Should the EU be blamed for the downfall of the WTO?

The European Union has been busy making bilateral trade agreements with diverse international partners since the mid-2000s. It has taken its integration with global markets into its own hands, and rarely relies on the WTO, the organisation that supposedly coordinate and monitor global trade cooperation. In this article, EUrologus seeks to explain the EU’s shift to one-on-one trading agreements, and its broader implications on how trade negotiations are currently conducted.

In 1995, the establishment of the WTO promised closer economic integration of world markets. The concept was appealing: to establish an organization that would create common rules for trade, adjudicate and settle any potential disputes. Experts and politicians alike had high hopes, especially after 2001, when even China signed on to be a member. Currently, the WTO has 164 member countries, which, at least on paper, looks like a blazing success.

But there is a problem. Most major decisions on trade cooperation currently simply forego WTO, and are negotiated between two or, at best, a small group of countries. These one-on-one agreements, also called bilateral trade agreements have a strong message for proponents of global economic institutions. Many countries no longer look to the WTO for strengthening economic cooperation opportunities, and simply take matters into their own hands. Resulting in negotiating closer trade agreements with their desired partners, one at a time. This is, by many metrics not ideal. Arguably negotiating agreements bilaterally is significantly more time-consuming and less efficient than coordinating as a group, and smaller countries may be at a significant disadvantage in one-on-one situations.

There are very few actors in the world right now who are keener on establishing bilateral agreements than the EU. The European Union has 83 bilateral agreements in place with international partners. According to the European Commission , an additional 25 agreements are already negotiated and are under ratification or adaptation. Most of these are relatively recent: according to our analysis, 59 out of the 83 started after 2008.

In our analysis, we grouped the EU’s bilateral trade agreements into three categories, corresponding to key years in the history of the WTO and global trade. The first watershed date is 1995, the establishment of WTO. The second one is 2008, the year of the global economic crisis, and by many expert accounts, the year when the WTO’s practices started to show significant cracks in their effectiveness. This gives us three time-categories: pre-1995 (5 agreements), 1995-2007 (19 agreements) 2008-today (59 agreements). We also counted provisionally applied agreements. In cases where an existing agreement is renegotiated later, we counted the agreement when its terms were originally made: even this way, there are significant differences between periods.

The past, present, and future of the WTO

While the shift away of the EU from WTO integration clearly does not help the initiative, the former is arguably just reacting to issues, not causing them. The first signs of the WTO stagnation became apparent after 2001, when the so-called “Doha round” of integration efforts, focusing on developing countries, ultimately failed, due to (seemingly unsolvable) conceptual disagreements. The 2008 economic crisis was the last straw, and negotiations did not pick up after the crisis. Some light can be seen at the end of the tunnel, as in 2013 the WTO was able to establish its first multilateral agreement since the creation of the organization: the Trade Facilitation Agreement . Still, we can argue that the pace of economic integration led by multilateral WTO processes is slow, and it is not surprising that some, including the EU, turn to alternative solutions to strengthen economic ties with trade partners.

Given that the WTO has a difficult time integrating global economic rules, let’s look at its other major function: dispute settlement. Since its establishment, according to the analysis of the Council on Foreign Relations (a well-established hub of experts and think-tank) over 500 disputes were brought to the WTO table, many of them from the US and China. The US was initially by far the most active participant of the WTO’s dispute settlement mechanism, initiating 124 cases and being the defendant in 156 more. At the peak of this tendency, President Obama’s administration alone filed 25 cases while in power, 16 of them against China. Interestingly, it was also the US that killed the WTO’s dispute settlement mechanism for good. More precisely, the Trump administration started to block new appointments to the Appellate Body of the WTO. As the terms of the initial seven judges on the panel gradually expired, the body became unable to hear cases; there is currently only one active judge, while cases need three to be settled

In this instance, despite its passive acting thus far, it was the EU that stepped up. Brussels led the initiative to establish an effectively functioning alternative dispute settlement mechanism: the Multi-party Interim Appeal Arbitration Arrangement (MPIA). The problem is that this is an additional opt-in agreement between countries, and currently only has 26 members. This results in a situation in which a country that does not wish to be held accountable for WTO rule violations, such as the US, can simply not join the mechanism. Currently, the US is not a member, but China is, which does give some hope for the initiative’s future.

The EU’s bilateral trade agreements

Hence, the EU has not been the actor who actively demolished WTO institutions, but it arguably still silently gave up. Prior to the establishment of the WTO, the EU was not big on international economic integration: something that is not surprising, given that the union was itself a relatively young integration project of countries. At the time, the EU only had 5 bilateral agreements, mostly with European partners such as Andorra, San Marino, and Switzerland. These were fairly logical agreements, considering the territorial proximity of these countries to the EU.

The difference gets striking between the 1995-2007 (13 years), and the 2008-2023 (16 years) periods. In nearly the same time span, the EU stipulated almost three times as many bilateral trade agreements in the most recent period as in the previous one. This is not even counting the 25 agreements that are waiting for final ratification or approval, most of which will likely become active in a few years. Moreover, many of the new bilateral agreements are ensuring cooperation with many of the developing countries the Doha round was unable to integrate. While negotiations are conducted with territorial blocks larger than a single country (Southern African countries, Pacific countries, the Western Balkans, etc.) the agreements are nonetheless bilateral. This means that members of the block do not need to agree about signing a partnership with the EU or negotiate together, they can sign on independently.

For example, in the case of the Southern African Development Community (SADC), some members of the block, namely Botswana, Lesotho, Mozambique, Namibia, South Africa and eSwatini (the former Swaziland) signed agreements with the EU, while others, the Democratic Republic of the Congo, Madagascar, Malawi, Mauritius, Zambia and Zimbabwe are still in various stages of negotiations. So, the negotiation does not necessarily happen with the Southern African Development Community as a group, but with its individual members, and a successful agreement has little to no implication on negotiations with other countries.

There are clear reasons the EU likes bilateral trade deals. Firstly, it seems to be remarkably efficient in establishing them, an improvement of the slow WTO proceedings. Second, the EU has an excellent bargaining position in bilateral negotiations with small partners, as it is a large and influential market. Thus, the EU is very effective in negotiating with less economically powerful countries, while it is perhaps less so when it comes to stronger partners. In the Asian case, South Korea and Japan are positive examples of trade cooperation, and even the EU-China Comprehensive Agreement on Investment is progressing slowly, but relatively well. On the other hand, trying to negotiate a free trade agreement with the US (the Transatlantic Trade and Investment Partnership, TTIP), was a huge failure. Canada has a provisionally applied but functioning bilateral agreement with the EU, and an agreement with Australia is under negotiation since 2018.

In conclusion, the EU is far from responsible for the WTO’s failure in establishing efficient multilateral global economic cooperation, but the Union did shift its focus on bilateral agreements reasonably quickly when the WTO did not deliver at the expected pace. Is the EU’s choice fair? Surely so, given its own economic interest. But the lack of a functioning WTO does increase the risk of potential trade wars, something the organisation was set up to prevent. And shocks from a trade war such as the US-China one, do reach European markets as well: in the long run, the EU does have an interest in keeping the WTO at least functional, if not increasingly relevant. Given the US’s recent reluctant behaviour towards the WTO, this is no easy task, but the EU, given its undeniable economic and market power, is probably in one of the best positions to give the WTO the boost it so desperately needs.