The Future of Trade Without Trade Rules

The World Trade Organization is in crisis. To appreciate what we have in it, we must consider the consequences of letting it die. The primary benefit is that the WTO helps keep national leaders from doing economically harmful things for domestic political reasons. Without that constraint, we can expect governments to take more and more actions that are politically popular but harmful to both their national economies and the global economy.

U.S. proponents of weakening or withdrawing from international organizations and agreements complain that they are tying the country’s hands. They have a point, which is the point. What critics of international arrangements ignore is that those agreements strengthen the ability of leaders to rise above short-term political pressures in order to ensure a long-term good. In his classic study of international economic policy, Harvard political scientist Robert Putnam argued that international agreements often allow leaders to pursue what they see as sensible long-term policies that would have been blocked by domestic interests if not for those international commitments.[1]

The decision last week by a WTO dispute settlement panel that ruled against the Trump Administration’s tariffs on China is a case study of this dynamic.[2] Although popular, the president’s China trade policy has been a colossal failure. Linette Lopez of Business Insider called it “an unmitigated, farcical disaster.”[3] The U.S. trade deficit with China that once so concerned Trump is now at the record levels of 2008.[4] China’s purchases of American goods are falling far short of its pledges under Trump’s hyped “phase-one trade deal.”[5]

Meanwhile, Beijing is backing farther away from structural reform in favor of state-led development. U.S. consumers and manufacturers are paying tariffs of as high as 25 percent on most Chinese imports. U.S. farmers face retaliatory tariffs in China and are being bailed out by the U.S. government.[6] While Trump promised that his tariffs would help lead a manufacturing revival, there are fewer manufacturing jobs in the States today than when he took office.[7]

With that sorry record, the WTO panel ruling could have been a godsend, allowing the United States to retreat and reconsider without losing face. Instead, U.S. Trade Representative Robert Lighthizer slammed the ruling saying it was just more proof that “the WTO is completely inadequate to stop China’s harmful technology practices.”[8]

He promised that the administration “will not let China use the WTO to take advantage of American workers, businesses, farmers and ranchers.” The Trump Administration effectively neutered the WTO appellate body by refusing to allow new members to join the body. He now argues that without an appeals process the ruling cannot be finalized. This, he contends, allows the administration to say that it can ignore the panel’s ruling.

Previous American presidents better understood the value of the WTO in constraining their own worst impulses. Prior to the Trump tariffs, one of the more cynical misuses of trade policy by the United States was the George W. Bush administration’s tariffs on steel imports in 2002, loosely justified under the WTO “safeguards” rules.[9] Bush administration officials were quite candid at the time in acknowledging that the tariffs were a political move, both to shore up support in Congress for its liberalized trade agenda and to help the president in electorally important states like Pennsylvania and Ohio.

It soon became very clear that the tariffs took a big toll on steel-using industries; many more jobs were lost in those industries due to higher tariffs than were added in steelmaking. When a WTO dispute panel ruled 21 months later that the tariffs violated WTO rules, clearing the way for tariff retaliation by the European Union and others, Bush quickly removed the tariffs.

In a post-WTO world, economic subsidies are likely to grow. Advanced economies are already racing each other to subsidize “re-shoring” production from China. The limitations under the WTO’s agreement on subsidies, already weak, are now being utterly disregarded. The WTO and other trade agreements limit such actions, but with the constraints gone, other countries will have little choice but to do the same and favor their own companies.[10] The limits on farm subsidies — so painfully negotiated between the United States and the EU during the Uruguay Round of multilateral talks that — are being tossed aside. That will cost taxpayers in advanced economies and hurt farmers in developing countries who lack governmental financial support.

Critics of the WTO from both the right and left have assailed it as undemocratic and argued that countries should be freer to use subsidies, tariffs, and other import restrictions to pursue their domestic economic goals. That argument has a superficial appeal. The purpose of the WTO, after all, is to prevent them from caving into that political pressure to address short-term problems that are harmful to their trading partners in order to ensure that those partners do not retaliate in kind.

Weakening international institutions, such as the WTO, makes us all vulnerable to short-sighted political expediency. The WTO is the linchpin of a rules-based trading system. The United States, long the champion of international rules, must return to its traditional role by leading a WTO reform movement with the goal of challenging China’s mercantilistic policies. Abandoning the WTO is a prescription for an all-against-all trade war and utter chaos.

[1] [2]

[3] [4]

[5] [6]

[7] [8]

[9] [10]

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