12:42 GMT13 June 2021
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    The World Trade Organisation (WTO) has become obsolete and cannot address modern challenges, professor of finance Michael Pettis told Sputnik, commenting on a row surrounding the Trump administration's snubbing of the organisation. According to the professor, the WTO and other international institutions need to change.

    The EU and China lambasted the US on December 19 for undermining the World Trade Organisation (WTO) by refusing to allow new appointments to the Appellate Body, the organisation's court, amid the US-China trade frictions.

    "It is… unfortunate that we are seeing, since the last trade policy review, especially during the past year, a different America with severely mismatched power and responsibility", China's Ambassador to the WTO Zhang Xiangchen said, as quoted by Xinhua.

    Commenting on the issue, Michael Pettis, professor of finance at the Guanghua School of Management at Peking University in Beijing, presumed that international financial institutions and agreements including WTO, TPP, and NAFTA "have become at least partially obsolete".

    "In the long run the current system of global trade and capital flows is not sustainable, and so many of these institutions will have to adjust or will become irrelevant. The Trump administration should have been much more diplomatic about demanding changes, but one way or another these bodies must change", Pettis told Sputnik.

    According to the academic, "the problem is that the WTO is designed to address the kinds of trade distortions that were typical eighty years ago".

    "In today's world, countries like Germany, Japan, and China, do not run surpluses because they produce goods more cheaply. They run surpluses because they simply cannot consume domestically all they produce, and they cannot do so because in order to gain international competitiveness, they have forced down the share of gross domestic product (GDP) retained by the average household", he said.

    The professor elaborated that in China, for example, "households retain among the lowest shares of GDP (in the form of wages, interest on savings, and government transfers) ever recorded, so it is not surprising that Chinese households consume a smaller part of total GDP than in any other country in the world".

    "It is also not surprising that China must export the difference, or it must close down local factories and fire workers, which of course it does not want to do", he opined.

    According to Pettis, to fix the problem the Chinese leadership should consider "a major redistribution of income domestically from local governments to ordinary households". He added that "Beijing knows it must do so, and has been promising to do so for over a decade, but this has been politically very difficult".

    "That is why tariffs are not terribly useful," the academic suggested in a reference to the US-Chinese tariff war. "Tariffs address relative costs in a system in which relative costs are not the problem: deficient domestic demand is the problem".

    Citing potential alternatives to the WTO system, the academic suggested that there are two ways to tackle the issue. Otherwise, the world may see a return to the 1920-1930s, he warned.

    "Either the world should negotiate a new global agreement that reduces the ability of surplus countries to force their surpluses onto their trade partners, or we will see a return to the days of the 1920s and 1930s in which trade was conducted in a disruptive way", he predicted.

    Referring to "historical precedents" he suggested that a "breakdown of the current trading system will be much more painful for surplus countries and countries with controlled capital accounts than it will be for deficit countries and countries with completely open and flexible capital accounts".

    Given this, he believes that "it make sense for the US and other similar economies (e.g. the UK)" to quit the system "unless it is radically reformed".

    However, the professor is very pessimistic about the outlook.

    "For many decades increasing globalisation has allowed counties with significant domestic demand imbalances to force their deficient demand onto the rest of the world rather than reform, and I think we've reached the limits of that system", he opined, adding that "for the next decade or two I think we are going to see a major reversal of the globalisation process of the past 50-60 years".

    The views and opinions expressed by the speaker do not necessarily reflect those of Sputnik.

    The views and opinions expressed in the article do not necessarily reflect those of Sputnik.


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    anti-globalism, globalism, trade war, trade agreements, NAFTA, Trans-Pacific Partnership (TPP), World Trade Organization (WTO), European Union, Donald Trump, China, Europe, US
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