The World Trade Organization at Risk

posted by
on February 18, 2018

WTO in the Crosshairs

by Greg Rushford

Greg Rushford is an independent journalist specializing in international trade and investment issues, and is the editor of The Rushford Report.

Published October 3, 2017

 While the world is focused on the nightmarish prospect of a nuclear war sparked by what seems to be a personal conflict between Kim Jong-un and Donald Trump, little attention has been paid to another brewing Korean conflict: the threat of economic war against America’s staunch ally in the peninsula’s south. The one similarity between a nuclear exchange with North Korea and a trade war with South Korea: once triggered, there could be no winners.
Misunderstanding in the White House

South Korea is the United States’s 6th most important trading partner, sandwiched between Germany (5th) and the United Kingdom (7th). Last year, total trade between the two amounted to more than $112 billion. So, even apart from its awkward timing and geopolitical sensitivity, this trade spat is worth a second look. Indeed, as if to illustrate the unintuitive web of cause and effect in global trade relations, the high-pressure legal skirmishing between Washington and Seoul has had reverberations in every major capital, threatening to disrupt the delicate framework that governs multilateral trade among the 164 member-nations of the World Trade Organization.

The threat to break with South Korea seems to have followed from President Trump’s common — though in the view of mainstream economists, incorrect — view that bilateral trade relationships are zero-sum games in which “winning” means running a trade surplus. Claiming the U.S.-South Korea preferential trade deal that went into effect five years ago has been “horrible” for America, the president ordered U.S. trade officials to withdraw from the pact.

That policy about-face — the agreement had been celebrated by both Republicans and Democrats — generated bewilderment on both sides of the Pacific. In Washington, the U.S. Chamber of Commerce, the Business Roundtable, the National Association of Manufacturers and too many farm lobbies to list raised a ruckus about the prospects for a self-inflicted wound if the initiative got past the press release stage.

Faced with such vehement interest group opposition, the White House backed off. But it ordered its chief trade negotiator, Robert Lighthizer, to demand that Korea agree to “amend and modify” the pact with one-sided changes that would be humiliating for Seoul. While details are skimpy, Lighthizer is apparently pressing Korea to eliminate all remaining tariffs on farm commodities immediately rather than phasing them out gradually. Meanwhile, the United States would gain license to indefinitely delay its own scheduled removal of market barriers.

Gordian KnotsSouth Korea’s trade minister, Kim Hyun-chong — who had played a key role in negotiating the 2012 Seoul-Washington deal — was reportedly both incredulous and angry. And by unfortunate coincidence, the resulting loss of trust on the part of Minister Kim has spilled over to another fight the White House has picked, this one with the World Trade Organization.

In August, Kim resigned his position as a jurist on the WTO’s Dispute Settlement Body, which serves as the neutral arbiter in interpreting members’ legal obligations under the global rules-based trading system. The appellate body on which Kim had been serving is the DSB’s court of final appeals; its decisions are binding.

 Kim’s resignation created a second vacancy on the seven-member panel, with a third jurist’s term set to expire in December. The longer those positions remain unfilled, the harder it will be for the remaining judges to manage an already backlogged caseload. It is no exaggeration to say that the institution is at risk of losing its value in preventing trade disputes from spilling over into broader economic and diplomatic conflicts.

But while most professional trade negotiators would cringe at the prospect of losing a way to depoliticize difficult dispute resolutions, U.S. Trade Representative Lighthizer has seen it as a hostage-taking opportunity. Taking advantage of the fact that the WTO relies on consensus in making appointments, the U.S. trade chief has refused to agree to fill any of the vacancies until he gets what he wants.

Lighthizer has not explained precisely what that is. The only clues are vague public postings to the effect that there are “systemic” issues with the appellate body that the Trump administration wants addressed.

Look Who’s Minding the StoreBut the muttering about legal procedure seems to boil down to one issue: Lighthizer has maintained for years that the 1995 choice to make the WTO’s dispute-panel decisions legally binding on members, especially the United States, was a mistake. Although U.S. presidents from Ronald Reagan to Bill Clinton had fought for that reform, Lighthizer — a veteran lawyer for the protectionist-minded U.S. steel industry and a dedicated America Firster decades before the rise of Donald Trump – has never accepted it.

In 2001, for instance, Lighthizer claimed at a seminar on Capitol Hill that WTO panels are often comprised of jurists who are “not qualified.” Lighthizer added that he suspected that some WTO jurists “may be crooked, although I have no evidence of that.” But even if they were “fair arbiters,” making WTO dispute-panel rulings binding would be “a threat to sovereignty,” he added. Perhaps because his reputation had preceded him, Lighthizer was rejected in 2003 when he sought an appointment to the appellate body.

Veteran trade observers suspect his goal is to force a return to the days when individual WTO members could block any adverse dispute-panel rulings. The Koreans, Europeans, Brazilians and several dozen other WTO members are furious, as are the Mexicans and Canadians (who have their own rule-of-law issues with Washington, associated with Trump’s renegotiation of Nafta). Presently, though, the other 163 WTO members are stymied in the face of intransigence from Washington.

Common (Non)senseBut I digress. For the president, the only evidence needed to judge the U.S.-South Korea trade pact to be unfair was the fact that Koreans sold Americans some $17 billion more in goods and services last year than they purchased. That logic doesn’t sit well with most economists, who dismiss the relevance of bilateral deficits in a global economy that is bound by an intricate web of cross-border supply chains — and who, in any event, view the imbalance in trade figures as largely driven by their flipside, the imbalance in international investment flows. More relevant here, it angers Americans who have directly benefited from the sharp cuts in trade barriers with Korea since the pact went into effect.

It’s safe to assume that, unlike the White House, Citrus World, the giant orange-growers co-op in Florida, does not consider it “horrible” to no longer face a 54 percent tariff on orange juice exports to Korea. Nor does Hershey’s, which used to be hit with an 8 percent tariff on sales of Kisses. Ditto for Campbell’s Soup — South Koreans reportedly just love the company’s clam chowder — which no longer need worry about a 30 percent tariff.

Wait, I’m not done. Johnson & Johnson no longer faces a 5 percent tariff on medical equipment. California winemakers no longer must cope with a 15 percent tariff. And so forth.

Remember, too, my earlier reference to global supply chains that obscure the winners and losers from wide-open trade. Virtually every U.S. manufacturer makes use of low- or no-tariff access to Korean components ranging from copper piping to sheet steel to semiconductors to SUV tires. And while protectionists complain that Boeing contributes to the U.S. trade deficit by buying parts from Doosan Machine Tools, the aerospace giant is the America’s single largest exporter at least in part because it can freely source components from dozens of other countries.

 No doubt some American firms would prefer to operate in an environment in which goods from Korea were no longer competitive in the U.S. domestic market. But few of any size would risk the reversal of global economic integration in the name of forcing a better deal from Korea. It thus shouldn’t be surprising that not one U.S. exporter or importer has publicly supported the idea of pulling out of the U.S.-South Korean trade pact. And not one U.S. ally favors the destruction of the WTO’s binding arbitration system, which gives national governments a way of managing interest group conflict over trade without risking a cycle of retaliation and counter-retaliation.

But in today’s Washington, it’s far from clear that cold logic — or even the organized efforts of trade-dependent American business — will influence trade policy. At least by the criterion of unpredictability, Kim Jong-un seems to have met his match.

Don’t Believe China’s Trade Hype

posted by
on February 18, 2018

Don’t Believe China’s Trade Hype

Beijing runs with the G-33—poorer, protectionist-minded WTO laggards.

Don’t expect much progress in dismantling global trade barriers from the World Trade Organization’s meeting in Buenos Aires this week. The Trump administration will take most of the blame. American trade negotiators have even said they will refuse to sign the customary ministerial declaration expressing support for the “centrality of the multilateral trading system.” The U.S., as WTO Deputy Director Alan Wolff noted, is “sitting this one out.”

In the absence of American leadership, all eyes are on Chinese President Xi Jinping. Mr. Xi has missed no opportunity to declare his support for the WTO’s mission of advancing free trade. He acknowledges that China has benefited greatly since becoming a WTO member in 2001.

“We should uphold multilateralism and pursue shared growth,” Mr. Xi declared last month in a speech to Asia-Pacific business leaders in Vietnam. His remarks were well-received—in clear contrast to Mr. Trump’s insular America First exhortations at the same forum. Global economic leadership is a key part of Mr. Xi’s “Chinese Dream.”

 But going by China’s actual record in the WTO, Mr. Xi will have to dream on. Despite the glowing free-trade rhetoric from Beijing, inside WTO negotiating rooms China is hardly a champion of free trade. Instead, the Chinese run with the G-33, a group of poorer, protectionist-minded WTO laggards—the likes of South Africa, Venezuela, Zimbabwe and India.

These countries tailor their negotiating positions to longstanding grudges against their former European colonial masters, as well as rich Americans. They support China’s assertion that it remains a developing nation deserving of “special and differential treatment” when it comes to dismantling trade barriers.

In the WTO’s thorny agriculture negotiations, for example, China and India stand together in demanding that rich Europeans and Americans dismantle trade-distorting subsidies. Yet they demand that “developing” countries be allowed to continue propping up tens of millions of subsistence farmers indefinitely.

Beijing insists that it made enough concessions on lowering agriculture tariffs and subsidies when it joined the WTO in 2001. When the WTO held its ministerial meetings in Bali in 2013, the Chinese and Indians won the “temporary” right to circumvent their existing legal restrictions on exceeding their (wasteful) domestic support programs. In Buenos Aires, they will push for the permanent right to prop up their globally uncompetitive farmers.

Beijing is also resisting an initiative to curb governmental subsidies that contribute to overfishing. In 2002 a group of WTO members led by Australia, New Zealand, Iceland and Chile established the so-called Friends of Fish to try to reach consensus. But China wants a carve-out to protect its subsidies and insists that countries be allowed to police violations themselves—an approach that threatens the collapse of already depleted global fishing stocks.

China has also failed to join the WTO’s Government Procurement Agreement. Forty-seven advanced economies have opened bidding on more than $1.7 trillion of their governmental contracts to foreign competition. China entered negotiations to join the GPA in 2002. The big news from the WTO’s 2011 ministerial meetings in Geneva was that Beijing would sign on. But that deal has never materialized, while talks drag on and on.

While Chinese rhetoric doesn’t square with the country’s record in the WTO, Beijing’s performance is not all negative. After arduous negotiations, Beijing joined the Information Technology Agreement, where 82 WTO members have agreed to slash tariffs on trade in high-tech goods.

 China also slashed average tariffs on industrial products to less than 9%, and has promised early action to slash its 25% auto tariffs. Chinese officials from President Xi on down vow that China will continue to play a “constructive” role inside the WTO.

Just how constructive depends on whether Beijing continues to seek special treatment at the expense of its partners. This week’s meeting might begin to shed light on an important question: Is Mr. Xi’s free-trade talk worth more than scoring political points against Donald Trump ?

Mr. Rushford edits the Rushford Report, an online journal that tracks trade politics.

Imports Are Good for American Workers

posted by
on September 13, 2017

by Greg Rushford (Milken Institute Review, April 21, 2017)

Recent polling by the Wall Street Journal suggests that Americans have become skeptics about international trade, with less than half believing that cross-border commerce is, on balance, beneficial. A vociferous third go further, agreeing with their new protectionist-in-chief that “our free trade has led to a lot of bad things happening.” And while President Trump’s trade agenda is yet to be fully shaped, the outline of what he wants is becoming clear: high tariff walls to curb competition from imports and more stringent Buy American laws for U.S. manufacturers — all in the name of protecting domestic jobs.

So what should Americans who reflexively cringe at the economic nationalism currently in vogue say to the skeptics? One option is to point to history: countries in the post-war era that have relied upon high protectionist tariffs and “buy domestic” import-substitution schemes — think India, Brazil and Argentina — lost their economic mojo and only began to recover their places in the sun when they opened their borders.

But there’s also an argument that doesn’t require historical perspective. Just look around at the most successful American manufacturers, and observe how access to global markets sustains their American workforces. Of course, it isn’t quite that simple. As David Autor of MIT reminds, trade produces losers as well as winners. But this reality can’t be allowed to block the American economy’s only plausible path toward ongoing prosperity.

Hogs and Drugs

Take Harley-Davidson, the motorcycle maker headquartered in Wisconsin that sells its iconic “hogs” in a zillion countries. The jobs of the men and women who make those Fat Boys growl depend upon imported components — transmissions from Japan, wheels from Australia, tires from Spain and Thailand. While Harley declines to reveal specifics, it’s a safe bet that, all told, about one-third of the value comes from outside the United States.

It’s a similar story for Merck, the New Jersey-based pharmaceutical giant that makes some of its lifesaving potions in Elkton, Va. (pop. 2,042). Because it operates there in a free-trade zone authorized by the federal government, Merck can save serious amounts by importing chemicals. But nobody has told Merck’s Elkton workers that free trade puts food on their tables.

Likewise for the venerable diesel-maker Cummins, which is based in Indianapolis. Cummins’s American workers could not make those engines as well or as cheaply without key imports including gaskets, bearings and cylinder heads.

Half of the goods the United States imports are inputs and raw materials that are necessary for U.S. companies to operate their domestic production. Those imports are absolutely essential to the health of American manufacturing.

“Half of the goods the United States imports are inputs and raw materials that are necessary for U.S. companies to operate their domestic production,” explains Scott Miller, a former Procter & Gamble executive who now edits TradeVistas, an economic research website for the Center for International and Strategic Studies in Washington. Those imports, Miller stresses, are “absolutely essential to the health of American manufacturing.”

True, Miller adds, the U.S. government could adopt the Indian-Brazilian-Argentine import-substitution model to force domestic manufacturers to bring their global supply chains back to American shores. But there would be consequences in the form of higher consumer prices, problematic quality resulting from undermining competition — and ultimately fewer American jobs.

Ironically, though, you aren’t likely to hear the CEOs of American export-oriented companies celebrating the role of imports in sustaining the jobs of their workforces. When I first started writing about the importance of imported components to domestic jobs in the 1990s, Harley-Davidson’s supply-chain managers freely acknowledged that they bought the best parts wherever they could be found. But these days the company is lying low, loath to offend customers who apparently assume their hogs were born and raised exclusively in Menomonee Falls and Kansas City. Cummins and Merck are hardly more communicative about their dependence on international trade, both for imported components and markets.

Ignorance Is Not Bliss

The explanation for the low profile of American corporations whose employees as well as profits depend on open trade is that few companies are prepared to stick their proverbial necks out when political leaders find it more convenient to pretend they never took Econ 101. Echoing Republican presidents Ronald Reagan and the two Bushes, Bill Clinton said he was for “free and fair trade” without specifying what the qualifier “fair” meant. Barack Obama was hardly better: his three favorite words, he often told audiences, were “Made in America.” Meanwhile, the populist from Mar-a-Lago — who does everything bigger — says that his four favorite words are “Made in the USA.”

Over the years, America’s corporate leaders have gotten the message: limit the anti-protectionist talk to only friends and family. There’s no good reason to spend goodwill on the topic, especially when corporate America has bigger fish to fry in the form of corporate tax reform and deregulation.

This see-no-evil approach has often translated into economic buffoonery when presidents and CEOs talk about trade to the American people. Obama, for instance, perfectly illustrated the point in a February 2012 speech to Boeing’s workforce in Everett, Washington. That’s where Boeing makes its newest commercial aircraft, the dazzling 787 Dreamliner. “Boeing has suppliers in all 50 states, providing goods and services like the airplane’s ground-breaking carbon fiber composite aircraft structure from Kansas, advanced jet engines from Ohio, wing components from Oklahoma, and revolutionary electrochromic windows from Alabama,” Obama boasted. American workers, he said, are the best in the world.

Boeing executives on that stage beamed enigmatically — perhaps because they were aware that some 70 percent of the Dreamliner’s parts come from an atlas’ worth of countries. “The wings are produced in Japan, the engines in the United Kingdom and the United States, the flaps and ailerons in Canada and Australia, the fuselage in Japan, Italy and the United States, the horizontal stabilizers in Italy, the landing gear in France, and the doors in Sweden and France,” a study by the Swedish National Board of Trade concluded. “All in all, a Boeing airplane is not particularly American.”

Perhaps irony is less surprising in the case of Donald Trump — but it is still striking. The president’s private Boeing 757, famous for its silk-lined master bedroom and solid gold bathroom fixtures, is kept airborne by Rolls Royce 211 fanjets, the UK-made workhorse of an entire generation of Boeing aircraft. Somehow, as Trump campaigned in front of the plane railing against nefarious foreigners stealing our manufacturing jobs, nobody seemed to take note of the “RR” logo prominently displayed on the portside engine.

As for the new American president’s passion for slapping high tariffs on imports from Mexico, perhaps Trump might consider some awkward facts. The Dreamliner’s wiring comes from Mexico. And, in return, the Mexicans are among Boeing’s most enthusiastic customers for the big plane — Mexico’s president Enrique Pena Nieto proudly flies one. Boeing’s CEO, Dennis Muilenburg, who seems no more enthusiastic about throwing his weight behind open trade than the CEOs of Merck, Cummins and Harley-Davidson, did not respond to an invitation to say whether he thought that was a pretty good deal for his company and its nearly 150,000 U.S.-based workers.

Somebody (other than college professors and think-tank nerds) needs to get back in the game of explaining the benefits of trade to American audiences. The Geneva-based World Trade Organization is giving it a shot. In a recent speech, WTO Director-General Roberto Azevedo appealed to a younger audience: “A jar of Nutella can contain hazelnuts from Turkey, palm oil from Malaysia, cocoa from Nigeria, sugar from Brazil and flavoring from China,” he noted. Meanwhile the company, which is headquartered in Italy, has a plant in Canada that brews up the chocolatey goodness sold by retailers across America.

* * *

It’s easy to dismiss the awkward silence of American corporate executives who know American jobs (and profits) depend on global supply chains simply as pragmatism-as-usual. But one indirect consequence, the sheer ignorance of American workers and politicians as to how their bread is buttered, is dangerously exposing the global economy to uncertainty. Is it too much to ask corporate America to explain that economic nationalism is a recipe for stagnation and joblessness?