All Roads to a Better Trade Deal Lead Through the WTO
In Washington, efforts to withdraw from the trade body are gaining momentum. That would be a big mistake.
On Capitol Hill, calls for the United States to drop out of the World Trade Organization (WTO) are getting louder. In early May, Republican Sen. Josh Hawley introduced a joint resolution for WTO withdrawal. This was quickly followed by a similar proposal in the House of Representatives, brought forward by Democrats Peter DeFazio and Frank Pallone Jr. These calls are noteworthy because they signaled some bipartisan congressional alignment on the issue with the administration of U.S. President Donald Trump, which has been constant in its criticisms of the global trade body. Trump himself has threatened withdrawal on a number of occasions, and his administration has even scuppered the WTO’s ability to resolve trade disputes by refusing to allow the appointment of new judges to its appellate body.
The proposals to withdraw hinge on three crucial questions. Has the WTO failed? Is multilateralism on trade issues dead? And would the United States be better off outside the WTO? To all three questions, the answer is unequivocally no. This is true even—and especially—when factoring in serious trade concerns with China that the WTO framework has not been able to resolve so far.
The WTO has been around since 1995. It was installed as an upgrade of the General Agreement on Tariffs and Trade, a set of multilateral trade rules first established at the end of World War II. The WTO set up a system to manage fast-growing global trade during an era when national incomes rose, commerce grew significantly, and hundreds of millions of people were lifted out of poverty. The system benefited rich and poor nations alike: In the United States, even after adjusting for inflation, per capita GDP is 45 percent higher today than when the WTO was created.
“Hold on!” a skeptic might say. “Just because those good things happened after the WTO was created does not mean the WTO can take the credit.” That’s fair enough. But it also means that one cannot hold the WTO accountable for everything else that has happened, such as how technological advancements and automation have reduced the share of manufacturing jobs in U.S. employment, contributing to social tensions and rising inequality.
That means we need to look more closely at the WTO’s direct and concrete achievements. For one, it greatly expanded the share of global trade that is covered by rules that govern countries’ behavior. That means, for example, that U.S. companies and their workers now have a better shot at winning foreign government contracts, or at selling their IT or other services abroad. The WTO has begun tackling barriers to U.S. agricultural exports—an area of trade that had originally been dropped, at U.S. insistence, from the global trade system in the 1950s. And it has considerably improved worldwide protection for U.S. intellectual property, whether that applies to Hollywood films, apps and software, or life-saving medicines.
The WTO has also significantly enhanced the United States’ ability to enforce these rules. The U.S. government has brought dozens and dozens of cases before the WTO’s trade adjudication bodies. And it has won the vast majority of them, thereby forcing European Union countries, Canada, and even China to adhere to the rules U.S. negotiators had championed.
In some other areas such as subsidies, the WTO’s achievements have been substantially more modest. But rather than serving as an indictment of the institution, this is a reflection of the interests and priorities of its members, including the United States. Limiting unfair and trade-distorting subsidies has been less palatable because the United States and other WTO members did not want anything stricter. While they might all believe that other countries’ subsidies are intolerable, that never seems to apply to their own subsidies for their own favored companies and industries. By excusing each country’s cherished subsidies, the system has ended up being fairly permissive.
That brings us to the second question: Has the WTO outlived its usefulness? After all, as one of 164 members, the United States has considerably less influence than its gigantic economy would suggest. Maybe the issues of today, such as how to deal with China’s unequal and discriminatory trade practices, are better tackled directly as a bilateral issue between Washington and Beijing?
But a multilateral approach to trade is arguably even more important today than when these institutions were first created. Tariffs were a primary concern back in the late 1940s, when countries were mainly shipping finished goods to each other. Countries liberalized in a variety of ways—some cut tariffs bilaterally, others multilaterally, some even unilaterally.
Today’s trade barriers are much different, however, even as trade has gotten more varied and complex. Tariffs are no longer the main obstacle to international commerce. Things like subsidies, taxation, and discriminatory regulations are a bigger source of friction, but these sorts of barriers are very difficult to resolve bilaterally between countries. The reason is simple: They most often apply to all trading partners at once.
The Trump administration has come to learn this the hard way in its failed negotiations with China. The much-touted “phase one” trade deal may be already falling apart due to China not meeting its commitments to purchase U.S. products. But more importantly, the January agreement was completely silent on some of the key issues that motivated Trump’s trade war in the first place, including unfair subsidies and protections benefiting Chinese state-owned companies.
The United States has entirely reasonable complaints about Beijing’s industrial subsidies and systematic expropriation of foreign technology. But the United States is not alone: Manufacturing powerhouses such as Germany and Japan share many of these concerns and would benefit immensely if China reformed its economic policies. This is why the administration’s go-it-alone approach toward China is unlikely to work—in trying to alter China’s general economic policies, the United States would effectively be working on behalf of Germany, Japan, and every other country that trades with China. Regardless of what Trump might think, the United States simply does not have that much unilateral economic leverage. More multilateralism, not less, is what’s needed to get China to play by a fairer, more market-oriented set of rules.
Finally, would the United States be better off if it were to leave the WTO? The joint resolutions in Congress seem to envision U.S. withdrawal leading to other countries such as Britain and Japan following suit and joining the United States in new trade arrangements outside the WTO. The problem, of course, is that the United States can unilaterally decide to exit the WTO, but it can’t force other countries to do the same. Furthermore, any new trade deals would require willing partners. This is another lesson Trump had to learn the hard way when he couldn’t force other countries to follow the United States in abandoning the planned Trans-Pacific Partnership. Japan, Canada, and the nine other countries that had negotiated the pact went ahead anyway, lowering trade and investment barriers among themselves, leaving U.S. companies out in the cold.
The hard truth for the United States is that no other major economy has shown any interest in abandoning the WTO. The main result of any unilateral departure would be a more isolated United States with less ability to pressure China and at greater risk of falling behind economically.
U.S. allies such as Japan and the countries of the European Union have shown that they are willing to confront China, and they have proposed new rules to address China’s problematic industrial subsidies and forced transfer of foreign technology. But their approach is to build coalitions of like-minded countries within the WTO, not to abandon the rules-based global system entirely and try to bully China on their own. What the United States needs to do now is to take them up on that offer and build on the foundation that the WTO already provides—instead of toppling the chess board and running away.
Phil Levy is the chief economist at Flexport and a former senior economist for trade on the Council of Economic Advisers in the George W. Bush administration. Twitter: @philipilevy