The Future of Multilateralism in the Post‐pandemic World

• Published date: 01 January 2023
• Author: Ligang Song,Vishesh Agarwal
• Date: 01 January 2023
• DOI: http://doi.org/10.1111/cwe.12459

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 62–87, Vol. 31, No. 1, 2023

62

*Ligang Song, Professor, Crawford School of Public Policy, Australian National University, Australia.

Email: ligang.song@anu.edu.au. Vishesh Agarwal, Economist, World Bank, Australia. Email: vagarwal3@

worldbank.org.

The Future of Multilateralism in the

Post-pandemic World

Ligang Song, Vishesh Agarwal*

Abstract

This paper applies an endogenous institutionalist framework to understand the

evolution of the rules-based international trading system since the end of World War II.

We argue that the initial success of the General Agreement on Trade and Tariffs

and re-enforcement that led to the formation of the WTO can be explained by three

major factors: the hegemonic position of the US, the belief that international trade

would foster prosperity and peace, and Cold War politics. However, declining US

hegemony along with a shift in global comparative advantage in labor-intensive

manufacturing led to a shift from multilateral towards preferential trade agreements

since the 1990s. Today, the WTO faces several new challenges, including increasing

geo-political competition between the US and China, increasing digitization of

commerce, and disrupted supply chains following COVID-19. A functioning WTO

that facilitates global economic re-integration remains crucial to ensure a strong

recovery from the pandemic and continued long-term prosperity and stability of the

global economy.

Keywords: endogenous institutional change, GATT, international trade, institutions,

WTO

JEL codes: F13, F15, N40

I. Introduction

For decades following the end of World War II (WWII), multilateral trade institutions

exemplified by the General Agreement on Trade and Tariffs (GATT) provided an

avenue for countries to commit to restraining unilateral trade or trade-related policies

in return for similar restraint by trading partners. In a monumental achievement

in world politics, member countries re-enforced the GATT rules, leading to the

formation of the WTO in 1995 which committed member countries to a non-

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

The Future of Multilateralism 63

optional and binding dispute settlement system overseen by a panel of international

legal experts. The decade following the formation of the WTO saw a rapid

increase in global economic openness, with the share of global trade (exports plus

imports) as a percentage of global GDP rising from 31 percent in 1994 to a peak of

51 percent before the Global Financial Crisis (GFC) in 2008 (Figure 1). However, since

the GFC the pace of growth in global trade has slowed considerably, with global GDP

growth outpacing global trade growth, resulting in global economic openness falling to

41 percent in 2020.

Figure 1. The rise and fall in global economic openness, 1960–2020

Sources: UNCTAD statastics (see: https://unctadstat.unctad.org/); World Development Indicators (see: https://

databank.worldbank.org/)

Note: GFC, the Global Financial Crisis.

Despite the initial success of the WTO, the failure of countries to successfully close

the Doha Round of multilateral trade negotiations began a general trend of pessimism

towards trade multilateralism. In recent years, the WTO has been further weakened

particularly with the beginning of a trade war between the two largest economies in

the world, the US and China, and several institutional regressions such as the inability

of countries to appoint judges to the WTO Appellate Body. This has resulted in a more

fractured trade environment with the proliferation of inward-looking preferential trade

agreements (PTAs), which have increased from less than 30 active agreements in

1991 to over 300 such agreements in 2020, further undermining the multilateral trade

institutions (Figure 2).

The WTO is a crucial public good that enhances the stability and certainty regarding

international trade policy, which in turn resulted in greater predictability for international

investors and allowed for an easing of institutional constraints to global production sharing

based on comparative advantage. More broadly, as put by Koopman et al. (2020, p. 830),