Yes, Virginia, the WTO matters a great deal

meta-cre­ation_­date: 16 Sep­tem­ber, 2003
Is the WTO good for any­thing? Some econ­o­mists (“John Quiggin”:http://mentalspace.ranters.net/quiggin/archives/001248.html, “Arnold Kling”:http://econlog.econlib.org/archives/000242.html ) whom I would have expect­ed to answer “yes” are express­ing doubts.  The col­lapse of the talks in Can­cún will prompt a lot of ques­tions about the util­i­ty of the WTO and, of course, the cyn­ics will have all the fun­ni­est lines. It would be dan­ger­ous to ignore the ques­tion, so in the spir­it of vig­or­ous inquiry, let’s throw every­thing into doubt. If the WTO were to be shut down the num­ber of things that would be thrown into doubt might sur­prise you. Lit­tle things like, say, world peace. Or the eco­nom­ic growth of devel­op­ing coun­tries. Or, much clos­er to home, your job. An exag­ger­a­tion? I don’t think so. Let’s try a thought exper­i­ment … [Over the past 28 hours or so I spent some wide-awake hours in the mid­dle of the night on air­planes return­ing from Can­cún to Mel­bourne. Some of the time I spent writ­ing this sto­ry. The moral of the fable is at the end] h3. Life after WTO: a fable For a few weeks there were only minor prob­lems: after all, the treaties were still in force. Only the orga­ni­za­tion in Gene­va was shut down; no more end­less talk-fests like Can­cún that go nowhere. No more impen­e­tra­ble jar­gon. No more closed-door dis­putes pan­els. But a lit­tle more than a month after the lights went out in the Cen­tre William Rap­pard in Gene­va, sev­er­al devel­op­ing coun­try governments—with advice from anti-glob­al­iza­tion NGOs in the USA and Europe—notified their trad­ing part­ners that they intend­ed to abro­gate the treaty so that they could lift their import tar­iffs above the rate at which they had been bound against increase in the WTO.

To an extent, the Unit­ed States and the EU had antic­i­pat­ed this and they act­ed quick­ly to try to keep a cap on defec­tions from the treaties. They sent senior offi­cials on fly­ing vis­its around the globe with threats of trade ‘con­se­quences’ for any coun­try that pulled back from its treaty oblig­a­tions. But the threats were ignored: three coun­tries in Latin Amer­i­ca, two in south Asia and most of West Africa formed—or said they had formed—a Fair Trade Alliance all of whose mem­bers increased their tar­iffs on a range of imports, breach­ing their bound WTO ceil­ing on import duties. The Unit­ed States react­ed in a ‘mea­sured’ way to this provoca­tive act by with­draw­ing only the pref­er­en­tial tar­iff rates that it had for­mer­ly applied to imports from these coun­tries under the old WTO rule that per­mit­ted this dis­crim­i­na­tion in favor of devel­op­ing coun­tries. The Euro­pean Com­mis­sion issued some rhetor­i­cal press state­ments about the plight of poor coun­tries but had to fol­low suit quick­ly, cut­ting its own pref­er­ences to avoid a diver­sion of the exports that the Alliance coun­tries had sent to the USA into the Euro­pean mar­ket. The les­son was quick­ly learned by the three Latins in the alliance: with­in a week or two they put their tar­iffs back down again to the WTO bound rates, but their retrac­tion was too late. Import com­pet­ing indus­tries in the USA lob­bied hard against the restora­tion of any of the pref­er­ences: win­ning an unusu­al­ly quick res­o­lu­tion from the Con­gress that had begun to real­ize that the demise of the WTO—if that’s what was happening—meant a change in the bal­ance of pow­er between itself and the Admin­is­tra­tion in the man­age­ment of trade pol­i­cy. Although the Pres­i­dent nego­ti­ates and man­ages treaties the Con­gress has been more and more will­ing to use its approval pow­ers cre­ative­ly. With the WTO orga­ni­za­tion shut down and WTO nego­ti­a­tions in the freez­er, the Administration’s role was reduced and Con­gress was clear­ly eager to take the cen­ter stage. Japan, sens­ing that it could now with­draw its own pref­er­ences with­out attract­ing much adverse atten­tion, with­drew con­ces­sions on imports from all devel­op­ing coun­try sources on cer­tain ‘sen­si­tive’ import items such as fresh fruit, spices, poul­try and wire assem­blies for auto­mo­biles. With their access to mar­kets in the EU, Japan and USA now dra­mat­i­cal­ly reduced pend­ing the restora­tion of pref­er­ences, the Latins and Africans quick­ly lost their already-mod­est access to com­mer­cial invest­ment and cred­it and found that even the IMF and World Bank had begun to warn that they would put lend­ing facil­i­ties on hold until the trade cri­sis was resolved. But the prospects of that hap­pen­ing any time soon were dra­mat­i­cal­ly reduced when the Euro­pean Com­mis­sion announced that it would start, imme­di­ate­ly, to imple­ment a $4 bil­lion ‘retal­i­a­tion’ pack­age of new duties aimed at imports from the Unit­ed States. EU bureau­crats had concluded—probably correctly—that nei­ther the Unit­ed States Admin­is­tra­tion or Con­gress would now feel the same oblig­a­tion to imple­ment the rec­om­men­da­tion of the (for­mer) WTO dis­putes pan­el to change the US “For­eign Sales Corporation(longish back­ground doc­u­ment on the FSC case)”:http://www.iie.com/publications/papers/hufbauer0102.htm (FSC) tax leg­is­la­tion that had been oper­at­ing as a mas­sive export sub­sidy to US firms. The Euro­peans opt­ed to pres­sure the USA to make a start on fix­ing FSC by putting penal­ty tar­iffs on imports of US cit­rus, oilseeds and air­plane parts (among many oth­er goods). But the effect of the Euro­pean action was almost the con­verse of what they had intend­ed. The Con­gress was now deter­mined to ‘take the wheel’ in US trade pol­i­cy (‘from the back seat’ as sev­er­al edi­to­ri­als remarked acid­ly). Con­gress quick­ly re-enact­ed the “Byrd amendment(triumphant EU press release on the WTO disptues pan­el decision)”:http://www.eurunion.org/news/press/2003/2003003.htm to the anti-dump­ing leg­is­la­tion that had been over­turned in 2003 by a WTO dis­putes pan­el. This law direct­ed that the col­lec­tions from anti-dump­ing duties should be giv­en to the firms that had suc­cess­ful­ly brought a dump­ing com­plaint. The law fos­tered the growth of a spec­u­la­tive anti-dump­ing bar that took ‘con­tin­gency’ fees for bring­ing a case: the num­ber of cas­es rock­et­ed. In vir­tu­al­ly every ‘chap­ter’ of the US tar­iff, from live ani­mals to nuclear pro­cess­ing equip­ment, anti-dump­ing duties were levied. Imports from Chi­na and Viet­nam were par­tic­u­lar­ly hard-hit in the rage of cas­es that fol­lowed because the deter­mi­na­tion of the “dump­ing mar­gins for ‘non-mar­ket economies’(Washington Post sto­ry on the Viet­nam ‘Cat­fish’ anti-dump­ing case)”:http://www.washingtonpost.com/ac2/wp-dyn/A46460-2003Jul12?language=printer could made most­ly by ref­er­ence to the alle­ga­tions of the firms bring­ing the com­plaint. The vol­ume of cas­es forced offi­cials in the Depart­ment of Com­merce to cut cor­ners in their inves­ti­ga­tions. But since there was no longer any prospect of a WTO review of their pro­ce­dures they had to wor­ry only about com­pli­ance with US domes­tic law; and it was clear that Con­gress want­ed them to be as aggres­sive as pos­si­ble. Nat­u­ral­ly, Viet­nam and Chi­na took a dim view of the trend and began to retal­i­ate, at first by tak­ing admin­is­tra­tive action, against US imports. With­in months it became obvi­ous that in indus­tries such as tex­tiles and elec­tron­ics the rash of trade suits was threat­en­ing US rela­tions with north Asian coun­tries and the dam­age was leak­ing bad­ly into many oth­er areas of coop­er­a­tion, includ­ing on secu­ri­ty mea­sures. The US Admin­is­tra­tion man­aged the prob­lem in the cas­es of Viet­nam, Repub­lic of Korea, Tai­wan and Malaysia by means of old-fash­ioned bilat­er­al ’ trade restraint’ mea­sures. In effect the mar­ket for telecom­mu­ni­ca­tions equip­ment and com­po­nents was cartelized by obscure exec­u­tive agree­ments that ensured there would be no ‘dis­rup­tion’ in the US mar­ket that there would be ‘rea­son­able returns’ for Asian exporters. The deals, wide­ly known as the ‘cell-phone com­pact’ saw prices of many types of con­sumer elec­tron­ics rise sharply and avail­abil­i­ty fall. But Chi­na was a very dif­fer­ent case. Despite the best efforts of the White House, the AFL-CIO con­vinc ed Con­gress to call for a wide-rang­ing inves­ti­ga­tion of Chi­nese labor prac­tices by the US Inter­na­tion­al Trade Com­mis­sion with a view to block­ing almost all tex­tile, footwear, cloth­ing and oth­er light man­u­fac­tures imports from Chi­na. Although there were many in Con­gress with the good sense to see that such actions would lead to a dete­ri­o­ra­tion in trade rela­tions with ‘tit-for-tat’ retal­i­a­tion between Chi­na and the USA, their argu­ments were weak­ened by the rapid­ly wors­en­ing US trade deficit. As ever, in times of glob­al eco­nom­ic uncer­tain­ty, the finan­cial mar­kets turned out to have an almost insa­tiable hunger for US dol­lars, dri­ving the exchange val­ue through the roof—along with the val­ue of imports—and squeez­ing US exports. The deci­sion of Ger­many to with­hold its con­tri­bu­tions to the Euro­pean Union bud­get (via the val­ue-added tax sys­tem) shocked many out­side Europe. But what puz­zled almost every­one across the Atlantic was the pass­ing ref­er­ence to the col­lapse of sup­port for WTO. What had that to do with any­thing? Sev­er­al acres of salmon-coloured newsprint bare­ly con­cealed the delight of the Finan­cial Times edi­tors with the Ger­man ‘bud­get blitzkrieg’. They explained to their US read­ers that this was a pre-emp­tive move intend­ed to reassert Ger­man con­trol over the Euro­pean bud­get process and over future deci­sions on the Euro mon­e­tary pact. The rules of the world trad­ing system—both the WTO and the GATT that pre­ced­ed it—were pecu­liar­ly impor­tant in the Euro­pean Union. Man­age­ment of Europe’s par­tic­i­pa­tion in the mul­ti­lat­er­al trade sys­tem was among the orig­i­nal, and until the WTO began to fall apart, the most secure and exten­sive of the “con­sti­tu­tion­al powers(link to the Jean Mon­net Center)”:http://www.jeanmonnetprogram.org/papers/00/000501–01.html of the Euro­pean Com­mu­ni­ties and the Union built on top of them. The Com­mon Agri­cul­tur­al Pol­i­cy (CAP) was the glue that held the Com­mu­ni­ty togeth­er for many decades, but it was fre­quent­ly on the brink of run­ning out of con­trol and bust­ing the bud­get, espe­cial­ly under pres­sure from France, Italy and Greece—and now from Poland, and the Czech repub­lic and Hun­gary. The Ger­mans, who had always paid more than their fair share of the bud­get for farm sub­si­dies, also had their ‘sofa farm­ers’ who pulled down big cheques from Brus­sels. But it was an open secret that the Ger­man gov­ern­ment relied on the restraints imposed by the WTO agree­ments to keep the ambi­tions of the polit­i­cal­ly pow­er­ful farm lob­bies in Europe under some con­trol. Now that the WTO dis­putes sys­tem had dis­ap­peared and the USA seemed to be treat­ing some of the treaty rules as ‘option­al’, the old defens­es against ‘green greed’ were seri­ous­ly weak­ened. No Ger­man Farm or Finance min­is­ter want­ed to go into a Euro­pean Coun­cil meet­ing argu­ing for bud­get cuts in appar­ent oppo­si­tion to his own farm­ers and to the farm­ers of oth­er EU coun­tries, with­out at least the addi­tion­al lever­age that the world trade rules pro­vid­ed. Cuts to the EU bud­get were now absolute­ly essen­tial. The Ger­man econ­o­my had been “stum­bling along(summary of recent Ger­man eco­nom­ic per­for­mance from Kiel University)”:http://www.uni-kiel.de/ifw/konfer/gd/gd03_1_s.htm through the late 1990s with mount­ing pub­lic financ­ing oblig­a­tions, low growth and ris­ing unem­ploy­ment. Now it was obvi­ous to all that with the ris­ing storms of trade con­flict between Asia and North Amer­i­ca and between North Amer­i­ca and Europe, and with no pos­si­bil­i­ty of putting the bat­tles into the ‘quar­an­tine’ of the WTO dis­putes process, world trade would slow fur­ther.


As trade charts turn down, in a glob­al econ­o­my struc­tured around glob­al­ized pro­duc­tion and invest­ment, eco­nom­ic growth quick­ly fol­lows into the trough. The Ger­man econ­o­my would not grow strong­ly enough to fund both its domes­tic oblig­a­tions and the ambi­tions of the farm­ers of south­ern and east­ern Europe. Already their deficits made it impos­si­ble to sus­tain the Euro­pean mon­e­tary pact lim­its on pub­lic debt and financ­ing. Rather than face up to the mas­sive fines that were the con­se­quence of break­ing the Euro rules, the Ger­man gov­ern­ment decid­ed to remind its Euro­pean part­ners that it still had its hand on the faucet. Equi­ties mar­kets were stunned by the Ger­man deci­sion. Uncer­tain what the move meant and unable to see the full con­se­quences for Europe, investors fled equi­ties and Euro­pean bonds of all qual­i­ties. The US dol­lar, gold, dia­monds and race-hors­es all leapt in val­ue but com­mod­i­ty prices took a dive, on the fair­ly safe assump­tion that con­sumer sen­ti­ment in Europe, Japan and pos­si­bly in North Amer­i­ca would dri­ve the indus­tri­al­ized coun­tries into a slump. The out­look, as every econ­o­mist on any cable chan­nel news pro­gram warned, was for a rebound in pro­tec­tion­ism, pos­si­bly along the lines of the 1930s now that the WTO ‘sched­ules’ of tar­iff bind­ings had lit­tle or no effect. For once, the econ­o­mists were right and seen to be right in short order. The com­mod­i­ty price plunge wors­ened the out­look for many devel­op­ing coun­tries, but those hard­est hit were those already ‘on the brink’. Argenti­na sus­pend­ed loan repay­ments to the inter­na­tion­al finan­cial insti­tu­tions. Resched­ul­ing meet­ings were hasti­ly orga­nized. But Argenti­na (and Uruguay), con­vinced that they could not trust the Brazil­ians not to com­pet­i­tive­ly deval­ue their cur­ren­cy, raised their tar­iffs and froze bank accounts to try to pre­serve their reserves. There was a chain-reac­tion around Latin Amer­i­ca: the bar­ri­ers went up in Brazil, then Paraguay, then Bolivia, Colom­bia and Chile. Final­ly, Mex­i­co reject­ed strong US pleas and put up its defences to imports and exchanges with coun­tries oth­er than its NAFTA part­ners. The chief con­se­quence of this step was that it dragged Japan into the Latin mael­strom…

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