What is the point of a WTO without the USA?

The initiative by EU Commission President Ursula von der Leyen and Chancellor Friedrich Merz has caused a stir. Since the EU summit at the end of June, there has been talk of creating an alternative organization to the World Trade Organization (WTO), founded in 1994, under the auspices of the EU.

Ursula von der Leyen emphasized that particularly close cooperation with like-minded trading nations in Asia is planned, referring to the cooperation within the CPTPP , the "Comprehensive and Progressive Agreement for Trans-Pacific Partnership." The trade alliance consists of Australia , Brunei , Canada , Chile , Japan, Malaysia , Mexico , New Zealand , Peru , Singapore , and Vietnam . The United Kingdom has now joined as the first European country.

Friedrich Merz has already spoken of a "new kind of trade organization" that could gradually replace "what we no longer have with the WTO." The Geneva-based organization has suffered for years from outdated rules , whose reform has so far failed due to disagreement among its members.

Dispute resolution hardly possible anymore

Crucially, however, is the Chancellor's reference to the widespread paralysis of dispute settlement in trade disputes. Since 2009 – during George W. Bush's term in office – the United States has blocked the appointment of new judges to the highest court for world trade, the WTO Appellate Body.

All subsequent US administrations—whether under Democratic or Republican presidents—have also maintained this blockade. They are protesting against the rulings of the final court of appeal in trade disputes that, in their view, are detrimental to the US's national interests.

This has led to a situation where trade disputes can no longer be finally resolved once one party appeals. Unresolved cases include the dispute between the EU and Indonesia over the export of nickel ore , the decision on the admissibility of subsidies to aircraft manufacturers Boeing and Airbus , and anti-dumping proceedings against China.

Liberalization of world trade without the USA

But can Europe establish a new WTO without US support? And how sensible would it be to join forces with like-minded partners around the globe, especially in the Asia-Pacific region? Jürgen Matthes, an expert on international economic policy at the German Economic Institute (IW) in Cologne, certainly welcomes the initiative in an interview with DW.

"An actual application for accession to CPTPP would be an important strategic step in several respects, because it would send a clear signal to the US that it is isolating itself with its protectionism while the liberalization of world trade continues around it," said Matthes.

"It would create a remarkably large, cross-regional trade agreement because it includes important states and the EU is the largest bloc within it. It would be an agreement encompassing virtually all continents. And perhaps it would even be possible to include one or two African countries," said the trade expert. "This would create an 'open club' with open conditions, but one that sets fair competition rules as a prerequisite for accession."

Without the USA, without China

However, this means that China cannot participate initially because Beijing is not exactly known for fair competition rules.

"Strategically, it's about creating a trade alliance that addresses the problems that are currently acute in the world's trade sector: This is not just US protectionism, but also the massive distortions of competition caused by China's immense subsidies, which we cannot really address because the WTO rules have too large loopholes," argues Matthes.

With regard to China , the EU's aim is to establish strict competition rules in such a trade alliance, "with regard to state-owned enterprises and industrial subsidies. Then one could say that anyone who meets these conditions can participate."

To achieve this, however, China would have to significantly change its system and eliminate distortions of competition and subsidies. Or finally commit to a radical reform of WTO rules.

Alliance of the Willing in Dispute Settlement in the WTO

Free trade advocates already have a response, called "MPIA." The "Multi-Party Interim Appeal Arbitration Arrangement" was forged within the WTO to provide an alternative arbitration system without the US. According to the EU Commission, 57 countries are now participating in MPIA, representing 57.6 percent of global trade. In addition to the EU member states, the United Kingdom is also involved.

However, business associations such as the Federal Association of Wholesale and Foreign Trade (BGA), which represents the interests of German export companies, do not want to see the WTO weakened under any circumstances.

The approach of creating a new framework with a smaller group of functioning democracies – for example, through the CPTPP – certainly has strategic advantages, BGA President Dirk Jandura told the Reuters news agency. However, there are risks: For example, global trade must not be allowed to break up into competing trading blocs with different rules. "It is crucial that this new organization be conceived only as a transitional solution, with the clear goal of reforming the WTO, not replacing it."

Reform instead of replacing the WTO

Brussels also emphasizes that it has no intention of making the WTO redundant. Commission President von der Leyen said that "structured cooperation" with the Asian CPTPP countries could be the basis for beginning a redesign of the WTO.

Even the WTO's former chief economist, Ralph Ossa, made no secret of the fact that the World Trade Organization needs to be reformed in a DW economics podcast. "Does the WTO need reforms? Absolutely," said Ossa, who has been teaching at his former place of work, the University of Zurich, since July 1.

The German Ministry of Economic Affairs underscores this interpretation: The WTO is indeed in need of reform, which is why the German government, together with the EU Commission, is advocating for reforms, said the spokesperson for Economic Affairs Minister Katherina Reiche. This includes, for example, new rules on industrial subsidies to create fair competition, digital trade initiatives, and investment facilitation. The EU is already in discussions on this with countries committed to open and rules-based trade , such as the members of the CPTPP.

Trade policy ambiguity

The fact that the EU is sending strong signals to the US and China could also be related to the fact that since Trump's "tariff hammer," it has deliberately been communicating ambiguously. The message is: The majority of trading nations are supporters of rules-based trade.

Cologne-based trade expert Matthes envisions a club under the heading "Open Markets with Fair Trade." "With open markets, the US is out, and with fair trade, China is out, unless the US changes under a new administration and we're dealing with a different China in the future."

Matthes sees a whole range of advantages: "We are creating more trade liberalization and opening up new markets for ourselves. We are isolating the US more strongly and showing Trump that protectionism is ultimately a mistake." Furthermore, the Europeans could send an important signal to China that they are no longer willing to tolerate its distortions of competition.