The General Disagreement on Tariffs and Trade
The system that has underpinned global trade for the past 70 years is foundering. So why is no one paying attention?
Nearly 70 years ago, with fresh memories of the disastrous trade wars of the 1930s, leaders of the United States and 22 other countries launched the GATT, the General Agreement on Tariffs and Trade. The GATT was charged with slashing tariffs and dismantling other protectionist barriers to global economic growth. And the Geneva-based international organization delivered. By 1995, when the GATT morphed into the World Trade Organization, a series of successful multilateral trade-liberalizing negotiations had slashed average global tariffs, which had been in the 40 percent range in the 1940s, to about 5 percent. Even though many protectionist schemes remained, the WTO seemed poised to continue the good work. But in the last two decades, the WTO has descended into dysfunction, lurching from one bitter fight to another.
A deeply concerned WTO Director-General Roberto Azevedo has bluntly warned the WTO’s 160 member countries that the GATT/WTO system has been “living on borrowed time.” He’s spot-on. I’ve been watching the GATT and its successor global trade rules-making institution for nearly four decades — witnessing the gradual destruction of the world’s most successful experiment in peaceful international economic cooperation. Although the most recent crisis that sparked Azevedo’s warnings was averted on Nov. 27, at least for now, the tensions that have weakened the WTO will remain for the foreseeable future.
The root of the problem is that too many countries either no longer believe that multilateral trade liberalization is beneficial for them, or that they lack, for varying reasons, the political will to lead. Too many shortsighted political leaders, forgetting their history, are back in the business of creating trade blocs. They are more interested in defending their own protectionist trade schemes to fret much about what they have been doing to the WTO-supervised multilateral trading rules. And without a shared core belief that the non-discriminatory global rules work for all, the WTO cannot deliver.
In Washington, D.C., President Barack Obama has never given high priority to the WTO. Neither have Republican or Democratic leaders in Congress. While individual European WTO members like the United Kingdom, the Netherlands, and Sweden still believe in the organization’s rationale, the 28-member EU makes the notion of “European leadership” an oxymoron. Tokyo’s main goal in any trade negotiation is to preserve Japan’s stratospheric 500-plus percent rice tariffs. The Chinese now run the world’s second-largest economy, but they aren’t leading either. In parts of Africa and Latin America, leaders tend to see multilateral trade liberalization as a plot for economic domination perpetuated by their rich former colonial masters. Average African tariff barriers still hover in the 12 to 20 percent range. And when it turns to former colonies that enjoy playing the spoiler, India leads the pack.
In May, India’s new prime minister, Narendra Modi, cast a gimlet eye on the only successful multilateral trade-liberalization deal the WTO had concluded in nearly 20 years of trying. Last December, when WTO members convened in Bali, India’s government (then controlled by the leftish Congress Party that Modi’s right-wing Bharatiya Janata Party trounced in this spring’s elections) signed a deal that was widely cheered. For good reason: The so-called Bali Package was guesstimated to give the global economy a trillion-dollar boost. The WTO’s richer countries pledged to provide developing countries with billions of “trade facilitation” dollars to modernize clogged ports, fix terrible roads, and streamline corrupt customs procedures. But Modi balked.
On July 31, the strong-willed Indian leader took trade facilitation hostage, refusing to sign the necessary legal protocol to implement it. India’s veto — unprecedented in GATT/WTO history — brought the WTO into what Director-General Azevedo called a state of “paralysis.” The good news is that after months of bitter wrangling, Modi released his veto, declaring victory.
Some victory. Essentially, India “won” the right to continue to increase the amount of subsidies that New Delhi has been lavishing upon its farmers into an indefinite future, without fears of being held legally accountable in the WTO. India’s “food security” program — paying globally uncompetitive farmers above-market prices to stockpile grains that are later doled out to the urban poor — has been widely criticized. Perhaps half the grain rots, or is sold on the black market. Meanwhile, Indian exports of surplus rice have distorted global markets for years. Undeterred by criticisms that the purpose of WTO trade negotiations is to reduce protectionism, not enhance it, Modi nevertheless claimed the high moral ground: asserting that Mother India is only fighting for the rights of the world’s poor.
The hypocrisy extends beyond agriculture. Modi has hiked tariffs on imports of high-tech equipment from other developing countries like the Philippines, Vietnam, and China. Meanwhile, India’s main goal in the WTO’s long-stalled Doha Round of broader trade liberalizing negotiations — which the Bali deal was intended to revive — is the “flexibility” to raise all industrial tariffs even more, whenever New Delhi finds enhanced protectionism politically attractive.
As it turns out, that’s basically what many African leaders also want from the WTO: the right to raise tariffs and advance their own industrial policies — while the rich countries dismantle theirs. It’s called necessary “policy space.” South Africa’s president, Jacob Zuma, has hardly bothered to disguise his suspicions that the WTO’s Bali deal was tilted in favor of the rich “North.” And some officials in Uganda, Tanzania, and Kenya also complained that trade facilitation meant opening their borders to import competition from giant multinational corporations.
On April 27, after meeting behind closed doors, a handful of African diplomats — nobody has publicly claimed credit — persuaded the African Union to “instruct” African WTO ambassadors in Geneva to try to delay the Bali deal’s implementation. As the AU, based in Addis Ababa, hadn’t even participated in the Bali negotiations, the power play ran into intense criticism from furious Americans, Europeans, and a long list of others. The Africans subsequently backed down, but the poisonous distrust that has paralyzed the WTO’s negotiations was back.
That distrust memorably first surfaced in late November 1999, when WTO ministers convened in Seattle, hoping to launch a new round of multilateral trade-liberalizing talks. The Battle of Seattle is best remembered for the vociferous band of anti-globalist protestors (colorfully dressed as sea turtles or ninjas) who trashed that city’s streets. Less noticed were the secret smiles from key African trade officials inside the barricaded convention center who were happy that the talks failed.
In 2001, it seemed trade liberalization was on the move again when the WTO’s Doha Round was launched. But then in September 2003, there was open cheering from African officials when WTO meetings in Cancun again collapsed in acrimony. The meetings in the Mexican resort had been intended to breathe life into the Doha Round, but instead threw those negotiations into intensive care, where they still remain. (The trade-facilitation deal that was reached in Bali last December was split off from the broader Doha negotiations, the idea being to harvest the easier parts to generate momentum to complete the Doha Round.)
Just a few hours after the Cancun debacle, I ran into a Kenyan diplomat named Mukhisa Kituyi in an Argentine-style steakhouse. It was a memorable September evening in the famous Mexican resort. Kituyi and his colleagues were celebrating that afternoon’s failure of the WTO meetings, washing down copious quantities of red meat with red wine. “We killed it,” one of the Kenyan officials boasted, referring to that afternoon’s negotiating failure.
Kituyi is now secretary-general of UNCTAD, the United Nations Conference on Trade and Development. While he declines to comment, it appears the Kenyan official remains a trade skeptic. Kituyi invited President Rafael Correa of Ecuador to deliver on Oct. 4 a rousing Special 50th Anniversary speech at UNCTAD’s Geneva headquarters, just a few blocks from the WTO’s offices along the Rue de Lausanne. Correa railed against “an immoral and unjust” world economic order. In a world “dominated by transnational capital and the hegemonic countries,” the Ecuadorian leader declared, the poor countries should protect themselves by forming regional trade accords. “The world of the future is a world of blocs,” he declared. Led by an approving Kituyi, the UNCTAD audience applauded.
This is not a trivial matter. In recent years, WTO members have cut more than 300 trade-distorting preferential trade deals with various favored trading partners. They all violate the fundamental GATT/WTO principle that member countries should not discriminate against each other. Perhaps half of global trade is diverted through these discriminatory “free trade” routes.
The top U.S. trade priorities are forming two regional trading blocs, one with Europe and the second with some Asian countries. China is excluded. Meanwhile, the Chinese are advancing their own regional trade bloc that would exclude the Americans. Many Africans are looking to their own side deals with each other.
Preventing the re-emergence of discriminatory trade blocs is exactly why the GATT was created in 1947. It’s a history lesson that present world leaders would be well advised to reflect upon.
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