On the Current State of the World Trading System



Alan Wm. Wolff

My object today is to sort through the noise of the current tempest over trade and to assess fundamentally where matters stand, how we came to be where we are at present, where the opportunities and challenges lie, and how best to proceed.

The promise of Buenos Aires

What I would most like to talk to you about today is the pathbreaking, and more to the point, path-finding WTO Ministerial meeting that took place a few short months ago in Buenos Aires in mid-December.

Buenos Aires was phenomenally positive for the world trading system in terms of potential. An exceptionally important turning point was achieved. For the first time in modern memory, trading countries, members of the WTO, are able to address new horizons in the WTO without preconceived agreed notions as to outcomes or process.

The way is open to improving the world trading system. Countries that want to address new subjects for negotiation can now do so, and they recorded their intention to do just that. They issued this important set of declarations:

  • 71 countries, accounting for 3/4 of global GDP agreed to meet and seek common ground with respect to rules to cover government measures relating to electronic commerce.
  • 58 countries accounting for 3/4 of world exports agreed to meet and seek common ground with respect to domestic regulation of services.
  • 70 countries accounting for 3/4 of world trade agreed to meet and seek common grounds with respect to investment facilitation.
  • 85 countries accounting for 3/4 of world trade agreed to meet and seek common ground with respect to the needs of micro and medium and small enterprises (MSMES).
  • For the first time in the history of the World Trade Organization, WTO members and observers endorsed a collective initiative to increase the participation of women in trade. 118 WTO members and observers agreed to support the Buenos Aires Declaration on Women and Trade, which seeks to remove barriers to, and foster, women’s economic empowerment.

Let me tell you about an example of one recent activity: I was given the privilege this last week of providing opening remarks at a meeting designed to explore ideas on how to improve the availability of trade-relevant information to MSMEs — micro, small and medium sized enterprises. The internet is transformative. It enables one person, no matter where located, to engage in international trade provided that she or he has access to the web. This is revolutionary. It affords a real prospect of inclusiveness in international trade unknown in any prior time. The benefits are available within developing and developed countries alike. It is one answer to the troubling growth of income inequality, and within a number of countries to reduced economic mobility. Anecdotally it benefits women even more than men, because it provides an opening that in many instances bypasses areas where women have had a lower participation rate in trade.

But, of course, there is a catch, several in fact. How can that person, that individual producer, know more about the market that she wishes to serve? How can she know the customs regulations, the product standards, or other legal requirements? What is the tariff that must be paid? The web gives individuals and small businesses potential access to a large part of the world’s peoples spread across some 200 countries, but those potential buyers are more divided by borders than united by laws and regulations.

There are many other subjects of course that require attention to foster MSME commerce, including trade finance, but knowledge is the first threshold that must be crossed. The WTO, the International Trade Center, and UNCTAD are hard at work to make the basic information that is needed available online with a few clicks of a mouse.

The several endeavors listed above, signed up to and now attended by WTO members accounting for most of world commerce, demonstrate that the WTO can and very likely will be updated to address current and future needs of international trade. These declarations are like a breath of fresh air for the WTO.

This is not all that is on the WTO agenda. At Buenos Aires, members rededicated themselves to addressing limits on subsidies to fisheries, and to addressing the major subjects that still need to be resolved, for example to make agricultural trade more open and fair.

This is not to say that new agreements will be immediately concluded. What starts as a discussion will continue as a negotiation if the participants so desire.

Threats to peace in world trade

Other aspects of the trading system have caught the headlines since the Buenos Aires Ministerial. As a result, it is not possible to talk about opportunities in international trade without talking about current challenges as well.

By far the press stories about trade will not be about the new activities of the WTO nor the routine administration of the agreements that currently regulate trade, but about the prospects for a trade war. This is the case for the simple reason that the term “trade war” is no longer a hypothetical advanced by over-excited commentators, but a subject addressed explicitly with widely differing degrees of concern by heads of government and by the Director General of WTO as well. And it is not just talk, there are trade measures. To say that this is a challenging time in the post WWII annals of international economic relations is a gross understatement. It is not unprecedented however.

Under the U.S. Constitution, the authority over tariffs is vested in the Congress, and with the Congress, that starts with the House Committee that originates trade legislation regulating tariffs — the House Ways and Means Committee. Sam Gibbons, a past chairman of that committee wisely observed that trade problems do not arrive suddenly, he said, just as you would not expect to look out the window of your house one morning and find a glacier in your back yard. Glaciers and trade problems build up slowly.

Let us start with steel. Overinvestment in steel capacity has led to trade restrictions repeatedly — in fact continuously — over the last half century. The cycle is more or less the same: the grant of large government subsidies in this sector gives rise to uneconomic investment, a plethora of selective remedies in the form of anti-dumping duties are imposed by importing countries, followed by imposition of a comprehensive trade measure. The subject of overcapacity in steel production facilities has been the subject of countless international meetings over recent years. Mark Twain famously said that history does not repeat itself, but it often rhymes. When it came time for consideration of a comprehensive response to steel trade problems, this time the United States did not resort to its domestic safeguard mechanism as it did in March 2002, under President George W. Bush, Access to safeguards is allowed under the WTO rules under certain conditions. Instead the U.S. invoked both the domestic authority and international justification of national security for its measure.

Foreign reaction uniformly rejects as illegitimate the Trump Administration’s use of national security as a justification. (This unfortunately echoes the America’s trading partners rejecting the U.S. use of a safeguard by the Bush Administration as unwarranted despite widespread bankruptcies among U.S. producers at the time. The two are not the same, but both were rejections). While the 2002 safeguard action was litigated in the WTO and found by a WTO panel to be unjustified under the provisions of the WTO’s dispute settlement system, members of the WTO and before it, Contracting Parties to the GATT, have been reluctant to adjudicate the bounds of what constitutes a valid claim that national security necessitates a measure.

At this point, history does appear to be repeating itself. The recourse this time, as it was during the Reagan Administration in 1983-85, has largely been for the U.S. administration to negotiate export restraints bilaterally with exporting countries who wish to avoid the imposition of tariffs on their trade.

If the trade measures are confined to steel, the risks to the international trading system can be contained. If there is, as appears to be the case, trade retaliation followed by rounds of counter-retaliation, there would be at some point not only foreseeable systemic risk but actual damage. The 301 tariff threat following hard on the heels of the 232 steel and aluminum measures causes far more concern about the viability of a stable international trading system than either measure alone. And this is compounded by threats of further actions.

Before the announcement of American steel and aluminum tariffs was completely digested, the U.S. President announced, pending domestic procedures involving comments on a retaliation list, that a 25% tariff would be applied to some $50 billion of U.S. imports from China, among other restrictive measures, as a result of its investigation of intellectual property theft and related actions attributed to China. The product list was published last night of what the increased tariff might cover. While the decision to impose tariffs was not widely anticipated, the U.S. government and private sector concerns that were the subject of the section 301 case had been aired for years. In the event, the increased tariffs caused greater concern than immediate trade effects as the U.S. government offered no specific WTO authority under which it intends to proceed to apply additional tariffs. This leaves open the possibility of similar future actions.

While current events clearly fall into the shock and awe category, the imposition of trade restrictions by the United States to address international trade problems is not unprecedented, although the prior actions differ greatly in many respects from the present circumstances.

In 1987, the Reagan Administration applied 100% tariffs on $300 million of Japanese imports in response to lack of access to the Japanese market for foreign semiconductors and the dumping of Japanese semiconductors on world markets. Both of the lack of market access and the continuation of dumping were in violation of a bilateral agreement reached a year earlier between the two countries. No GATT authority was cited by the U.S. government in applying the retaliatory tariffs. The tariffs were lifted when the Japanese market became more open and the dumping ceased. As with steel, a single sector was involved, although for semiconductors, it was a single country that the measures were aimed at. There was no systemic risk from the U.S. action, but other countries condemned U.S unilateralism, fearing that the U.S. would in the future continue to resort to such measures, acting outside agreed rules. For this reason, America’s trading partners sought binding dispute settlement as a major objective in the Uruguay Round of trade negotiations along with a pledge that the U.S. would resort to international dispute settlement when international trade rules were violated.

There was another occasion, much earlier, of the U.S. using tariffs to address a major trade problem. The broadest trade action taken by any U.S. administration in modern times was the imposition by President Nixon on August 15, 1971 of a 10% import surcharge on all countries (although duty-free products were exempted, which helped reduce the impact on developing countries). The justification offered for the import surcharge was that the measure was necessary for balance of payments purposes. The international trade rules at the time under the GATT balance of payments provisions did not allow the use of tariffs on imports, just quotas. The U.S. government did not claim that its measure was in compliance with the rules, just that it was justified economically and that no country would really wish to see the U.S. apply quotas on all imports.

Interestingly, the import surcharge was imposed under U.S. domestic national security authority and was upheld as such by the U.S. Supreme Court. The measure was, of course, condemned by a GATT working party and was not lifted until December 18, 1971, when the Smithsonian Agreement was signed. That agreement addressed the balance of payments problem by an agreed devaluation of the U.S. dollar. This led within a relatively short time to the end of the U.S. tying the value of the dollar to gold and to a floating exchange rate system.

Along with the import surcharge, the Nixon Administration demanded unilateral concessions from its major trading partners – the European Communities, Japan and Canada. None were forthcoming. As a consequence, the Tokyo Round of Multilateral Trade Negotiations was launched in September 1973. The Tokyo Round resulted in the first major nontariff trade agreements — on government procurement, product standards and customs valuation. The path was cleared for making progress toward more open, rules-based trade.

Why cite these prior U.S. actions and results? It is not to justify or defend current and threatened U.S. conduct. It is useful to understand these cases because they happened and more importantly because the various combatants found solutions. One could assume they represent merely protectionism for its own sake. But a closer look requires that critics complete the analysis: Are there systemic issues to which the U.S. was responding, whether or not its response is one its trading partners would support? In the case of semiconductors and prior rounds of steel measures, the measures were a response to the distortions created by foreign industrial policies fostered by state capitalism. In the case of the import surcharge, it was both a response to a need for international monetary reform and what the U.S. at the time saw as an imbalance in the trading system, the U.S. government contending that its market was more open that those of its trading partners.

In two of the prior cases of major U.S. unilateral actions, the means employed by the U.S. were close to the international norm – for the import surcharge, imposing tariffs rather than quotas, and in the 2002 steel case, resorting to the safeguard mechanism that it considered was fully justified by the facts.

The international economic system survived. Following the import surcharge and its removal, the international monetary and trading systems were both strengthened. In semiconductors, the U.S. and Japan eventually created an international forum in which six parties – China, Chinese Taipei, Korea, the European Union and the United States – have pledged to conduct tariff-free trade and work together on environmental and other common issues. An outlier is steel where no adequate solution had been found.

Again — to avoid any misunderstanding, the discussion above of prior U.S. trade actions is not set out to express support for any current measures and counter-measures. It is only to suggest that real problems can find mutually agreed solutions.

Before moving on to comment on the direction of possible solutions, there is another challenge to the world trading system that requires attention.

Dealing with the steel 232 case and the China 301 case has for the moment supplanted in the informed public mind the threat represented by the seizing up of the WTO dispute settlement mechanism. The United States, under the consensus rule of the WTO, is preventing the appointment of members to the WTO Appellate Body as individual member’s terms have been running out. Later this year, there will be four open seats on the seven-member body.

Why is the U.S. blocking appointments? The U.S. has on numerous occasions over the last several administrations, Democratic and Republican, listed areas in which WTO dispute settlement system has, in its view, malfunctioned very seriously. The basic bargain of the Uruguay Round was nullified by the Appellate Body – that binding dispute settlement would be accepted by the United States in return for an iron-clad commitment that the dispute settlement system would neither add to nor subtract from the rights and obligations of the parties, particularly with respect to trade remedies. In the U.S. view, this cornerstone of the WTO was progressively eviscerated through a series of interpretations made by the WTO Appellate Body that narrowed the scope for use of trade remedies. In response, the U.S., following the precedent set by the European Union and expanding on it, has not agreed to vacancies being filled as AB members terms end.

The result before long will be that there will be no appellate function in the WTO. This is not a technical matter, but a highly important political one. If there is no appeal possible, and a party wins a case before a panel, and the other party “appeals”, the winning party may feel justified in retaliating, and the newly aggrieved party that lost at the panel stage, may counter the retaliation. As pointed out by the WTO Director General, the risk of a trade war among major parties is real. It is not a solution to design around the United States, to try to get parties to accept binding arbitration, because any country, including the United States, that did not agree to binding arbitration, could feel justified in taking trade action, followed, by the other party responding in kind.

A foretaste of this was witnessed in the opening exchanges between the United States and the European Union over steel before the U.S. exempted the EU’s steel shipments from additional tariffs. The threat of rounds of retaliation and counter-retaliation could be repeated again and again not only by the United States but by others. The systemic risk of a complete breakdown in the WTO dispute settlement system is real, it just has not ripened as quickly as the steel 232 national security case and the 301 China Intellectual Property case.

The danger posed to the world trading system is currently grave. It is not just that there is a willingness on the part of major players to act outside the rules. There exists a lack of trust and it is increasing. All are united in expressing their support of multilateralism, but many in practice pursue mercantilist objectives.

Moving forward

The positive work of the WTO continues as these threats remain unresolved. Twenty-two countries have applied for WTO membership. Many are war-ravaged and highly vulnerable. The last two entrants were Afghanistan and Liberia. During the December Ministerial Meeting, a working party was formed to consider the application of South Sudan. The desire of these smaller economies to be integrated into the world trading system, to raise the standard of living of their peoples, and to have a better chance at maintaining peace, is very strong. Their profound commitment to join the WTO, the world’s trading system, underlines the fact that faith in a working multilateral trading system is well-founded.

It is far from optimal, and perhaps unsustainable, to try to muddle through – for the major trading nations to try to compartmentalize differences, separating them from areas of cooperation. Compartments, for the Titanic, all too quickly were breached. It is imperative that the major beneficiaries of the world trading system — which certainly include China, the United States, the European Union, Japan, India and Brazil — come together and identify their common ground. If major players operate increasingly on two tracks — adhering to the rules of the system for some matters and operating outside the system for others, the current global trade arrangements, as was true of the fixed exchange rate system almost a half century ago, are unsustainable without change. Change must come in the conduct of members, but also through improvements in the existing agreements and how they are implemented.

There is only one world economy. Nations are interconnected. Autarky can only exist at the cost of accepting a much lower level of income for all countries’ peoples. The problems faced are real. Serious efforts much be invested in understanding them, identifying solutions, and implementing them. Each of the current major parties with whom I have spoken believes very strongly that it is in the right. Respective visions of the problems, much less the solutions, do not match. This needs to change. Real communication, blunt and direct, is required. Seeking to assess which country can best sustain a trade war only leads to one certain result — extensive casualties on all sides.

Systemic failure is unacceptable. There being only this one planet to share, common ground must be found, and new balances struck.

View the PDF with full remarks below:

IMF remarks April 2018_

Ambassador Alan Wm. Wolf began his four-year term as Deputy Director-General at the World Trade Organization on October 1, 2017.