By Greg Rushford
May 24, 2020
NOTE TO READERS: This text is the third of three lectures that I presented via Zoom to students at the Wakefield Country Day School in Huntly, VA. I presented this third class on May 19, 2020. For the first lecture, click here, and for the second lecture, click here. You may also return to the main page and click on the links there.
Welcome to the third of three classes on the fundamentals of International Political Economy. This one’s on the big picture: the World Trade Organization. The WTO is the international institution that has presided over the rules of global trade flows for the past 25 years.
The WTO has been part of the world’s most successful international economic experiment that has served the world well for 70-plus years, but is currently facing an uncertain future.
This is because political support has waned for its mission in key world capitals has waned — notably including New Delhi, Beijing, and Washington, D.C. Before we’re finished this morning, I’ll pass along some context aimed at helping make some rather confusing current headlines, well, perhaps less so.
This topic is important. There’s not enough time this morning even to mention all the issues, much less answer the inevitable questions. But I can explain the basics, and offer an analytic framework aimed at equipping you to think through some big thoughts independently. And I can point you to sources aimed at smoothing the path for further reading and reflection.
Let’s take this from the top.
More than 600 international civil servants who come from 80-some countries work in the WTO’s secretariat, which is headquartered in Geneva, Switzerland. The Centre William Rappard building is a gem of European classical architecture. The building dates to the 1920s, and is situated in a lovely park — adorned with inspiring sculptures — that runs along the shores of Lake Geneva, with distant views of the famous Mont Blanc and the Swiss Alps.
Regardless of the impressive surroundings, keep this in mind: the responsibility for the decision-making is not vested in the staffers and their Director General who work in Geneva, as important as their renowned expertise is. The responsibility for setting the rules of global commerce is to be found at the highest political levels of government in 164 member countries.
To repeat, because this isn’t always understood as well as it should — the key to understanding the international economic issues that drive the WTO’s trade negotiations is to be found in in the political calculations in various world capital cities.
So why is the WTO so important?
The importance of tariff slashing
The driving economic idea when the WTO was launched in 1995 was to broaden the successes of its predecessor organization, the General Agreement on Tariffs and Trade. The GATT — just 23 countries led by the United States —had been established in 1947. It was first tasked with slashing high protectionist tariffs that had been notorious drags on global economic growth during some particularly nasty trade wars of the 1930s.
But before we get to the economics of dealing with tariff wars and dismantling other barriers to trade, the first thing to keep in mind is the fundamental rationale that has always driven the GATT and the WTO: national security.
National security drives the economics
I highly recommend that you google a 2018 report: The International Trading System at Risk and the Need to Return to First Principles. The report was written for the economics and security committee of the NATO Parliamentary Assembly. This is as good an explanation of the importance of the GATT and the WTO, historically and currently, as I’ve seen, even though the NATO economists are not connected to the WTO in any way.
The NATO Parliamentary Assembly is based in Brussels. It brings together parliamentarians — members of the U.S. Congress and their legislative counterparts in the 30 NATO countries— to exchange ideas.
The acronym NATO stands for the North Atlantic Treaty Organization. This North American-European military alliance was created in 1949 as a defensive shield against military aggression from Joseph Stalin’s Soviet Union. (The world’s oldest military alliance, today NATO forces remain on the watch for mischief from Russia’s president, Vladimir Putin. American leadership in NATO has always been regarded as central.)
To be clear: NATO and its parliamentary assembly are totally separate institutions from the GATT/WTO. People who work in these organizations don’t even talk to each other. I’m not even sure how much the NATO parliamentarians talk to their counterparts on the military side of NATO.
Still, it’s important to recognize that prominent NATO circles understand and respect the economic portfolios of the GATT and WTO. They understand that this is about more than economics. And they certainly do not want NATO countries to start slapping each other with high tariffs and other trade restraints, as such would weaken the vital security ties.
The 2018 report looked back over the years at what the GATT/WTO had accomplished:
“[T]he liberal trading system established after World War II had not only contributed to an unprecedented rise of prosperity on both sides of the Atlantic, pulled millions out of poverty, and encouraged the diffusion of technology and ideas, it had also reinforced the security order. In fact, security, democracy and free trade proved mutually reinforcing.”
The report recognized that world leaders who had created the liberal international economic order after World War II “knew full well that during the 1930s an array of ‘beggar thy neighbour’ protectionist measures had contributed to the Great Depression, poisoned inter-state relations and had doubtless been a central factor in the descent into World War II.”
In other words, as former U.S. Secretary of State Cordell Hull, who served under President Franklin D. Roosevelt from 1933-44, was fond of saying: trade wars tend to end in real shooting wars.
“I saw that you could not separate the idea of commerce from the idea of war and peace,” as Hull recollected n his memoirs. “I thereupon came to believe that if we could increase commercial exchanges among nations over lowered trade and tariff barriers and remove international obstacles to trade, we would go a long way toward eliminating war itself.”
This nexus between national security, peaceful resolution of conflicts, and economic prosperity is so fundamental to the WTO’s mission that it’s often overlooked, or just taken for granted.
The business of streamlining global trade flows
Why have the GATT and the WTO been regarded as the world’s most successful international economic experiment? The short answer is that when the GATT was launched in 1947, average global tariffs had been in the 20-30 percent range — with peaks for some import-sensitive products far higher than that.
This was, at least, a measurable improvement from the higher (prohibitive) tariffs during the 1930s Great Depression.
But the GATT’s founders realized that there would inevitably be powerful domestic lobbies around the world that would always seek protection from import competition. Nations cannot be counted upon to dismantle their protectionist schemes unilaterally, even though such would be in their own self-interests.
A series of GATT multilateral negotiating rounds steadily slashed tariffs, which had fallen to an average of perhaps 11 percent when the WTO took over the GATT’s legal framework in 1995. Presently, they are about nine percent worldwide — and are roughly between two- and three percent for the most advanced economies in Europe, the United States, and Japan.
As tariffs and other restraints to trade have been slowly-but-steadily slashed in the past seven-plus decades, world trade volumes have risen a whopping 4,136 percent, the WTO has reported. The lives of countless millions of people worldwide who have never heard of the GATT or the WTO have been enriched.
It’s more than just tariffs
These days, the WTO deals with far more than tariffs: too many issues to list here.
There have been successful negotiations that have smoothed the flow of information technology across international borders. And others aimed at giving the poorer WTO members a helping hand in expanding their international trade. Perhaps the most difficult political issues are associated with making international agriculture trade more efficient. The WTO’s website has the details.
You might also familiarize yourself with the sites for the World Bank and the Organization for Economic Cooperation and Development (OECD). The Bank, headquartered in Washington, D.C., is one of the so-called Bretton Woods institutions, dating to 1944. The OECD, based in Paris, is an organization whose members are the so-called rich countries). These sites house some of the world’s best international economic research.You will never run out of term-paper materials.
The importance of being true to core principles
It is always worth keeping in mind the core principle that has always driven the GATT and the WTO. It’s called MFN: most-favored-nation. It’s simple — but not simplistic. MFN’s so-called “national treatment” means that WTO member countries must not discriminate against other trading partners: all must be treated equally.
The United States, once again, was first-among-equals in insisting that the GATT and WTO would be based on the core MFN obligations. That’s not surprising, as the concept of treating all of America’s trading partners equally goes to the heart of who we are as a people.
I strongly recommend a book called Clashing Over Commerce: A History of US Trade Policy. This tome looks rather daunting; it runs over 800 pages. Fortunately, it is smooth reading and can be absorbed in bites. This remarkable scholarship was researched and written by Douglas Irwin, the nation’s leading economic historian who teaches at Dartmouth College. I keep this book close, for the perspectives it sheds on current, sometimes confusing, headlines.
And some of the most valuable perspectives shed light that is related to the American character — and is particularly striking in current political environment in Washington.
Irwin notes that Thomas Jefferson wrote in 1785: “I think all the world would gain by setting commerce at perfect liberty.” And consider this observation on trade, from Benjamin Franklin: “Most of the restraints put upon it in different countries seem to have been the projects of particulars for their private interest, under the pretense of public good.”
It’s that last phrase where Franklin nailed it. (Remember last class, when we talked about globally uncompetitive U.S. rose growers who lobbied for high “unfair dumping” tariffs on Colombia that would have resulted in sky-high prices for all American consumers?)
Difficult Global Politics
So why, despite the impressive history, is the WTO today an institution in serious trouble?
Since its creation in 1995, the WTO has not been able to conclude one major multilateral trade-liberalizing round of negotiations. The so-called Doha Round, which began in 2001, has been in a coma for more than a decade. (Paul Blustein, a former top Washington Post reporter, wrote about the Doha collapse in his 2009 ground-breaking book, Misadventures of the Most Favored Nations. This book is required reading.)
The most important reason for concern is simply put: the political will in key world capitals when it comes to dismantling trade barriers has been gradually but steadily weakening.
I’ve been tracking this decline for years, and immodestly suggest that you might want to go to my website, www.rushfordreport.com. I wrote “Murder on the Doha Express” for the Milken Institute Review in 2012. Two years later I contributed “The General Disagreement on Tariffs and Trade” to Foreign Policy magazine. In 2015, I contributed “The WTO Struggles in Nairobi” for the Wall Street Journal. And in 2018 I wrote “Trump’s War on the WTO,” again for the Journal.
While there are many complexities, a quick look at the attitudes of just three WTO member countries — India, China, and the United States — illustrate what’s been going on.
“India First”
India, although that country has only about a two-percent share of global trade flows, has always been difficult. Indian politicians have never really seemed to believe in multilateral trade liberalization. They will tell you that India can cut its own (high) tariffs and dismantle the rest of its (considerable) trade barriers when leaders believe that is in their own self-interest — which doesn’t happen frequently.
When Indian trade diplomats speak, many other developing countries’ leaders tend to listen. So protectionism, New Delhi-style, has champions far beyond the Subcontinent.
Indian political leaders have always championed restrictive “Buy India” laws, aimed at keeping globally competitive foreigners at bay. It’s terrible economics, the evidence for which is seen in India’s continuing poverty. But the politically-connected domestic lobbies in India that benefit from the schemes have never complained.
India has just this year played a leading role in once-again delaying the most important current negotiations the WTO has underway. Those negotiations are aimed at prohibiting harmful governmental subsidies that have contributed to overfishing and the depletion of fish stocks worldwide. They have been dragging on for some two decades, with no particular sense of urgency. (If you are wondering why, stay tuned. I intend to publish a report on the fish negotiations in my online journal in the very near future.)
“China First”
Naturally, everyone is curious about China’s contribution to the WTO’s decline.
I was among those who welcomed China’s joining the WTO in 2001, and was thrilled when that formerly impoverished country started to embrace global competition — lifting hundreds of millions of ordinary Chinese people out of cruel economic miseries.
But anyone who scans the current headlines can see ample cause for concerns about where China is now heading.
For openers, China has also been one of the obstacles to a successful WTO deal to save the world’s fishing grounds. China is the world’s biggest subsidizer of its huge industrial-scale fishing fleets that are devastating fishing grounds as far away as West Africa. (Check out the website of the Environmental Justice Foundation for those sobering details. It has fascinating and alarming documentation.)
China is also the world’s second-largest economy. Yet in the WTO fish negotiations, China is insisting that it be given special carveouts to continue the destructive practices — as if China it were still one of the world’s poorer nations.
Since joining the WTO in 2001, leaders of the Chinese Communist Party in Beijing have often spoken highly of the institution. They have praised multilateralism, in general. But if I had to write an article making the case that China is anywhere close to becoming a respected WTO leader today, it would be, well, short.
Beijing has been negotiating to join the WTO’s Government Procurement Agreement, under which member countries agree to open public contracts to competitive international bidders since 2002 —without summoning the political will to seal the deal.
In 2008 China helped put the WTO’s so-called Doha Round of multilateral trade liberalization in its coma, by refusing to cut high tariffs on a range of about a dozen key industrial tariffs. (India was an accomplice. As mentioned previously, Paul Blustein’s Misadventures of the Most Favored Nations has those details.)
Remember how trade politics in New Delhi turn on Buy Indian trade rules? Beijing has its Buy Chinese rules, and the Party has many ways to make life uncomfortable — miserable, even — for foreign investors, while propping up its own government-owned enterprises.
This month, Australia called for a global medical investigation to pinpoint precisely how the global coronavirus pandemic began. Who wouldn’t want to know that?
It seems the Communist Party of China is, well, sensitive on this particular issue. Furious Chinese officials immediately banned imports of Australian beef from four processors — keeping straight faces to pretend the ban was driven by health concerns. As the Wall Street Journal editorialized last week, this constitutes flat-out “coercive” economic diplomacy. (Not to mention the cruelty of denying delicious Aussie steaks to innocent Chinese diners.)
Such Beijing bullying is hardly an isolated case.
The Chinese have also just slapped on prohibitive 73-plus percent anti-dumping tariffs on imports of Australian barley. Here’s a term-paper idea: figure out how Chinese officials calculate that Australian barley farmers are so generous that they would sell their stuff to Chinese consumers at a 73 percent loss.
“America First”
Meanwhile, America’s political support for multilateral trade liberalization has been declining in recent years.
President Barack Obama never gave the WTO much of a priority. His three favorite words, Obama told campaign audiences, were “Made in America.” Unwilling to focus on the WTO’s multilateral trade-liberalizing negotiations, he focused on a smaller regional trade deal with eleven trading partners called the Trans-Pacific Partnership. But Obama failed to obtain the necessary approval for even that deal from the U.S. Congress.
(In one of his first acts of office in 2017, President Trump withdrew the United States from the TPP, saying it would have been a terrible deal, while offering no evidence for that assertion.)
President Donald Trump’s stated positions on the WTO are clear. Multilateral trade liberalization is simply not on his agenda.
He has repeatedly called the WTO a “disaster.” He has repeatedly said that he is a “Tariff Man.” He has launched a series of trade wars against “cheating” American trading partners ranging from Canada and the Europeans to China. Trump has said that he believes that trade wars are “easy” to win. (The WTO’s website reports that global trade growth had already begun to slow last year, before the coronavirus pandemic struck.)
The WTO was created “to benefit everybody but us,” Trump asserted on Fox News. He has threatened to withdraw.
And when it comes to matters of national security, the White House has been working to raise tariffs on certain imports on grounds they present security threats to America. These products include — I’m not making this up! — automobile bumpers, and nails. And the White House has also called steel imported from Canada, our NATO ally to our immediate north, a national security threat. Talk about material for student term papers!
The United States has also brought to a halt the WTO’s legal machinery to resolve trade disputes between members. This has been accomplished simply by withholding consensus to replace the expiring terms of jurists on the Appellate Body. That judicial body — established when the WTO was created in 1995, with strong U.S. support — now cannot function because it lacks a quorum.
United States trade officials no longer stress that Washington still believes in the WTO’s core principle: Most-Favored Nation non-discriminatory treatment of all trading partners. I’ve recently asked President Trump’s top trade negotiator, Robert Lighthizer, if he would care to issue a statement stressing the MFN’s importance. There has been no response. (U.S. Trade Representative Lighthizer hasn’t visited WTO headquarters in Geneva, sending another unmistakable signal that multilateral trade liberalization remains in disfavor in the White House.)
It’s important, of course, to see how the White House defends itself from its critics. I suggest you google some recent columns in the New York Times written by Peter Navarro, a White House trade official, and by Ambassador Robert Lighthizer, the U.S. Trade Representative. (Navarro has also authored a recent opinion piece in the Wall Street Journal, and has appeared on cable television frequently. And the Office of the U.S. Trade Representative has a website that further explains the Trump administration’s thinking.)
Senator Josh Hawley, a Republican from Missouri, has been pressing for a congressional resolution calling for the United States to withdraw from the WTO. He also wrote it up for the New York Times’ opinion pages. (Remember, when the authors are politicians, the trick is to sift through the rhetoric, looking for economically viable thought.)
You might also want to become familiar with some academically sound sources whom your university economics professors will expect you to be familiar with. In Washington, D.C., check out William Reinsch’s columns that appear on the site for the Center for Strategic and International Studies. The respected Peterson Institute for International Economics also publishes helpful research and analysis.
In Europe, the site for the Brussels-based European Center for International Political Economy (ECIPE) is another must-read.
Here’s another piece of unsolicited advice, if you want to keep on top of international affairs: If you aren’t already doing so, start reading The Economist immediately — and keep reading it for the rest of your lives.
So why be optimistic?
One final thought: don’t let the gloom-and-doom get the best of you.
The declining support for the WTO’s international economic architecture that has served the world so well is deeply troubling to many. Still, there is good reason to end this class on an optimistic note.
The problems that young people faced in previous generations were also daunting — even much worse. When I was born in 1944, people were still being killed in World War II. In 1945, after the war ended, Europe was devastated, with millions upon millions of refugees struggling to survive. Across the Pacific, Japan was flattened. People were starving in the Philippines. Africa, still in the grip of European colonialism, was unfree.
When I first visited Europe in the early 1960s — almost twenty years after the fighting ended — piles of rubble from previously bombed-out cities like Rotterdam and London were still visible. Faces on the streets of Paris were still gaunt.
Today, these wonderful European cities have been restored. They are marvelous — visit them.
And go to Asia, Tokyo sparkles, as do other Asian cities that have embraced global competition: Hong Kong, Singapore, Seoul, Taipei.
The Philippines unfortunately remains poor — due to insular “Filipino First” protectionist sentiments fueled by an entrenched corrupt elite that have long held that country back.
But in recent years the Philippines has begun to open up to global competition, enough to become one of the fastest-growing economies in Southeast Asia. And while all of sub-Saharan Africa only has about one percent of global trade flows, there are some encouraging signs of progress there, also.
So there is much important work to do. Whatever you make of your lives, this is a wonderful time to be young and well-educated.
As the 19th Century American thinker Henry David Thoreau once put it: “Go confidently in the direction of your dreams — Live the life you’ve imagined.”