Saving the World from Trade Wars

In recent weeks, Chinese officials have been in high pique and the country’s Internet chat boards have been aflame with nationalistic fury. The reason: tires. On Sept. 11, the Obama administration announced it will impose stiff import tariffs on Chinese-made tires for the next three years. In retaliation, Beijing announced it is considering raising duties on American-made car parts and chicken meat. Markets around the world retreated on investors’ fears that the spat might escalate into a full-blown trade war, replete with the Chinese dumping U.S. Treasury bills.

That eventuality is, thankfully, unlikely — due in part to the influence of the World Trade Organization (WTO). When rumblings of trade confrontations are in the air, thanks should be given to the WTO, which helps maintain relative stability and tranquility in global trade by providing a system for adjudicating quarrels. Nevertheless, the Geneva-based organization is sorely in need of reform — or else, it might become irrelevant, increasing the danger that trade disputes will become trade wars.

In the current U.S.-China feud, both sides have ample grounds to get their dander up. The United States is concerned that Chinese manufacturers get an unfair edge in world markets, thanks in part to Beijing’s policy of keeping its currency cheap. The U.S. tire market is just one sector in which Chinese imports have made huge inroads. In taking action, President Barack Obama invoked a law allowing the temporary imposition of tariffs on goods that are "disrupting" American industries. (The Chinese agreed to this mechanism as a condition of entry into the WTO.)

The Chinese, on the other hand, resent being singled out for punishment. They view the White House’s move as pandering to a powerful constituency — in this case, the United Steelworkers. Most of all, they worry that such tariffs might be just the beginning. Other countries might follow suit by raising their own tariffs on Chinese tires. And other old-line U.S. industries might seek similar protection from Chinese competition.

In situations such as this, the WTO’s very existence is a calming influence. When a country’s politicians and citizens are up in arms over another country’s trade practices, bringing a case to the WTO can lower the political temperature. Instead of lashing out and unilaterally imposing sanctions, which might provoke retaliation and counter-retaliation, a trade minister can righteously announce that he or she is pursuing litigation in Geneva. Aggrieved parties take comfort in knowing that their case will be adjudicated by an impartial body — and a body with teeth. The WTO has a potent means of enforcement, by authorizing the imposition of sanctions against a country that refuses to abide by the rulings of its judges.

The system works, but slowly and far from perfectly. Cases typically take two years or more for the WTO to complete. Plus, when a final decision arrives, it is not retroactive. Even though the losing country often changes its offending practices, it does not incur penalties for the actions it has taken in the past.

Thus, if China lodges a complaint about the tire tariffs at the WTO — as it plans to do — the United States could keep the tariffs in place for years. If China wins, the United States would simply eliminate the duties at that point (right before they were meant to expire anyway). Chinese analysts have already noted that Beijing would get little satisfaction from such an outcome.

Another, longer-term worry is the impact that the woes of the WTO’s Doha round negotiations may have on its ability to enforce rulings. Launched shortly after the Sept. 11 attacks, the Doha talks were focused on making trade more beneficial for the world’s poor by reducing barriers to developing countries’ goods and curbing agricultural subsidy programs in rich countries. But the talks have been stalemated for years. At the last big WTO meeting in July 2008, talks collapsed amid bitter wrangling among the United States, India, and China over how much developing countries would have to open their markets in return for actions taken by rich countries. The best anyone hopes for at this point is a highly watered-down deal that will fall far short of the initial goals.

If the WTO is unable to negotiate major new agreements on an international stage, respect for its rules are sure to atrophy — perhaps to the point that the 153 member-nations will start to flout their commitments and ignore tribunals’ rulings. The plethora of bilateral and regional free trade agreements in recent years only exacerbates the risk of WTO marginalization.

Even if cooler heads prevail in Washington and Beijing, the international community should heed the wake-up call and embark on the steps necessary to bolster the WTO’s long-term viability. Completing a reasonably ambitious Doha round would be a good start — but only a start. Instead of pursuing more bilateral and regional deals, the world’s governments should embark on new, ambitious talks under WTO auspices. Discussions on currency manipulation, the food crisis, and protectionist subsidies should route through Geneva. And WTO members should further improve the organization by making tribunal decisions retroactive.

Doing otherwise would court trouble for a lot more than tires.