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Economy

World Trade Organization At Risk

Nov 16 , 2018

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As the White House began to escalate the U.S.-Sino trade war last April, President Trump’s trade adviser Peter Navarro was asked on CNN whether the United States is planning to leave the World Trade Organization (WTO).

A controversial advocate of American neo-protectionism known for his China-bashing books and documentaries, Navarro said that “a lot of the problem has been the World Trade Organization, which is over 160 countries, and a lot of them simply don’t like us and so we don’t get good results there.”

When Navarro was asked whether the U.S. will ultimately leave the WTO, he dodged the question saying that it was “a provocative question.” But it was a fair question.

Historical shift

After all, the U.S. was the key architect of the WTO; the 164-member international organization established in 1995 that replaced the General Agreement on Tariffs and Trade (GATT), which was created in 1948. Today, the WTO oversees global trade rules and resolves trade disputes on the basis of international trade law and practices. It covers some 98% of global trade.

Since the postwar era, successive rounds of trade liberalization have promoted a dramatic expansion of trade. So the average most-favored nation (MFN) applied tariff of TWO members fell from 25% in 1994 to less than 10% today - before the Trump era.

Unlike previous postwar and post-Cold War administrations, the Trump trade hawks seem to believe that the WTO does not add “value” to the U.S. economy. As a candidate, Trump called WTO trade deals a “disaster” proposing that the U.S. “renegotiate” or “pull out” from such agreements. As president, Trump has made it very clear that his administration prefers bilateral agreements to exploit US economic muscle; not multilateral deals that rely on international rules.

While the White House has targeted all major economies that currently have a trade surplus with America - including Canada, Mexico, Germany, the European Union, Japan, and South Korea - its primary effort has been to break China’s opposition to Washington’s new managed trade.

Through the Cold War, Washington promoted global economic integration - world trade, investment, and migration - which served to contain the Soviet Union. After the end of the Cold War, voices stressing America’s unipolar clout in security (the Bush neoconservatives) and trade (Trump’s trade hawks) have advanced - at the expense of those emphasizing the importance of realist diplomacy and international alliances.

The WTO is just the latest, though very symbolic, target of those who see America as a “victim” of "unfair" trade – in contrast to the historical record.

How the China ‘MES’ debacle heralded the attack against the WTO 

Trump's trade hawks began to criticize the WTO during the 2016 campaign, when they first targeted China and Trump declared in Iowa that “China is not a market economy.” But that was preceded by the refusal of former President Obama, the EU, and Japan to grant China its market economy status (MES), even as the key clause in China’s 2001 agreement to join the WTO expired on December 11, 2016. Indeed, Trump has benefited immensely from the decisions of those who now criticize his decisions.

The key issue in the MES debacle was the WTO’s Western member states’ desire to inflate tariffs against Chinese goods. When China joined the WTO on December 11, 2001, it was written into the agreement that member states could treat China as a “non-market economy.”

Due to the size of the Chinese economy, government intervention, and state-owned enterprises, advanced economies argued that Chinese domestic price comparisons must be ignored and “constructed values” should be used to gain a “true picture” of the Chinese economy - which allowed them to impose heavy anti-dumping duties on the basis that China's low prices did not reflect market reality.

Since the early 2000s, the surrogate figures have permitted wide discretion and manipulation of price data, which was then used as the basis for anti-dumping charges; i.e., tariffs up to 40% higher than normal anti-dumping duties. On the campaign trail, Trump exploited precisely such figures when he pledged he would introduce 45% tariffs against Chinese products. It was this revision of history that paved the way for the White House’s effort to undermine the postwar international trading regime.

In the Trump White House, not only China but all emerging and developing economies are potential targets, as evidenced by the Trump administration’s criticisms of emerging economies claims of special treatment under WTO rules for developing countries.

A world without the WTO?

The bottom line: Since the unipolar 'America First' doctrine cannot accommodate the multipolar WTO, one has to go. But the first steps came before the Trump era.

The White House has suggested that the U.S. may simply ignore WTO rulings that are not in its favor, amid alleged concerns that dispute settlement infringes on U.S. sovereignty. Moreover, from the time of the Obama administration, the U.S. has been blocking new appointments to the WTO's Appellate Body (AB); i.e., the seven-member body responsible for appeals. As more judicial terms are set to expire, the AB may no longer meet its quorum after December 2019. It’s a tactic that serves the White House’s strategic goals.

Officially, none of these measures are acknowledged. Still, the Trump administration’s overall approach has sparked questions regarding the future of U.S. leadership and participation in the WTO, as well as the role of Congress in U.S. trade policy.

Although unease about the ‘America First’ doctrine has now surfaced, many are still signing bilateral deals with the U.S. As long as this happens, the Trump administration will continue to divide and rule its allies. There is a way to respond to the Trump challenge, but that requires unity and cooperation among and between the major advanced and emerging economies.

In the absence of effective Democratic opposition, a sustained effort by President Trump to withdraw the U.S. unilaterally from the WTO – if legal under U.S. law – would devastate America’s foreign trade, debilitate the WTO, and pave the way to the kind of horrors that led to the creation of the WTO after WWII in the first place.

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