Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

What is the WTO and its role in the US-China trade war

The World Trade Organisation, or WTO, has been in the headlines due to its involvement in the US-China trade war. What is the WTO’s role in this?

What is the WTO and its role in the US-China trade war

What is the WTO?

The World Trade Organisation (WTO) is an international organisation with a primary goal of promoting trade between countries, as well as intermediating trade dispute between its members.

Contrary to international organisations such as the World Bank and the International Monetary Fund (IMF), the ruling is not delegated to a board, but it is reached by consensus among its 164 country members.

Currently the institution is in the process of electing a new WTO chief, after its previous Director-General, Roberto Azevêdo, left in August, with former UK conservative trade minister and Brexiteer Liam Fox as one of the frontrunners for the job. The main responsibility of the new appointee will be acting as peacemaker in the US-China and the UK-EU trade negotiations.

History of the WTO

The WTO was founded in 1995 to replace its predecessor, the General Agreement on Tariffs and Trade (GATT), which was established in 1947 after World War II along with other international economic institutions such as the World Bank and IMF.

In order to avoid future international conflicts, the WTO’s role was to promote economic liberation and incentivise international trade by reducing obstacles to international trade through incentivising the movement of capital and eliminating tariffs and quotas. As a marker of its success, the weighted average tariffs by its members has reduced from 22% in 1947 up to 5% in 1999.1

Free trade areas have been especially important in helping to achieve this success. A free trade area is an alliance between a group of countries which eliminates trade barriers and boosts trade between members. The main free-trade areas are:

  • North America Free Trade Agreement (NAFTA)
  • European Free Trade Association (EFTA)
  • South Asia Free Trade Agreement (SAFTA)
  • Union of South American Nations (UNASUR)

Does trade liberation always promote economic growth?

It seems rational that by removing trade barriers such as tariffs and quotas, economic growth will inevitably accelerate. But does free trade always work?

  1. Soviet Union: in the 1980’s, a highly controlled economy and centralised government had led to a stagnated economy with low rates of productivity. At the time, General Secretary Gorbachev promoted a decentralisation of the economy along with an aggressive liberation of international investment and trade. After the initial success of the reform, the radical and sudden shift in its policies brought with it hyperinflation. This triggered the snowball effect of skyrocketed interest rates, with a subsequent surge in the country’s’ deficit, depreciation of the ruble and a plummet in international trade, ending with the country’s debt default in 1998

  2. China: in the late 70s, and after the death of its ruler Mao Zedong, China committed to a policy of openness to the outside world by widening foreign economic relations. The country sharply increased its exports, but helped to increase its competitiveness by depreciating its currency whilst maintaining relatively high barriers of entry, especially with tariffs and quotas on consumer goods. China used this newfound wealth to invest in other parts of its economy to become less dependent on manufacturing and exports. China has also since reduced its entry barriers, helping to increase trade with countries around the world. In this case, the liberation of international trade helped China become the world’s largest economy based on purchasing power parity

Who funds the WTO?

The WTO’s financing comes mainly from contributions by its members, established according to their share of international trade.

Figure 1: member contributions to WTO budget (2019)

Rank Country Contribution (CHF) Contribution (%)
1 United States 22,660,405 11.59%
2 China 19,737,680 10.10%
3 Germany 13,882,455 7.10%
4 Japan 7,896,245 4.04%
5 United Kingdom 7,446,595 3.81%
6 France 7,440,730 3.81%
7 South Korea 5,777,025 2.96%
8 Netherland 5,745,745 2.94%
9 Hong Kong 5,427,080 2.78%
10 Italy 5,096,685 2.61%
Others 94,389,355 48.28%
Total 195,500,000 100%

Source: WTO

How are trade disputes settled by the WTO?

The WTO oversees approximately 60 different agreements called the WTO trade rules. These include different areas of the economy (i.e. agriculture and intellectual property rights) and are negotiated and agreed by all country members. Such legal framework mainly ratifies countries’ commitments to lower customs tariffs and other trade barriers, as well as set a procedure to resolve conflicts.

WTO members have agreed that if they believe fellow-members are violating such trade rules, they will use the multilateral system to settle these disputes instead of retaliating with their own tariff increases. The WTO’s Dispute Settlement Understanding (DSU) is therefore an important, although costly, legal framework to help resolve conflict between members.

However, President Trump has been a constant critic of the WTO during his presidency and the United States has moved to block the appointment of new members to the Appellate Body, a board of seven which makes a binding determination on international trade disputes.

US-China trade war

The ongoing trade war between the world’s two largest economies began in mid-2018 when the US imposed tariffs on China in order to force it to correct what they said were 'unfair trade practices'. The chart below shows that since China joined the WTO in 2001, the US trade deficit with China has ballooned to around $350 billion.

Figure 2: US trade deficit with China

Source: United States Census Bureau

What’s more, alleged theft of intellectual property is estimated to cost the US between $300 and $600 billion a year.2 But China state that its leadership in certain technological fields is based on large investment in research and development and feel that the US is trying to curb its rise as a global power.

The trade war has negatively impacted both economies, leading to a higher prices for US consumers and contributing to a slowdown in China’s economic growth.

In total, the US currently applies tariffs exclusively to Chinese goods worth $362 billion, while China applied tariffs exclusively to US goods worth $185 billion.

China brought this case to the WTO’s DSU, who recently ruled that tariffs imposed by the US in 2018, which triggered the escalation in tensions between the two countries, were inconsistent with the international trade rules as the US failed to justify the alleged technology theft.

The panel claims that the US did not provide evidence on how the Chinese goods and services affected by the tariffs received benefits from the so-called unfair practices. Therefore, they had not met its obligation of demonstrating that the tariffs were justified. The WTO stated that the ruling only applies to the original case brought by China, as China’s retaliation has not been challenged by Washington.

1 National Bureau of Economic Research
2 The Guardian

Get your free beginner's guide to investing

●  Discover the benefits of investing your money

●  Learn about the different investment options available and how to get started

●  Understand how to build a diversified portfolio and manage your risk

Form has failed to submit. Please contact IG directly.

  • I’d like to receive information from IG Group companies about trading ideas and their products and services via email.

Get my guide

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

Form has failed to submit. Please contact IG directly.

  • I’d like to receive information from IG Group companies about trading ideas and their products and services via email.

Get my guide

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

●  Discover the benefits of investing your money

●  Learn about the different investment options available and how to get started

●  Understand how to build a diversified portfolio and manage your risk

Get your free beginner's guide to investing

Publication date : 2020-10-08T09:28:18+0100

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Open an account now