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WTO the Latest Victim of Sanctions

May 04, 2022
  • Zhou Xiaoming

    Former Deputy Permanent Representative of China’s Mission to the UN Office in Geneva

Global economic governance is under attack — both its institutions and rules. Paradoxically, the assault does not come from what Washington terms as “revisionist states” such as China and Russia but from the United States and its Western allies.

Since the start of the Russia-Ukraine war on Feb. 24, the U.S. and its Western allies have imposed, in the words of the White House, “the most impactful, coordinated, and wide-ranging economic restrictions in history” on Russia. Although their stated intensions were to damage the Russian economy, the sanctions have significantly undermined the global economic governance.

The removal of Russian banks from the SWIFT international payment system and the freezing of Russia’s central bank reserves in Western countries — measures often described as “financial nuclear” and once unthinkable — shocked many. With these sanctions, the West literally launched a financial war against Russia. As a result, the international financial system, which is supposed to serve as an international public good, is now being privatized as a tool of the West in its contest against its antagonist.

The weaponization of the system has shaken the confidence of an increasing number of non-Western countries in the system. It is feared that the West’s financial sanctions against Russia could become a blueprint for the future. Dreading the prospect of becoming the target of America’s next sanction, they are trying to shun the U.S.-led system.

The move away from the U.S. dollar and SWIFT is gaining momentum. More and more countries have opted to trade in their own currencies. For example, Russia and India have put in place a payment mechanism in rubles and rupees for trade. Alternative payment systems, such as China’s cross-border interbank payment system, are getting a strong boost. Over time, a fragmented international financial system is expected to emerge with a weakened U.S. dollar and several rival international payment systems.

The West’s financial sanctions against Russia are threatening to unhinge the international financial system whose creation it led after World War II. Equally damaging to global economic governance is the U.S. politicizing the agenda of the Group of 20. At the G20 meeting of finance ministers and central bank governors in April, the U.S., together with its Western allies, disrupted the gathering by walking out of a session when a Russian minister began to speak and by insisting on condemnation of Russia in talks about the group’s communique. In this way, Washington obstructed the group’s consensus building, leaving in the cold critical economic issues such as post-COVID global economic recovery and distribution of vaccines. Consequently, the G20, for the first time in its 14-year history, failed to issue a communique.

The U.S. had also tried to exclude Russia at the G20 leaders’ meeting in November but without success. Having failed to have his way, President Joe Biden threatened to boycott the summit unless Ukraine were invited. His effort to hijack the G20 summit to have Ukraine at the table demonstrates, if anything, his determination to turn the gathering into something other than an economic summit. Suspicion lingers that he is more interested in beating Russia than addressing the looming global economic recession.

With the summit at stake, Indonesia, the host country, obliged Biden this time around. However, his victory may compromise the mission of the G20 agenda, and sideline the forum. If the recent G20 meeting of finance ministers and central bank governors is any indicator, Biden’s win foreshadows a fracturing of the unity of the group and infighting between attendees.

With the U.S. and its Western allies focusing on scoring geopolitical points, the world’s critical economic issues are highly likely to be sacrificed, together with the G20, which — because of its lethargic response to the global economic challenge — may gradually cease to be the prime group for economic and financial governance.

It is unfortunate that the G20 may be forced to see itself being marginalized at a time when the global economic situation calls for a larger role. History shows that the surest way to enfeeble and paralyze an international economic organization is to politicize it. 

Then there was a coordinated action by the U.S. and European Union to strip Russia of its most-favored nation status in the World Trade Organization — allegedly on national security grounds. MFN status is a fundamental principle in the international trading system established under the WTO, whose members are required to accord MFN status to all other members. Exceptions are limited but include national security. 

Of all 164 members of the WTO, the United States is particularly fond of the national security exception. The Trump administration employed it to justify slapping punitive tariffs on steel and aluminum products from the EU, only to have them rescinded by Biden last year for the sake of the transatlantic alliance. The turnabout strikes one as meaning that Washington’s use of the rule has more to do with something other than national security.

In September 2020, a WTO expert panel ruled that the U.S. had contravened WTO rules by imposing discriminatory tariffs on $200 billion worth of Chinese imports — in the name of national security. Of late, the Biden administration reportedly has been considering cutting back some of the tariffs on some $369 billion of Chinese goods to ease inflationary pressure at home. In view of Washington’s track record, it is doubtful that U.S. reliance on the rule this time around is justified. In the 27-year history of the WTO, exceptions have seldom been invoked by its members, even by warring countries, with the notable exception of the U.S., which has denied Cuba and North Korea MFN status.

Some members of the WTO from time to time have armed conflicts — Armenia and Azerbaijan, for example. And there are countries that are in a perennial state of war in the Middle East. Yet they have refrained from resorting to the exception rule. Would Washington have gone ahead with revoking Russia’s MFN status if it had exercised the kind of constraint and concern for the well-being of the organization that other members have demonstrated?

By denying Russia MFN status, the Biden administration has set a pernicious example. If other countries follow suit, we will soon find the WTO crumbling. The exception rule is subject to abuse, and its injudicious use has the potential to shake the organization to its roots. What is at stake now is the health, if not the survival, of the organization.

The U.S. managed to cripple the WTO physically when it paralyzed the organization’s appellate body toward the end of 2020. Its stripping Russia of MFN status on national security grounds may, so to speak, damage the brain of the organization. President Biden has time and again talked about the need for the U.S. to lead the world. However, if imposing sanctions on national security grounds is what he meant by U.S. leadership, the world trade body and, indeed, global economic governance, would be much better off without it. 

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