This article first appeared in Forum, The Edge Malaysia Weekly on December 24, 2018 - December 30, 2018

Trade tensions between the US and China continue to escalate and the World Trade Organization (WTO), the global forum of the management of trade rules and disputes, seems powerless to stop them.

The WTO’s multilateral, rules-based trading system has underpinned huge increases in global prosperity since the 1960s. But shortcomings in investment rules and enforcement mean WTO reform is now top of the G20, US and EU agendas.

Much of the drama stems from US accusations that the WTO has failed to hold China accountable for not opening up its economy as promised when it joined the body in 2001. No reform, says US President Donald Trump, could see his country withdraw from the WTO.

The US is seriously concerned about China’s attitude to intellectual property (IP) rights. The Trump administration claims Chinese theft of American companies’ proprietary knowledge through cyberattacks, counterfeiting, online piracy and forced technology transfer from investing companies has cost US$50 billion in corporate earnings.

The US is right: Intellectual property is vital to the modern economy. Trade used to be all about moving physical goods from their points of manufacture to customers in different countries. Today, it is increasingly about “intangible” products and services, based on research and development efforts, brands and patented or licensed technology.

Much of modern international trade and investment is driven by human know-how, knowledge, creativity and innovation.

The WTO has accelerated this globalisation of knowledge-based industries, thanks to its Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), ratified in 1994.

TRIPS requires all WTO members to institute basic laws to protect IP. As recently as the 1980s, many countries did not even grant patents — unsustainable, given the rapid pace of globalisation and technological development of the era.

The creation and harmonisation of basic global IP standards under TRIPS has been transformative for developing countries in particular. Under TRIPS, more countries have benefited from the integration of domestic companies into global value chains, through which modern products and services are designed, manufactured and marketed across many countries. China, Singapore and South Korea are notable examples.

These global value chains have created cheaper consumer goods and reduced poverty by helping to integrate developing countries into the global economy.

According to the World Intellectual Property Organization, one-third of the value of manufactured goods sold globally (US$5.9 trillion) comes from intangible capital, underlining the importance of IP to today’s global economy.

Outside of China, IP problems abound. Counterfeit and pirated goods account for 2.5% of global trade. Rights holders are unable uphold their IP rights in local courts and many countries have yet to fully upgrade their domestic IP laws in line with their treaty obligations.

Meanwhile, the text of TRIPS has not had a meaningful update since its inception in the 1980s, and could benefit from updates to take account of developments in new technologies, particularly in the biotechnology and digital sectors.

These shortcomings have compounded problems of the multilateral trading system. As a result, knowledge-exporting countries increasingly look outside the WTO to achieve their trade objectives. Bilateral free trade agreements and regional deals (the North America Free Trade Agreement replacement being a current example) have allowed like-minded countries to modernise and update trade and investment rules, free from the constraints of a unanimous vote by 164 countries.

But this is fragmenting the international trading system and limiting the opportunities for countries outside these deals.

At the November G20 summit in Buenos Aires and October conference on WTO reform in Ottawa, leaders focused on the mechanics of dispute resolution and enforcement.

These are important to restoring faith in the WTO. But in the longer term, the WTO needs to ensure the IP rules that govern trade in knowledge-intensive intangible capital are strong and well enforced. If needed, countries willing to move faster on these reforms could form coalitions under the auspices of the WTO.

This month, Beijing announced a number of new punishments for domestic IP infringers. It suggests that China’s officials are beginning to understand the importance of IP for smooth trade and relations. But to ensure modern trade and investment can continue on non-discriminatory terms for everyone, the WTO should put IP first.

Philip Stevens is Senior Fellow at the Institute for Democracy and Economic Affairs, and Matthias Bauer is Senior Economist at the European Centre for International Political Economy, Brussels

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