and resented by the first). However, the elephant in the room is China with its state capitalism. The Chinese economic model is based on a domestically relatively successful industrial policy that, however, increasingly leads to competitive distortions in world markets to the benefit of Chinese firms and to the detriment of others (Matthes 2020a). These spillovers of China’s state capitalism could eventually put the WTO in jeopardy. Therefore, China is a key player in saving the WTO and in ending its crisis. This claim will be elaborated on and discussed in this article with a focus on a possible solution to the AB crisis.

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How to Unlock the WTO Blockage and Why China Holds the Key
Jürgen Matthes in CESifo Forum Externe Veröffentlichung 30. April 2021

How to Unlock the WTO Blockage and Why China Holds the Key

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Institut der deutschen Wirtschaft (IW) Institut der deutschen Wirtschaft (IW)

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