My purpose this evening is to outline where we are in the world of trade, given my own set of experiences and my current vantage point at the WTO, and to indicate where the international trading system could and should be. (Note: my remarks are personal, and not made on behalf of the WTO or its Members.)
There has not been a more interesting time in international trade since the founding of the World Trade Organization, 23 years ago. Until the recent U.S. election and Brexit, for decades trade had not been the subject of mass media reporting, other than for the occasional additional negative story (e.g.: riots and tear gas at the 1999 WTO Ministerial Meeting in Seattle) . Aside from the Financial Times, the Economist and some business publications, trade had ceased to be covered, not much of interest to mass circulation newspapers and other forms of media, often not covered regularly at all. Now, all too often trade is front page news.
What has changed? Why is trade so contentious? First, technological change, automation, the information revolution, have caused major dislocations. Globalization played its part as well. The public does not blame smart phones for current conditions. The default is to blame trade. Whatever the reasons, the effect has been a rise of populism, nativism, nationalism in a number of countries. How politicians react makes a difference too. The leading candidates for the U.S. presidency in 2016 attacked international trade arrangements. The majority of Americans support free trade agreements, yet this has no current effect. The new U.S. President proceeded once in office in a manner dramatically at odds with the approach of all of his predecessors. This caused more than a few to question the U.S. commitment to the multilateral trading system. At present, the U.S. president is the only current head of government of a major economy to say that all prior trade agreements are bad, and that he is unconcerned by the prospect of a trade war. Perhaps he is alone in all of history in saying so. He is also the only President to suggest the complete elimination of tariffs with the largest Western economies as an alternative to a threatened rebalancing with U.S. tariffs rising to match presumed foreign market closure.
To make sense of the current turmoil, it is necessary to separate out what is actually happening from the headlines in the news. The picture is decidedly mixed, but there are many positive factors and opportunities, as well as negative factors, many in the form of challenges to the world trading system. Clearly, the system in key respects is considered by most WTO members short of what it should be (although there is no current consensus on what that end point is). Nevertheless, it is entirely possible to discern possible paths forward.
Listing the positives
First, the current headlines ignore the reality that world trade continues to grow at a respectable clip of roughly 4.7% last year, after just growing at a rate of just 1.8% in 2016. It is forecast to rise at a rate slightly above 4% this year. To date the system has been remarkably resilient -- the trading rules held throughout the global financial crisis, although that memory is fading. Tariffs stayed low and contractually bound, and competitive currency depreciation did not become the rule. Yes, that was then and this is now, but the system is at present still largely holding. There are, however, signs of weakness – presumably to some degree a result of current stress over trade. Foreign direct investment has fallen off by 25% in 2017. However, threatened massive trade restrictions are actually not in place.
Second, progress has continued. Additional improvements have been made in the world trading system in the years following the global financial crisis:
- A new trade facilitation agreement was signed and entered into force, which when fully implemented could reduce trade costs by an average of 14.3% and boost global trade by up to $1 trillion per year, with the biggest gains in the poorest countries,
- Agreement was reached to ban agricultural export subsidies, and
- Agreement was reached on an expansion of the list of duty-free IT products to adjust for advances in technology.
True, these measures have not been endorsed by the current U.S. Administration, but nor have they been disavowed. While unpredictability is a tool used by the new Administration, there is no reason to believe that these agreements would be rejected by it.
Third, in December last year, The Miracle of Buenos Aires (half loaves but no fishes) occurred. At Buenos Aires, trade ministers issued an important set of declarations:
- 71 countries, accounting for 3/4 of global GDP agreed to meet and seek common ground with respect to rules to cover government measures relating to electronic commerce and are now doing so.
- 58 countries accounting for 3/4 of world exports agreed to meet and seek common ground with respect to domestic regulation services and are now doing so.
- 70 countries accounting for 3/4 of world trade agreed to meet and seek common ground with respect to investment facilitation and are now doing so.
- 85 countries accounting for 3/4 of world trade agreed to meet and seek common ground with respect to the needs of micro and medium and small enterprises (MSMES) and are now doing so.
- While there was no immediate agreement on curtailing fisheries subsidies, a firm commitment was adopted to reach agreement by the next ministerial (scheduled for 2019).
The WTO Ministerial at Buenos Aires was, due to these new and renewed initiatives, remarkably successful.
This is not to say that new agreements will be concluded in the near term. What starts as a discussion will continue as a negotiation at a pace the participants desire. As the initiatives are open to all, this could include most if not all the WTO members. This means that the WTO can and very likely will be updated to address a number of current and future needs of international trade. What is important is that there is movement in a good direction for the world trading system. A restart at seeking agreement on key aspects of agriculture is also a shared objective. These efforts have the potential of constituting an important breakthrough.
Other positive aspects of Buenos Aires: the North-South divide was by no means universal. Agricultural proposals were, for example, made jointly by the EU and Brazil, and the U.S. together with Kenya and Uganda.
A fourth positive can be found in the ongoing work of the WTO. National product standards are notified and discussed when they are still in draft form, comments can be taken on board; the use of international standards is fostered, and sanitary and phyto-sanitary regulations are addressed. Technical assistance is made available to developing countries through the Standards and Trade Development Facility to facilitate developing country exports through an enhanced ability of these countries to meet standards. The Government Procurement Agreement is another positive example of WTO activities. Some new adherents to the Agreement have joined seeing the benefit of its assistance in fighting domestic corruption.
Last but not least on the list of positives, there is the WTO accession process. Twenty-two countries are seeking membership. They are a living testament to the value of the WTO. The last two countries to join were Afghanistan and Liberia, both damaged by war and the second also by the outbreak of Ebola. Those in the current queue for entry include Bosnia Herzegovina, Sudan, South Sudan, Timor L'este, and Serbia. Many of these countries seek to integrate their economies into the global economy not just to raise the standard of living of their peoples but to bring peace and stability.
(1) Current and threatened trade restrictive measures
There are a series of events vying for consideration for the position of top of the list of current challenges to the world trading system.
I can start with the U.S. invocation of its domestic section 232 national security authority as well as the national security exception to the WTO rules in imposing 25% tariffs on steel and aluminum imports from selected countries.
That there are restrictions imposed on steel imports is nothing new. Steel is a capital intensive good. Capacity utilization can affect profitability dramatically. Governments build steel mills often in disregard of likely demand. Industrial policy as a rule generally results in the creation of overcapacity. It is the invocation of the national security exception that is rare in these circumstances. Moreover, selectively imposing restrictions on the trade of allies for stated reasons of national security is unprecedented. Retaliation and threats of counter-retaliation also break new ground. Roughly $30 billion of trade is involved. The systemic threat comes from the chain reaction of initial and retaliatory measures, the potential for this interfering with co-operation on other matters and even more from the precedent created in invoking national security as a justification for the action, which has no clear bounds.
Concerns over an expanding resort to national security as a justification for trade actions has been heightened since another product, autos, even more important to world trade, is now under investigation by the United States government under the same domestic national security authority that was used in the case of steel and aluminum. U.S. auto imports in 2017 were around $180 billion. Were these imports to be subject to restrictions, the retaliation could add a like amount to total trade restrictions. We are not used to talking about new trade restrictions in hundreds of billions of dollars of trade coverage.
The second headline grabbing trade event is the US intellectual charges and threatened measures against China. Again, the threatened tariffs on both sides in multiples of $50 billion is eye-catching.
Before these two sets of measures and countermeasures mentioned above were being contemplated, the number one systemic threat was the impasse over the WTO's Appellate Body appointment process. The AB is designed to consist of 7 members. The U.S. is blocking appointments as vacancies arise. The AB currently consists of only four members. As of the end of September, if the current impasse persists, there will be three members. Three is the minimum needed to decide an appeal, and due to possible conflicts on the part of any remaining member and in general the heavy caseload, appeals as a practical matter may cease to be available.
This is not just a problem for parties to individual cases, there is a systemic risk. It occurs as follows: WTO member A brings a case against WTO Member B. Member A wins a decision of a dispute settlement panel. It asks Member B to adjust its measures to bring them into conformity with B's WTO obligations as determined by the panel. B says it will not do so as it is appealing the panel decision. But no appeal is possible as a practical matter. Member A then states that it will retaliate. Member B then states that is will counter-retaliate. A trade war ensues. This would have been less incredible as a likely scenario were it not for the steel and aluminum and intellectual property matters just mentioned, and the threats and counter-threats that were issued in connection with them.
Why is the U.S. blocking appointments to the Appellate Body? The U.S. asserts that the AB has overreached, acted beyond its authority, and in so doing destroyed the bargain upon which binding WTO dispute settlement was based. The deal was that trade remedies would be available in limited, carefully crafted circumstances(1). Enough of those involved in the negotiations at the end of the Uruguay Round negotiations in the early 1990s state that this is the case. U.S. complaints about the conduct of the Appellate Body have been made consistently over three Republican administrations and one Democratic one. In the eyes of informed observers, America’s grievance must be regarded as well-founded.
These three threats -- over steel and aluminum, China IP retaliation and counter-retaliation, and the Appellate Body impasse – are the casi belli of what the press not unreasonably calls a potential "trade war". They are not the end of the list of challenges however. These mask more fundamental issues.
(2) The Rise of China
Underlying the tensions in the system, alongside other causes, is the economic rise of China. The experience of the rise of a major economy is not new in the post-WWII period. The rise of a new economic power appears to inevitably involve trade friction. This was the case with respect to the rise of Japan in the last half of the 20th century. Around 1990, the 21st century was heralded as the coming Century of Japan. Now, at some point in the not too distant future, China is seen as surpassing other economic powers to be the largest. There are of course major differences between the two cases. The U.S. and the EU regarded Japan as an ally. Japan was the stationary aircraft carrier for the American presence in Asia. China is sometimes called a “strategic competitor” but never an ally of the developed economies. The Japanese market was closed to both trade and foreign investment during its rise. Deng Xiaoping opened the Chinese market to foreign goods and foreign investment. The Chinese domestic market is far larger in scale and global importance than was Japan’s and the announced intention of the Chinese leadership is to be dominant in its own market as well as abroad with respect to a number of industries of the future are also important differences. The WTO rules were not well-crafted to deal with these issues.
(3) The Need for Leadership
As noted, the U.S. had not abdicated a leading role in the WTO, as had appeared to be the case through mid-December of last year. Rather, while participating actively in the several of the new initiatives emerging from Buenos Aires and in the regular work of the WTO, for the future it has an agenda with a focus that is different than that of prior U.S. administrations. It seeks to reform the system. In my view, its actions do not indicate a desire to destroy the WTO.
Traditional trade liberalization initiatives, such as tariff elimination for more IT products or environmental goods, are not mentioned at present as U.S. objectives, which they were during prior US Administrations. The U.S. is seeking compliance with existing transparency requirements; further disciplines on subsidies; with respect to those claiming a need for exceptions from the rules due to their development needs, differentiation by level of size and competitiveness; curtailing what it views as the overreach by WTO dispute settlement (adding to the rights and obligations of members beyond what was negotiated); improvements in the domestic regulation of services, market access at least for agricultural goods; and new rules to foster e-commerce.
While this is a strong positive agenda, the United States is not casting itself in the 70-year accustomed role of guarantor and motiving force for the multilateral trading system.
This leaves a gap for other potential leaders to fill if they wish to do so.
The European Union is the prime candidate. It has, however, to deal with the problems caused by Brexit as well as internal issues. Moreover, it has invested much more heavily in an extensive number of bilateral arrangements than it has in the multilateral trading system. It nevertheless may grasp and take on board the imperative to reform and perhaps recommit more strongly to the multilateral trading system.
China, the world's largest manufacturing and exporting country would be a natural candidate but has not seemed to be willing to accept this role. This is despite a strong statement endorsing the multilateral trading system by President Xi Jinping in 2017.
An article in the Financial Times called upon the "middle countries" to lead. At least two of these are EU Member States -- France and Germany -- and therefore must lead from within that bloc. The FT also named Japan. In fact, Japan was superb as a leader and partner in the crafting of the 12-country Trans Pacific Partnership Agreement. With respect to current issues at the WTO, it has been working hard at composing differences on various subjects, but apparently has not stepped forward at the level of Prime Minister to give the same priority to the multilateral trading system that it gave to the regional arrangement.
Other middle countries do not appear to feel that they have the ability to provide broad leadership.
This said, there are some bright spots, such as Australia, Singapore and Japan teaming up to move the discussion forward on rules for e-commerce. So, new leadership may be emerging incrementally in selected areas.
(4) Declining Trust
Compliance with rules, whether at the individual or national level, relies heavily on self-restraint. It is what makes civilization possible. Dispute settlement, retaliation, criticism by others, these are mechanisms kept in reserve to achieve performance expected to be consistent with international obligations. The willingness of governments to obey the rules depends heavily on the belief that others will do likewise. Similarly, the willingness of governments to enter new trade agreements depends on trust. It is inconceivable that there is not some erosion of trust currently although it is clear that trust has not completely evaporated. This is a rapidly evolving picture.
(5) Declining Certainty
World trade and investment depend heavily on stability of the regulatory environment -- that tariffs and rules governing imports and investment will not be variable, but rather will be predictable. Certainty is diminishing. This cannot but have a negative effect on business confidence, and therefore on investment and trade.
(6) Underinvestment by stakeholders
There has been substantial underinvestment by WTO members and by the private sector (businesses and civil society) in adapting the international trading system to meet current challenges as they evolved. In preparation for results at the Buenos Aires Ministerial, other than the host, Argentine President Macri, as far as I know no president or prime minister reached out to a peer in another country to accomplish anything. No business or other interest, again as far as I know, reached out to the head of its national government to press it to achieve a particular objective at the WTO. What one sows, one reaps. There was no harvest of new agreements at Buenos Aires, but fortunately the opportunities created for the future were substantial.
(7) Failure to have adequate domestic adjustment policies
During times of rapid technological change, domestic policies, not just trade policies must provide a cushion, to help the workforce and communities adapt. The pace of change has only quickened. Smart phones replaced entire industries and caused other industries to grow. Shifts in demand for various skill sets have occurred very quickly. We are now apparently racing toward singularity – when artificial intelligence (AI) equals human intelligence. We do not have to reach that point for there to be major economic dislocations and vast needs for adjustment. Going forward, it will be even more illogical to blame international trade for the problems caused. But trade may take its share of calumny --politics make trade all too easy a target.
Shortcomings in the current world trading system
No set of trading arrangements are perfect for all circumstances, particularly with the passage of time. It has now been over seven decades since the original rules were negotiated. The world has changed substantially.
As one of the leaders who participated in the creation of the WTO reacted when I listed shortcomings in the current rules: “The architects of the multilateral trading system cannot have been expected to be so prescient as to foresee [these changes]. They were addressing the problems of the day as they saw them. In fact, the surprising thing perhaps is that the rules that they designed proved to be quite flexible and adaptable to huge changes in the technological and the political environment. But they are definitely looking dated now in a number of areas and in my view, it is time for [rethinking them] and [putting into place] a new design."
Some issues were thought to have been put to rest when the WTO was created. One was unilateralism. The change in the U.S. government's attitude could not have been anticipated. It was not to be expected that the guardian and creator of the current international trading rules would belittle the rules as not being "religious obligations", and assert its freedom to act accordingly. Nor was it foreseen that the national security exception would be a clause invoked often and for broad swaths of trade. It is not that the United States had an unblemished record of adherence to multilateral trade rules, but it had never treated them with disdain.
Nor was it anticipated that China after accession to the WTO would continue and accelerate industrial policies that are intended to change trade patterns to the deep concern of others. The assumption was that the role of state-owned enterprises would diminish rather than increase.
It was not anticipated:
- That the world’s largest trading country would as a matter of principle claim to have developing country status for potential preferential treatment under the rules.
- That WTO-unregulated and under-regulated domestic subsidies, agricultural and industrial, would be a dominant cause of distortions of international trade.
- That the exception for FTAs would cover much more of world trade beyond local, geographically limited, regions.
- That technology-driven globalization would spread the benefits of trade so widely as to lead to greatly increased engagement in trade rule-making, greatly complicating decision making.
- That the Appellate Body would make decisions that appear to be based on a belief that trade remedies (trade defense instruments) would fall within a narrow exception to the rules to be continuously constrained.
And while it is not the problem of the moment, it was not anticipated
- That the provision prohibiting the use of exchange rates to frustrate trade liberalization would be a dead letter.
A path forward
While crisis management is essential, it is far from sufficient. Idealism (the historic link made by political leaders of liberal trading arrangements to world peace) is no longer the guiding star for the major trading countries. What is needed is pragmatism and re-dedication to multilateralism through deeds. The widespread underinvestment in the multilateral trading system is a course that cannot be continued. The system needs renewal periodically and this is the time for engaging in the necessary effort.
There needs to be a new Geneva consensus, not a Washington consensus, either as that term was used until the last presidential election (free market), or how it might be used now (nationalistic), and not a Beijing consensus (with more of a role for the state in directing economic planning) either.
In late May, at the OECD, French President Emmanuel Macron announced that it was time for the world's biggest economic powers to start talks on reshaping the WTO’s rules to prevent current tensions spiraling into trade wars. He called for the EU, United States, China and Japan to draw up a blueprint for WTO reform in time for the next G-20 meeting in Argentina at the end of the year. Macron stated: "The new rules must meet the current challenges of world trade: massive state subsidies creating distortions of global markets, intellectual property, social rights and climate protection,"
In response, the WTO Director General Roberto Azevêdo endorsed the need for reform. "We have been saying for a long time that the system is far from perfect. That it needs to be improved.” He noted that many discussions took place among trade ministers on the functioning of the Dispute Settlement Body (DSB), overcapacity of production, and protection of intellectual property. He concluded: “So there are many topics where improvements are possible. Members decide what the priorities are."
Besides the Macron suggestion of major trading powers coming together, there is a separate exercise already under way that is trilateral – where Japan, the EU and the United States seek to coordinate their respective approaches to overcapacity, domestic subsidies, and industrial policies that distort trade.
For its part, the U.S. announced a reform agenda at the Buenos Aires Ministerial in December 2017 that focused on compliance with existing obligations (particularly with respect to commitments to provide transparency through notification of measures), a review of differentiation among those WTO members claiming development status and preventing attempts to obtain through litigation what could not be gained through negotiation.
The optimal path forward would be to bring policies and measures that affect trade back within the rules to a greater extent. With respect to new subject areas, the Joint Declaration Initiatives at Buenos Aires are a good beginning. With respect to a number of the major areas of contention that pose potential systemic risks, solutions can be found through interpretation of existing rules to some degree and through adoption of new rules. Either way, a consensus for reform needs to take shape.
Part of the way forward is to renew the WTO Appellate Body with sufficient change so that it has full legitimacy in the eyes of the WTO Membership as a whole. That is absent at present. The WTO appellate function will almost surely wither absent a breakthrough. As noted, the consequences of that occurring will be very damaging to world trade.
The challenges can be met, with pragmatism and good will. The attitude has to be one of working for the common good as part of individual member's self-interest. There cannot be progress without a shared vision and abandonment of any insistence on threshold demands, of “me before you” -- satisfy my interests first as a precondition for engagement.
The present is not the first international economic crisis. There are a number of relevant examples. One is what happened in 1971. The international monetary system could no longer function as it had. The dollar was tied to gold, and European central banks were cashing in their dollars. The U.S. was running out of gold. The dollar was the world's reserve currency, and the U.S. did not have the freedom to change the value of the dollar, despite its balance of payments problems. America's trading partners were opposed to seeing the dollar devalued. On August 15, 1971, the U.S. imposed a 10% surcharge on imports and closed the gold window. The import surcharge was technically inconsistent with U.S. obligations under the trading rules of the time -- the General Agreement on Tariffs and Trade (the GATT). As a result, U.S. measure was condemned almost unanimously by the members of a GATT working party. The U.S. defense was that it was justified under the rules to impose more stringent measures – quantitative restrictions. This was not a legal defense at all. Another parallel with current events is that the U.S. President's proclamation was issued under a World War I national security statute. However, the U.S. did not seek to defend its action in the GATT proceedings as necessary for national security reasons.
As part of its package of measures, the U.S. made demands of its three major trading partners – the European Communities, Japan and Canada -- for unilateral unreciprocated concessions. Negotiations ensued that quickly resulted in a stalemate.
At the Smithsonian Institution in Washington on December 18, 1971, an accord was reached that allowed the U.S. dollar to be devalued. The Smithsonian Agreement led within a relatively short time to agreement on a floating exchange rate system. The trade talks eventually led to the launch in September 1973 of the Tokyo Round of Multilateral Trade Negotiations. The result in 1979 was the first GATT nontariff trade agreements and further trade liberalization.
In short, a crisis, accompanied by unilateral U.S. action inconsistent with the trade rules of the time, led to reforms. The crisis and how it was managed led to a better place for the world economy. Can that happen again? It is possible. As the American humorist Mark Twain said, "History does not repeat itself, but it often rhymes."
With good will and effort, the world trading system can be updated and improved. It is essential to do so, in order to have an effective functioning WTO for the economic well-being of the world.
- Trade defense was almost always viewed by academia as the black sheep of the family of trade agreement provisions (the relative to be hidden away and shunned), rather than a contractual and equal right and a politically necessary escape valve. That valve was increasingly blocked by GATT and WTO dispute settlement decisions and then a wave of populism hit, and the international trading system is less prepared to resist the shocks. I believe we can get to a better place, but as time goes by, positions harden, and maybe it may be naïve to think that there is a solution. I would like to see the AB saved because I believe it makes institutional sense, but it would need to be restored to the original intent (which is entirely ascertainable) to survive. Back to text