The FDI angle

• The number of subsidies, tariffs and export restrictions introduced globally has more than doubled since 2010, reflecting the trend of governments embracing economic sovereignty over free trade.
• This rise of protectionism, coupled with internal problems at the World Trade Organization (WTO), is raising questions about the ability of today's rules-based system for global trade to prevent the distortive effects of these policies.

Why it matters: Some believe the WTO system's shortcomings reflect a broader backlash to globalisation and multilateralism. But others claim governments' market interventions are driven by the need to compensate for the WTO's weaknesses.

When the clock strikes midnight on January 1 2025, the World Trade Organization (WTO) will turn 30. Like many others celebrating this milestone, it finds itself at a turning point. When the WTO was born — back in January 1995, as the world marched towards globalisation, economic efficiencies and the promise of emerging markets — it entered a world with a mission: to level the playing field for international trade.

But three decades on, the mood music has changed. 

Today’s trade wars, expanding concepts of national security and protectionist policymaking reveal governments’ growing readiness to push the boundaries of WTO principles that strive to create a fair trading, and in turn investment, environment. This reassertion of national sovereignty is calling into question both the WTO’s credibility and its ability to guarantee the rules-based international system it oversees.

Things are made worse by one of its biggest critics returning to the White House. During his first stint as US president, Donald Trump threatened to pull the country out of the WTO. He is now promising to impose blanket tariffs on all imports, seemingly without considering the country’s international obligations. But the roots of the problems at the WTO run deeper and wider than the US’s political landscape. 

“For a long time, the idea was ‘let’s have an organised, rules-based system where everybody is on the same level playing field, everybody follows the rules, and we respect each other’s rights’,” says William Reinsch, former president of the US’s National Foreign Trade Council, now at the Center for Strategic and International Studies. “Then there was recognition that occasionally countries get out of step … But when [countries] truncate that process, or call it into question, then the legitimacy of the larger institution gets undermined as well.” 

In an era marked by the erosion of trust in globalisation, the organisation — which is based in Geneva but controlled by its 166 member governments flung across the world — is at the centre of fierce debate over the durability of today’s governance of global trade.

Circumventing the rules

The number of subsidies, tariffs and export restrictions introduced globally has more than doubled from 1576 measures per year in 2010 to 3285 measures per year in 2023, according to Global Trade Alert (GTA) data (based on three-year moving averages). 

This proliferation of industrial policymaking does not indicate an equal uptick in the flouting of WTO rules, with all three measures being permitted in certain situations (see Boxout on page 21). Ismaila Dieng, a WTO spokesperson, says that while governments are adopting policy measures “which have been questioned or criticised for undermining the WTO’s rules-based system ... differences of opinion between WTO members on the WTO-consistency of their respective measures affecting international trade is not a new development”.

However Simon Evenett, a geopolitics professor at IMD Business School in Switzerland and GTA’s founder, echoes other fDi sources in saying there is growing “evidence of the rules being circumvented, if not outright broken”. 

The highest-profile example is the US–China trade war. Since 2018, both countries have escalated tariffs against the others’ exports of goods, spanning from steel and solar panels to agricultural goods and cranes — lifting duties above the bound rates and clashing with the most-favoured-nation principle. 

The US claims its actions are a response to Beijing’s anti-competitive support for its private sector which, it alleges, harms businesses around the world. But this approach by the US — which was the architect of the WTO’s predecessor, the 1947 General Agreement on Tariffs and Trade (Gatt) — has sparked the ire of other members. “Both the Trump and Biden administrations have used tariffs in utter disregard of the WTO multilateral rules,” says Gaurav Pundir, a director at India’s ministry of Commerce and Industry. 

The US is not the only country pushing the boundaries of WTO obligations. In 2024, Canada followed its southern neighbour by imposing 100% tariffs on Chinese electric vehicles (EVs) and 25% tariffs on Chinese steel. The WTO has ruled that Indonesia’s ban on the export of unprocessed nickel — part of its bid to climb the critical minerals value chain — breaches its rules. In 2022, the UK bowed to EU pressure and removed prohibited local content requirements from its contracts-for-difference scheme that subsidises green energy production. Meanwhile, the US is standing by the local content requirements embedded in the tax credit it offers EV buyers under the Inflation Reduction Act (IRA), despite facing criticism from China, the EU and Korea. 

Tit-for-tat enforcement

The growing examples of governments seeming to overlook their WTO obligations coincide with the organisation’s internal problems, which are hobbling its ability to contain anti-competitive industrial policy.

First is dispute resolution. The WTO’s appellate body — its highest dispute-settlement forum — has not functioned since 2019, following US moves to block the appointment of new judges on the grounds it was overstepping its authority. To fill the hole left by the appellate body, 54 of the WTO’s members have established the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) where they can appeal decisions of WTO panels, which remain the first port of call for adjudicating disputes. But MPIA has only decided on one case. And the US and Indonesia, among others, have not joined MPIA and are appealing unfavourable WTO rulings ‘into the void’ — industry parlance for rejecting panel decisions, and in the absence of an appellate body, causing a stalemate on disputes.

A more fundamental shortcoming is that the WTO cannot directly penalise governments for breaking its rules. They cannot force a country to reduce tariffs or stop issuing a subsidy. Instead, its solution is allowing other countries to request WTO authorisation to impose retaliatory — or ‘countervailing’ — tariffs to offset the damage  to their local market. This can pave the way for a tit-for-tat spiral of countermeasures, with no one having the ultimate authority to hold governments accountable.

In addition, retaliatory tariffs must equal the damage caused to their home market, which requires thorough economic analysis. “It might take two years to go through [this] investigation and action, and by then your domestic industry could already be completely wiped out,” says Jose Signoret, senior economist at the World Bank.

The EU’s recent tariffs on Chinese EVs are an example of countervailing measures, in response to what it deems to be China’s “unfairly subsidised” EVs. Mr Reinsch believes they could also become an example of the WTO remedy’s shortcomings. “If the goal is to stop Europe from being flooded with Chinese EVs, it’s not going to work,” he says. Meanwhile, the US’s 100% tariffs on Chinese EVs cannot be justified as countervailing duties, he says, given the marginal value the country imports each year. 

Subsidies race

While tariffs and trade wars hit the headlines, the WTO faces an even bigger challenge to rein in subsidies that distort trade and investment. GTA data shows the uptick in industrial policymaking over the past 15 years is driven by these corporate financial incentives, and the World Bank has noted that the international trading system is “ill-equipped to discipline” their use.

The root cause is a lack of transparency. There is weak compliance with the WTO’s requirement, under its Agreement on Subsidies and Countervailing Measures, that governments notify it of their subsidy programmes. “There are huge gaps in knowing what countries are doing, in which industries and how deep these levels of support are,” Mr Signoret says. It’s the reason why GTA started tracking subsidies and, according to Mr Evenett, why they have become governments’ policy interventions of choice. “Tariffs are very public and you have to give the benefit to every firm in a sector,” he says. “A subsidy, on the other hand, can be done very quietly, and be very firm-specific.”

This opacity has created fertile ground for the global subsidies race that has unfolded since the IRA was launched in 2022. “The idea is that I don’t complain about your subsidies, and you don’t complain about mine,” Mr Evenett explains. It is one reason why actionable subsidies are rarely challenged. The IRA is held up as the prime example: the only WTO challenge it has faced is for the local content requirements in its EV purchaser tax credits. That’s despite other countries complaining that huge IRA production subsidies granted to corporations are damaging their local markets.

Lorand Bartels, a counsel at law firm Freshfields, agrees there seems to be “an unofficial agreement that [countries] won’t challenge each others’ green subsidies” in particular. 

Despite calls for more than a decade to reform this agreement, the negotiating gridlock that has plagued the WTO’s broader functioning means informal talks have only started recently. To add to or amend the WTO’s rulebook, the consensus of all 166 members are required. This is why only two agreements — the Agreement on Trade Facilitation and Agreement on Fisheries Subsidies — have been added to the rulebook over the past 20 years.

National security carte blanche

The WTO must also contend with governments’ questionable use of the so-called security exception in the Gatt, which allows members to engage in what would otherwise be illegal activity if necessary for national security. 

This provision, which dates back to 1947, was intended for use during war and emergencies. But just as governments have expanded the concept of national security when screening inbound investments, Mr Bartels says there is “a great reliance” on the Gatt exception, “and some of those instances are less plausible than others”. 

Research by Columbia University law professor Petros Mavroidis found that between 1995 and June 2024, governments spanning from OECD countries to least developed countries have invoked the security exception to justify their market interventions 492 times. 

However, the movement has been led vocally by the US. In 2018, the Trump administration imposed 25% tariffs on steel imports from most countries — including its closest ally Canada — in reliance on the security exception. The US has since exempted its northern neighbour from these tariffs, but its conviction in its entitlement to use the security exception as a carte blanche has remained. 

Since the 1980s, the US has claimed that national security is a domestic political matter incapable of review by the WTO or its Gatt predecessor. On these grounds, the Biden administration in 2023 publicly rejected the WTO’s finding that it could not use national security to justify tariffs on Chinese steel.

The US’s steadfastness on the topic has put the WTO’s authority in a bind. 

“The US is never, ever going to let … a handful of people sitting in a room in Geneva decide what US national security is,” says Thomas Graham, a former member of the WTO’s appellate body. “So it’s a very difficult, almost insoluble, confrontation which raises the question of how far the WTO’s dispute settlement authority can go in ruling upon national actions.”

Steffen Hindelang, executive director of the CELIS Institute — a not-for profit research enterprise — goes a step further. “If you accept that countries can judge for themselves what national security means without an [independent] third party being able to review it, then the WTO is at its end,” he says.

Collateral damage or sidestepping?

The WTO’s challenges in containing unfair market interventions do not happen in a vacuum. It is surrounded by a broader blowback to multilateralism among countries which Mr Evenett describes as “[thinking] they’re big enough to look after their own interests”. 

Aside from the US, he says this also includes India. The country is a key instigator of the WTO’s negotiating gridlock, having blocked the Investment Facilitation for Development Agreement’s admission to the organisation’s official rulebook. It is also refusing to sign the OECD’s Pillar One tax agreement and sat out Asia’s Regional Comprehensive Economic Partnership. Others point to the EU’s embrace of ‘strategic autonomy’ and Canada’s call for friendshoring as further examples. 

Some stress that this environment is the major cause of the organisation’s challenges. “The WTO is a product of its own time,” says Victor do Prado, a geoeconomics professor at the Paris Institute of Political Studies and former WTO official. “[It] does have issues, but it’s a sort of a barometer of what’s happening in the world.” He describes the WTO as “collateral damage” in an era of rising national sovereignty.

Even the decline in WTO disputes settlement requests since 2019 — with requests for consultations and panel reviews down nearly two-thirds compared to the five years prior — is not wholly attributed to the disappearance of the appellate body. “The sense that there should be open markets, and rules should be complied with … [is not] the mood at the moment,” says Mr Bartels, who is also Cambridge University law professor. “This is not the right condition for bringing cases.” 

However, there is evidence suggesting the WTO’s shortcomings are spurring governments to take matters into their own hands, to counter what they consider unfair practices by their peers. 

The US’s escalation of tariffs against China coincides with government statements criticising Beijing’s failure to embrace market-oriented principles and phase out distortive subsidies, as it promised when joining the WTO in 2001. The Office of the US Trade Representative said in 2022 it had “become widely accepted” in the country “that WTO rules do not, and cannot, effectively discipline many of China’s most harmful policies and practices”.

Another example is the EU’s response to Indonesia’s ‘appeal into the void’ of the 2022 WTO panel ruling against its ban on nickel ore exports. In the absence of an appellate body, the European Commission is investigating imposing its own countermeasures. “It’s saying that the enforcement rules in the WTO don’t work, and so it’s going to do the next best thing: precisely, to enforce WTO law,” says Mr Bartels.

Governments’ growing preference for subsidies over other market interventions is also leveraging WTO deficiencies. Weak transparency under the outdated Subsidies and Countervailing Measures Agreement is an example of “incomplete” WTO rules “channelling protectionism to the under-regulated areas”, says Mr Evenett. 

fDi sources agree that as more governments appeal WTO rulings into the void, invoke national security exceptions, and issue potentially distortive subsidies, the temptation to challenge its rules grows. “It’s contagious,” says Mr Reinsch. “When the big guys break the rules, it really creates an opening for the small ones to do the same and then justify it. 

“It means the institution has declining moral authority, which is really worrisome.” 

Rebalancing for reality

To reassert its influence in today’s era of industrial policymaking, many suggest the WTO must adapt to modern realities by balancing multilateralism and international rules with sovereignty. “We have to rethink the role of industrial policy and acknowledge economic security in the WTO,” Mr Mavroidis explains. 

Sympathising with the US’s response to China, some stress the need for this rebalancing is driven in no small way by Beijing’s growing influence in foreign markets. With the bulk of WTO agreements struck before China joined the organisation in 2001, Mr Mavroidis says they “are not enough to address the role of the Chinese state in the workings of the Chinese economy”, which clashes with the spirit of the organisation.

Some countries, including the US and India, are calling on green subsidies to be explicitly permitted under international rules. “Their case is that those subsidies should be allowed and not challenged, because they’re legitimately addressing a global public good,” Mr Signoret explains.

The biggest hurdle to changing any agreement is the need to obtain the consensus of 166 governments. This year has seen some members push for agreements to be made based on the more easily-attainable concepts of ‘convergence’ and ‘responsible consensus’. But countries such as India, which considers full consensus as a pillar of the WTO, stand in the way. 

As for the appellate body, some advocate not to replace it, but to put a bigger focus on governments finding ways to strike mutual agreements. “The appellate body became a great liability for the WTO, because it became simply a dispute settlement place,” Mr Graham says. To encourage countries to negotiate solutions, rather than litigate them, he suggests limiting any appellate function to “a very modest check on occasional egregious errors” by the panels. 

Bigger than Trump

Despite its challenges, criticisms and calls for reform, ex and current WTO officials stress these should not overshadow its often-noticed work keeping the majority of global trade in check. “Clearly you see countries adopting … measures that can be construed as WTO inconsistent,” Mr do Prado says. “But the central feature continues to be that most countries still abide by the WTO agreements.”

Mr Dieng concedes that geopolitics and the global trading landscape “are undoubtedly raising important challenges for the WTO and its rules-based system” but stresses that the organisation remains “as essential as ever for pursuing an orderly and predictable global trading system that benefits all”. 

Simon Lester, a non-resident fellow at the Baker Institute and former legal affairs officer at the WTO, notes that the daily work of committees and councils where governments debate their concerns is a “core functionality of the WTO that still works for anybody who wants to use it”. It is within these bodies that members can address “potential arbitrary discrimination or disguised protectionism” by their peers, adds Mr Dieng.

And even without an appellate body, the WTO still manages to resolve disputes. The settlement in March of Australia and China’s fallout over wine tariffs is one example.

Mr Lester is among those stressing that the WTO’s secretariat is not responsible for its shortcomings, but rather its members which have created the rules-based system it oversees. “If the WTO as a system is failing, it’s because the governments, who are the key actors in the system, are causing it to fail,” he says.

This makes Mr Trump’s return to the Oval Office particularly consequential. In line with his unpredictability, opinion in the US is divided over whether he will follow through on his promise eight years ago to leave the WTO. 

Irrespective of the next White House’s moves, other governments must work towards finding common ground on how to retool the WTO for a world that seems to have passed peak globalisation. The industrial policies of one country shape choices made by its peers. “This underscores the need for international co-operation,” said Julia Nielson, a deputy director at the OECD, speaking at its headquarters in November. “That’s to make sure everyone’s interests are taken into account. But also because at some point, everyone needs saving from themselves through international rules.”

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This article first appeared in the December 2024/January 2025 print edition of fDi Intelligence