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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