The European Commission on 18 September proposed sanctions on countries that commit “willful and repeated” obfuscation of their trade policies, as part of an effort to modernise the World Trade Organisation. The WTO “must adapt or it will be in serious trouble”, said Commissioner for Trade. Cecilia Malmstrom.

On 28 June, EU leaders agreed “in substance” on a set of proposals to improve the WTO, which should pave the way for finding common ground with President Trump and de-escalate the ongoing trade disputes. But Italy blocked their formal adoption until the migration issue was fully addressed. These proposals came against the backdrop of the EU’s efforts, supported by other major economies, including Japan and China, to shield the multilateral system against Trump’s offensive.

The EU executive’s concept paper defends strengthening the organisation’s monitoring powers to check whether countries are implementing multilateral agreements and transparent trade policies to facilitate the arrival of foreign players. As a first step, the Commission wants to improve the notification system the institution and to single out uncooperative members.

In the case of “willful and repeated non-compliance” to report about trade policies or the implementation of WTO agreements, the EU executive wants to impose sanctions on the countries exposed. It would represent the first step towards punishing countries that breach multilateral trade rules. “There has to be a cost to not living up to your obligations” to notify countries about your trade policies, Malmström said.

The Commission would exclude developing nations with “limited resources” to meet notification obligations and deadlines from the sanctions. Instead, it would offer “incentives” to these countries to improve their notification system.

China is under the spotlight as its subsidies have been responsible for the global steel glut that fuelled the trade disputes between the US and its partners. The EU and the US also blamed Beijing for compelling foreign companies to share intellectual property and know-how in order to access the Chinese market.

The EU and China said on June 1 that they would expand trade and investment cooperation amid the global trade dispute triggered by US tariffs. But as part of the efforts to address outstanding trade disputes, Europe will present a complaint before the WTO against China’s unfair trade practices relating to intellectual property. Malmström said that it was in China’s interest to engage in the modernisation of WTO given that the organisation served its interests well as 90 per cent of the members of the organisation accepted the need to revamp the institution.

India could lose special and differential treatment (S&DT) flexibilities, including the consensus principle for making new rules at the WTO, if the EU and a group of countries, have their way in steamrolling reforms in the global trading system, said trade envoys familiar with the development.

On September 18, the EU issued a concept paper called “WTO modernisation” largely parroting President Trump’s criticism of the global trade body, particularly the manner in which it helped China since 2001. Senior trade officials from eleven countries, including Japan, Canada, Norway, Switzerland, Australia, New Zealand, Singapore, Korea, Mexico, Chile, and Brazil, besides the EU have discussed the concept paper at a meeting on September 20 to which the US, China and India had not been invited.

For addressing the concerns raised by the US President and trade representative ambassador Robert Lighthizer, the EU has called for abandoning the Marrakesh Agreement that established the WTO in 1995, so as to launch plurilateral (more than two countries) negotiations. In the area of rule-making and development, the EU has argued that “divergent interests, the extreme difficulty in arriving at consensus decisions by all 164 members, and the current approach on development” caused numerous roadblocks. Brussels wants to enhance the role of the WTO Secretariat in ways that would severely undermine the member-driven principles.

Without mentioning the US, which is responsible for global trade wars, the EU said that what is now the “deepest crisis” in the global trading system can only be addressed by jettisoning the Uruguay Round commitments and the creation of the WTO based on the Marrakesh Agreement. “It is clear that 23 years after the creation of the organization and the conclusion of the Uruguay Round (commitments), the multilateral system is in need of a change,” it argued.

The WTO’s negotiating function based on the consensus principle “has not been able to deliver any significant improvements in the trade rule book apart from the agreements reached on Trade Facilitation and Export Competition”, the EU pointed out. It did not, however, mention that both the Trade Facilitation Agreement and Export Competition are parts of the unfinished Doha Development Agenda.

The WTO system, according to the EU, “remains blocked by an antiquated approach to flexibilities, which allow over 2/3 of the membership, including the world’s largest and most dynamic economies (China, India, Brazil, South Africa, and Indonesia) to claim S&DT”.

Without naming the US, Brussels said the crisis in the multilateral trading system “is set to deepen further in the coming months, as more unilateral measures are threatened and imposed, leading in some cases to countermeasures or to mercantilist deals”.

The EU’s proposal calls for new rules in the area of subsidies and state-owned enterprises for targeting China. “The EU’s paper lacks credibility since it shifts the focus away from well-vented US protectionist actions and towards more stringent rules on developing countries,” said one of the envoys representing a developing country.

Some other developing- country members including India asked what they will get in return if they agree to the reforms and what payment the EU is asking for to address developmental concerns. An envoy of a least-developed country argued that the paper will “take things backwards” instead of coming to grips with the real problems at WTO. Members must address issues concerning inclusivity and the development deficit at the WTO, he said.

The writer is a former senior professor of International Trade, and author of World Trade Organisation: Implications for Indian Economy. He may be reached at vasu022@gmail.com