The economics of the multilateral trading system
Jun 2026
Lesson 2
Trade agreements exist not because free trade is always self-evident, but because unilateral policies shift costs onto trading partners. The GATT's success rested on reciprocity and non-discrimination; as the WTO extended rules into services, agriculture, subsidies, and intellectual property, the original logic became harder to apply and cooperation more politically fragile.
This is your guide to one of the most consequential forces shaping the global economy. In six lessons, UZH Professor of Economics and former WTO Chief Economist, Ralph Ossa takes you inside the multilateral trading system: how it was built, how it works, where it’s holding, and where it's beginning to crack. The series is based on UBS Center Public Paper #16 The Multilateral Trading System.
Many of today’s tensions are interpreted as evidence that the multilateral trading system is no longer fit for purpose. Before accepting that conclusion, it is useful to step back and ask a more precise economic question: what problem the system was designed to solve, and to what extent today’s trade challenges fall within the scope of that design?
Why trade agreements exist
The economic case for trade liberalization is well established. Openness allows firms and households to access cheaper and more diverse inputs and final goods, raises productivity through specialization and selection, and can support longrun growth by facilitating the diffusion of ideas and technologies. These gains help explain why trade has historically been a powerful engine of growth and convergence.
The existence of gains from trade does not, by itself, explain why trade agreements are needed. If liberalization were always attractive from a national perspective, governments could pursue it unilaterally. The problem is that trade policy choices can be used to shift costs onto trading partners. Acting alone, a government may be able to improve its own position through tariffs or related measures, even if doing so reduces global welfare. When many governments behave in this way, the result is higher trade barriers, reduced trade, and losses for all. Trade agreements exist to limit such unilateral behavior and to prevent these collectively inefficient outcomes.
Two channels are particularly important. Large economies can use tariffs to extract revenue from foreign exporters by worsening their terms of trade. Trade policy can also be deployed as an instrument of industrial policy, drawing production toward the domestic market at the expense of others. Although these motives differ, their effects are similar when pursued unilaterally: higher trade barriers, higher prices, and lower trade. By constraining these actions and linking policy choices across countries, trade agreements internalize the resulting spillovers and reduce the risk of damaging policy escalation.
Why the GATT worked
The core architecture of the General Agreement on Tariffs and Trade (GATT) was well aligned with the economic problem trade agreements were meant to address. It focused on a narrow set of border instruments – tariffs on goods – and relied on two simple but powerful principles: reciprocity and non-discrimination.
Reciprocity ensured that tariff reductions were exchanged rather than granted unilaterally. On the way down, it encouraged liberalization by linking improved market access at home to improved access abroad. On the way up, it disciplined protection by allowing proportionate retaliation, thereby neutralizing incentives to raise tariffs in the first place. Economically, reciprocity aligned national policy choices with mutually beneficial outcomes and limited the scope for unilateral escalation.
Non-discrimination, operationalized through the most-favored-nation (MFN) rule, ensured that tariff concessions negotiated among some members did not worsen access conditions for others. Its economic function was to prevent trade diversion: when liberalization between a subset of countries lowers domestic prices, extending the same tariff treatment to all suppliers preserves outsiders’ competitive position. MFN therefore protects non-participants from being disadvantaged by others’ agreements, without granting them the gains from liberalization itself. Those gains remain tied to reciprocal commitments. This separation between preserving access and generating new market-opening benefits is a defining feature of MFN and a key reason why it supported both stability and cooperation in the GATT system.
This logic also helps clarify a tension that runs through current debates. In advanced economies, dissatisfaction with MFN often reflects the perception that non-participants benefit from liberalization without making reciprocal commitments. In many developing economies, by contrast, MFN liberalization elsewhere is sometimes seen as having fallen short of delivering meaningful marketaccess gains. Economically, both expectations rest on a misreading of what MFN is designed to do. MFN preserves existing access conditions when others liberalize, but it does not shift the gains from liberalization toward outsiders. Those gains remain tied to reciprocal bargaining. When MFN is asked to substitute for such bargaining, it will inevitably disappoint on both fronts.
Taken together, these features explain why the GATT proved effective for decades. It delivered deep liberalization, stabilized expectations, and constrained the most damaging forms of unilateralism – while avoiding intrusive constraints on domestic policy and preserving substantial national autonomy.
Where economics becomes less supportive
The creation of the World Trade Organization extended multilateral rules beyond tariffs on goods into services, intellectual property, agriculture, and domestic subsidies. These extensions were motivated by real economic concerns, but they also moved the system toward deeper forms of integration for which the original GATT logic is less well suited.
A first indication of this shift appears in services, where market access is shaped primarily by domestic regulation rather than border measures. As a result, disciplining unilateral incentives requires negotiating over a wide range of behindthe- border policies. This makes cooperation more demanding, more politically contentious, and less amenable to the reciprocity- based bargaining that worked for tariffs. The result has been limited progress and persistent disagreement.
A different set of tensions arises in intellectual property. While cross-border spillovers create a rationale for international cooperation, harmonization of standards is neither necessary nor sufficient for efficiency. Differences in market size and innovative capacity imply divergent national incentives, making uniform rules distributionally contentious and politically fragile. These features help explain why intellectual property has remained one of the most contested elements of the WTO framework.
These limits are even more deeply embedded in agriculture. Market access in agriculture has long been shaped primarily by domestic support, administered prices, and food security policies rather than by border measures alone. As a result, reciprocity has been difficult to operationalize, and multilateral disciplines have relied heavily on historically anchored commitments, differentiation, and exceptions. This has allowed cooperation to persist, but largely by managing disagreement rather than by generating sustained reciprocal liberalization.
Subsidies push these tensions to their limit. From a conventional economic perspective, production subsidies are often a more efficient policy instrument than tariffs for pursuing domestic redistributive or industrial objectives. Moreover, their spillovers on trading partners are frequently positive in narrow economic terms, for example through lower import prices. As a result, standard externalitybased arguments provide only a limited basis for disciplining subsidies beyond what is needed to preserve negotiated market access.
Yet conventional economic spillovers do not capture the main source of international concern about subsidies. Governments often object to foreign subsidies even when they generate positive price effects, because they are perceived as unfair and can undermine political support for open trade – especially in economies with limited fiscal space. These systemic externalities are political rather than economic, and help explain why subsidy disciplines are repeatedly demanded despite their limited grounding in conventional economic theory.
The common thread is that deeper integration pushes cooperation into policy areas where preferences diverge more sharply, reciprocity is harder to define, and binding multilateral rules are more difficult to sustain.
Beyond tariffs: predictability, regulation, and commitment
Trade agreements nevertheless perform functions that extend beyond disciplining tariffs. Three are particularly relevant today. First, they enhance predictability. Trade policy uncertainty raises effective trade costs and discourages investment, while generating none of the revenue associated with tariffs. In this sense, uncertainty is a particularly wasteful form of protection. The elimination of uncertainty associated with China’s accession to the WTO illustrates how powerful this channel can be, even in the absence of large changes in applied tariffs.
Second, trade agreements facilitate coordination over domestic regulation. Regulatory differences often reflect legitimate national choices, but uncoordinated regulation can fragment markets and raise trade costs. Transparency, dialogue, and procedural cooperation – rather than harmonization – have proven particularly valuable in this domain, as illustrated by WTO committee work on technical barriers and sanitary measures.
Third, trade agreements allow governments to commit vis-à-vis domestic interest groups. By binding future policy choices, they reduce incentives for rentseeking and over-investment in protected sectors, strengthening governments’ ability to resist protectionist pressure over time.
Implications
The economic analysis in this section points to a nuanced conclusion. The multilateral trading system was most effective where it addressed a well-defined problem – unilateral trade policies that shift costs onto trading partners – using simple and incentive-compatible rules. Tariffs on goods, disciplined through reciprocity and non-discrimination, fit this logic closely. In this domain, binding multilateral commitments reduced uncertainty, constrained escalation, and delivered durable integration.
As the scope of cooperation expanded, however, the nature of the policy problems also changed. In areas where market access is shaped less by border measures and more by domestic regulation, the logic that supported tariff cooperation carries over less directly. Reciprocity becomes harder to define, distributional stakes become more salient, and enforcement increasingly intrusive. This does not imply that cooperation in these areas is infeasible, but it does imply that sustaining binding multilateral rules requires greater convergence of preferences, stronger institutions, and more differentiated forms of commitment.
At the same time, the analysis highlights functions of trade agreements that remain valuable even where comprehensive rule-making is difficult. By enhancing predictability, facilitating transparency and dialogue over domestic regulation, and allowing governments to commit vis-à-vis domestic interests, trade agreements can support cooperation without requiring deep harmonization.
The implication is therefore not that the multilateral trading system has reached the limits of its economic rationale, but that effectiveness depends on matching instruments to problems. Where simple rules can internalize clear cross-border externalities, binding commitments remain powerful. Where policy objectives are heterogeneous and instruments primarily domestic, cooperation is more likely to succeed when it emphasizes predictability, transparency, and restraint rather than uniform, highly binding obligations.
In this series, Prof. Ralph Ossa distills his experience from academia and policy making into something rare: a clear, honest assessment of where the system actually stands today. Each lesson offers insights that stand on their own. Follow all six, and you'll come away with a complete picture – and a much sharper understanding of what holds the global economy together, and what happens when it starts to fray.
Trade agreements exist not because free trade is always self-evident, but because unilateral policies shift costs onto trading partners. The GATT's success rested on reciprocity and non-discrimination; as the WTO extended rules into services, agriculture, subsidies, and intellectual property, the original logic became harder to apply and cooperation more politically fragile.
This is your guide to one of the most consequential forces shaping the global economy. In six lessons, UZH Professor of Economics and former WTO Chief Economist, Ralph Ossa takes you inside the multilateral trading system: how it was built, how it works, where it’s holding, and where it's beginning to crack. The series is based on UBS Center Public Paper #16 The Multilateral Trading System.
Many of today’s tensions are interpreted as evidence that the multilateral trading system is no longer fit for purpose. Before accepting that conclusion, it is useful to step back and ask a more precise economic question: what problem the system was designed to solve, and to what extent today’s trade challenges fall within the scope of that design?
The United Nations Office at Geneva (UNOG), housed at the historic Palais des Nations, is the second largest United Nations centre after the United Nations Headquarters in New York. The facility, an outstanding testimony to twentieth century architecture, is situated in the beautiful Ariana park in Geneva, Switzerland. Image: Jonathan Ansel moy de Vitry / Unsplash
Born in the aftermath of World War II, the General Agreement on Tariffs and Trade (GATT) entered into force on January 1, 1948, in Geneva. As illustrated in the photo, representatives of 23 founding members convened at the Palais des Nations to establish a rules-based framework aimed at reducing trade barriers and preventing economic fragmentation. Switzerland played a central role as host, positioning Geneva as a lasting hub for multilateral cooperation., Source: World Trade Organization (WTO)
Full series
Public Paper 16
The multilateral trading system is widely perceived to be in crisis, undermined by geopolitical tensions, unilateral trade policies, and growing skepticism toward global cooperation. UZH Professor of Economics Ralph Ossa, who served as Chief Economist of the World Trade Organization (WTO), argues in our latest UBS Center Public Paper, that such narratives are both overstated and insufficiently precise. While the system faces real and structural pressures, it continues to govern the majority of global trade and to deliver significant economic value.
The multilateral trading system is widely perceived to be in crisis, undermined by geopolitical tensions, unilateral trade policies, and growing skepticism toward global cooperation. UZH Professor of Economics Ralph Ossa, who served as Chief Economist of the World Trade Organization (WTO), argues in our latest UBS Center Public Paper, that such narratives are both overstated and insufficiently precise. While the system faces real and structural pressures, it continues to govern the majority of global trade and to deliver significant economic value.
Related videos
Author
UBS Foundation Professor of Economics
Ralph Ossa, who served as Chief Economist of the World Trade Organization (WTO) from January 2023 to June 2025, took up the UBS Foundation Professorship of Economics at the Department of Economics of the University of Zurich (UZH) as of July 1, 2025. Before joining the WTO, Ralph Ossa was already teaching and conducting research at UZH in the field of international economics, with a particular focus on policy-relevant questions. He was chairman of the Department of Economics from 2019 to 2022 and coeditor of the Journal of International Economics from 2016 to 2022. Prior to Zurich, he was on the faculty at the University of Chicago Booth School of Business. He holds a PhD in Economics from the London School of Economics.
UBS Foundation Professor of Economics
Ralph Ossa, who served as Chief Economist of the World Trade Organization (WTO) from January 2023 to June 2025, took up the UBS Foundation Professorship of Economics at the Department of Economics of the University of Zurich (UZH) as of July 1, 2025. Before joining the WTO, Ralph Ossa was already teaching and conducting research at UZH in the field of international economics, with a particular focus on policy-relevant questions. He was chairman of the Department of Economics from 2019 to 2022 and coeditor of the Journal of International Economics from 2016 to 2022. Prior to Zurich, he was on the faculty at the University of Chicago Booth School of Business. He holds a PhD in Economics from the London School of Economics.