WTO, ESG and the Fracture of Free Trade

Shankkar Aiyar
5 min readJan 22, 2023

Free trade was, effectively, never free. The idea of mutualism and shared prosperity is being upended by economic, demographic and geopolitical factors. The fear of competitive deficiencies is finding expression in new rules on trade and investment.

By Shankkar Aiyar | Published: 22nd January 2023 01:12 AM |

Twenty-seven is scarcely the age to be written off. Yet the obituary of the World Trade Organisation — born this month in 1995, out of the post-war arrangement of GATT — is being scripted by a convergence of factors. The passionate call by WTO chief Ngozi Okonjo-Iweala, this week at Davos, for “re-globalisation” and the warning against ‘fragmentation and deglobalisation’ underlines the final throes of an institution dying in slow motion.

WTO Headquarters Geneva | The New Indian Express | AFP File Photo

The WTO was designed as a multilateral platform for member countries to define norms and decide on disputes. The construct of consensus has turned out to be its bane. Since its inception, from Doha round to the Geneva round, the WTO has successfully failed to conclude trade negotiations. The WTO’s appellate body meant to address disputes has been dysfunctional and has not met since November 2020.

The unravelling of the WTO is symptomatic of the fracturing of free trade. Free trade was, effectively, never free. Yet the idea scaffolded the promise of mutualism, the potential of shared prosperity. That promise promoted in the post-war era is being upended by a combination of economic, demographic and geopolitical factors. The emergence of China as a rising power and the war in Ukraine has catalysed the spectre of fear.

The shakeout in thinking was visible in Donald Trump’s paroxysms on national security and policies on trade with China. In December 2001, the United States enabled the entry of China into the WTO. Despite several reports, China continued with overt and covert subsidies. This was enabled by the strategy of wishful thinking that prosperity would lead to change in China.

The movie didn’t play out as scripted — and is evidenced by events in Hong Kong and the threat of annexing Taiwan. China accounts for nearly 15 per cent of global exports — in 2022 China’s exports grew to 42 trillion yuan (around $ 6 trillion) and it recorded a trade surplus of $877 billion.

You could say the chickens came home to roost. The arrival of the Covid-19 pandemic exposed the grim reality that the global supply chain was a Chinese supply chain. Resilience acquired currency. Just-in-time economics yielded to just-in-case politics.

Regardless of the chaos of its politics, the institutional framework in the United States has few peers at scenario mapping and in using every crisis to build resilience. The 2009 Recovery and Reinvestment Act, enacted post the global financial crisis, under the Obama administration, framed the modernization of America’s energy and communications infrastructure and enabled ramping up of oil and gas production and partial, if not full, energy independence.

The Biden administration has expanded on the idea and inducted measures which hark back to the era of industrial policy. They embed explicit subsidies, impose export controls and curb foreign investment. Between the CHIPS and Science Act and the inventively named and smartly designed Inflation Reduction Act, the United States has created a war chest of nearly $ 425 billion to boost supply chains, fund chip development and subsidize migration to green energy consumption.

The US is not alone in rewriting the rules of the game. In the wake of the pandemic, in 2020 the EU pushed a 1.8 trillion Euros Next Generation EU Recovery Plan of which a third was slated for funding the Fit for 55 Green Deal — green energy initiatives for cutting net emissions by 55 per cent by 2030. It doesn’t stop there. The EU has also crafted policies under the Green Deal such as the Carbon Border Adjustment Mechanism (CBAM) which envisages a tax on imports based on the carbon content.

The next barrier for trade and investment is ESG — environmental, social, and governance norms. Developing nations such as India are dependent on flows from developed economies for investment. Globally over $50 trillion in investible savings are expected to come under ESG norms by 2025. This means both portfolio and foreign direct investments will be subject to ESG norms and will bring pressure on countries to accept conditions not necessarily justified or suitable to local economic conditions.

There is no quarrelling about the pious intent of tackling climate change — even though the “loss and damage” compensation fund initiated in 2020, is yet to fructify. Nor is there any disputing the right of sovereign nations from determining what is in their national interest. But it is evident that mechanisms to address structural issues such as demographic deficit and competitive deficiencies are finding expression in new rules on trade and investment.

History is littered with literature on the advantages of expanding trade to propel global growth. The basic tenet of trade is located in enabling competitive advantages to induce productivity and efficiency for producing and consuming nations. This paradigm is being actively binned by the day as implicit and explicit protectionism finds its way into norms for trade and investment.

Budget 2023 arrives at the confluence of gathering economic and geopolitical headwinds. The evolving reconfiguration of global supply chains afforded India the opportunity to consolidate and expand its footprint in global marts. That hope is challenged by the rapidly changing contours of global engagement. The context calls for India to create a template of responses to preserve its aspirations.

Shankkar Aiyar, political economy analyst, is author of ‘Accidental India’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’ and ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’.

You can email him at shankkar.aiyar@gmail.com and follow him on Twitter @ShankkarAiyar. His previous columns can be found here. This column was first published here.

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Shankkar Aiyar

Journalist-Analyst. Author of ‘Accidental India, ‘Áadhaar: A Biometric History’ and ‘The Gated Republic’. Studying how politics rules the economics of people!