The Trump Administration has made no secret about its frustration with the World Trade Organization. Campaign rhetoric is being channeled into policy. The United States is single-handedly strangling the Appellate Body by blocking appointment of new members and complaining about those who are holding over past their terms. The latest WTO ministerial resulted in no deals. An Administration that touts enforcement has largely eschewed filing WTO complaints.
The Administration’s approach has been roundly criticized. But its frustrations are not without merit, and those who seek to save the multilateral system would do well to look past the rhetoric and appreciate the underlying issues. The current U.S. Trade Representative is not a callow trade nihilist who has never worked in government: he was a high-ranking USTR official during the Reagan Administration.
The Multilateral Trading System: What the United States Was Willing to Give Away
The United States, as perhaps the principal architect of the multilateral system, has long been invested in its success. To that end, the United States opened its markets in ways that are exceptional among major trading partners. For example, at the WTO, Members have both bound rates – a ceiling on their tariffs – and applied rates – the rates charged at the border. If there is an import surge, a Member can raise its applied rate up to the bound rate and curb imports. The United States, however, typically did not reserve that kind of space. Its applied and bound rates are largely the same.
Despite leaving itself such little room, the United States nevertheless agreed to lower tariffs more than other major Members. The United States has an average bound tariff of 3.4%. Canada’s is 6.5%; the EU’s is 5%: China’s is 10%; Brazil’s is 31.4%, and India’s is 48.5%. Even Singapore, purportedly a free-trader’s paradise, has average bound rates of 9.6%.
The Multilateral Trading System: What the United States Insisted on Preserving
There was a tradeoff, though. Since the inception of the modern trading system after World War II, the United States has recognized that it is the global market of last resort. As Terry Stewart’s voluminous history demonstrates, the one set of tools the United States has insisted on, in exchange for comparatively unrestricted market access, is trade remedies: antidumping, countervailing duty, and safeguards proceedings that protect specific industries from unfair trade or import surges, as needed.
The importance of trade remedies to the United States is not a newfangled position that emerged as the United States started to lose manufacturing jobs. To the contrary, the United States anticipated this potential job loss and pushed for strong trade remedies language in multilateral agreements when discussions first began. The GATT, signed in 1947, included language condemning injurious dumping. In the Kennedy Round, U.S. negotiators were under significant pressure to agree to antidumping disciplines, and they did so; but Congress – directly accountable to constituents — felt negotiators had exceeded their remit and refused to change U.S. law. U.S. negotiators entered the next round of negotiations, the Tokyo Round, duly chastened.
In the Uruguay Round, which led to the creation of the WTO and its binding dispute settlement system, the United States continued to fight to preserve its ability to use trade remedies. For example, when the Antidumping Agreement was negotiated, the United States successfully pushed for a standard of review, Article 17.6, that imposes constraints on the DSB’s ability to second-guess administering authority interpretations of facts and Agreement obligations. Similarly, some countries wanted to eliminate the practice of zeroing (a methodology used to calculate duties in antidumping proceedings), which the United States and others, including the European Communities, declined to agree to. Consistent with that position, these Members continued to use zeroing even after the WTO entered into force. In addition to the Antidumping Agreement, the Uruguay Round negotiations resulted in agreements on subsidies and safeguards.
How the WTO Views Trade Remedies
Notwithstanding these negotiated outcomes, the WTO Dispute Settlement Body has arrogated to itself the prerogative of imposing different ones. In doing so, the DSB has altered the balance of rights and obligations, contrary to the mandate of Article 3 of the Dispute Settlement Understanding. Today, the standard of review is essentially dead letter. Having gutted the standard of review, the DSB has also concluded that zeroing is prohibited in all types of proceedings. In the case of countervailing duty proceedings, the DSB essentially created a new standard for determining when state-owned enterprises are providing countervailable subsidies; given that China has a disproportionate number of state-owned enterprises, there is reason to worry that the DSB’s decision will make it easier for China to engage in unfair trade. Finally, the DSB has also made it difficult for Members to avail themselves of safeguards.
The erosion of trade remedy rights did not occur in a vacuum. The WTO has been criticized for implying in its trade monitoring reports that trade remedies were protectionist. That criticism led the WTO to include the following defensive disclaimer in the reports:
The Reports have never categorized the use of trade remedies as protectionist, WTO inconsistent or criticized governments for utilizing them.
That characterization seems at odds, however, with one of the first such reports from April 2009, which states that:
Many WTO Members are facing increased pressure to take protectionist actions. At the start of this year, most WTO Members appeared to have successfully kept these pressures under control. There was only limited evidenced {sic} of increases in tariffs and non-tariff barriers, or of increased resort to trade-remedy actions. Since then, there has been significant slippage. (paragraph 3, emphasis added)
These statements certainly leave the impression the benchmark of success is more trade — even if that trade is unfair.
The Consequences
Consequences flow from the WTO’s sua sponte rebalancing of rights and obligations. With respect to the system itself, it is worth asking if the WTO’s inability to conclude any rounds since the Urugay Round is at all related to the fact that Members have been able to secure benefits through litigation that they were unable to secure at the negotiating table (e.g. zeroing). Or to skepticism that any bargains reached will, in fact, be honored (e.g., the standard of review).
With regard to the United States, the upshot of the DSB’s overreach is that it has compromised the U.S. ability to use the one set of tools it insisted on as a condition of its willingness to be the market of last resort. It is difficult to quantify what the loss of trade remedy flexibilities has meant in terms of lost U.S. jobs. However, the work of MIT economics professor David Autor in examining the consequences of Chinese import penetration in the Midwest – steel country more recently dubbed the Rust Belt — is one place to start. Consider the charts on page 225 – and consider them again in the context of Candidate Trump’s trade rhetoric in the Rust Belt states that had been predicted to go for Hillary Clinton.
- President Trump won Michigan by 10,000 votes. This is what he said in one of his speeches there: “Our country has lost 70,000 factories since China entered the World Trade Organization – another Bill and Hillary-backed deal.”
- He won Wisconsin by 22,000 votes. This is what he said in one of his speeches there: “1 in 5 manufacturing jobs has disappeared in Milwaukee since we fully opened our markets to China . . . .”
- He won Pennsylvania by 67,000 votes. This is what he said in a campaign speech in Pennsylvania: “The City of Philadelphia has lost more than one-third of its manufacturing jobs since China joined the World Trade Organization — another Bill and Hillary-backed disaster.”
If Hillary Clinton had won those three states, she would have won the election. These are states that President Obama won, by hundreds of thousands of votes.
Not all manufacturing jobs were lost because of China, nor because of weakened trade remedies. Nevertheless, in light of the slim margins of victory in three key states, the stark consequences for the global trading system, and the history of U.S. insistence on the importance of these tools, it is worth pausing and reflecting on the role the WTO’s erosion of the U.S. trade remedy arsenal may have played in the electoral outcomes in those states.
If there is any validity to the argument, then, ironically, the WTO will have contributed to its own existential threat. The Trump Administration in December deemed the very failure of the organization’s Ministerial a success. Similarly, the Administration is seemingly impervious to pleas to staff up the Appellate Body so that disputes can proceed to finality. The negotiating arm of the WTO has been mostly stymied for some time; the Trump Administration seems to be working to ensure that the litigation arm is similarly stymied.
There is a temptation to dismiss those who find validity in the current Administration’s trade agenda as grandstanding populists, or economic ignoramuses, or both. A WTO official commented at an on-the-record event that anti-trade sentiment of 2016 would eventually resolve itself because polls indicate that the sympathizers were by and large old, and they would die. Even if the comments were tongue-in-cheek, they reflect a propensity for ignoring, rather than addressing, the more serious problems that exist within the multilateral trading system. Are we that confident that young people competing in a gig economy won’t draw the same conclusions as their older predecessors?
In the absence of U.S. leadership, WTO Members are scavenging for someone else to pick up slack. But so far, there are no takers. Suggestions that a mercantilist China will step into the breach are difficult to take seriously. The vacuum alone highlights the degree to which the United States has been an essential variable in the system’s success.
We are left, then, with unsettling questions. What if the United States has been right these past 70 years – what if trade remedies were, in fact, a necessary tool to allow the United States to play the role of market of last resort? And what if the U.S. willingness to play the role of market of last resort was a necessary condition for the viability of the system?
According to the Dispute Settlement Understanding, the DSB was meant to be “a central element in providing security and predictability in the multilateral trading system.” But by altering negotiated outcomes, the DSB may have become just the opposite.
