The U.S. and World Trade Disorganization

Paul Blustein

Journalist in Residence

The Brookings Institution

Lawrence University April 16, 2009

After 7 Years, Talks Collapse on World Trade

GENEVA — World trade talks collapsed here on Tuesday after seven years of on-again, off-again negotiations

By STEPHEN CASTLE and MARK LANDLER

July 30, 2008

Globalization of money

• Benefits are a source of skepticism among many economists

• Risks of panic have long been a source of worry

• Confidence has been lacking in ability of international institutions to govern the system

To my children:

Nina, Nathan,

Dan and Jack,

whom I will always

love unconditionally,

even if they go

to work on Wall Street

The globalization of trade

• Benefits command a much broader consensus among economists

• Little dispute that overall, the expansion of trade has been a force for growth and higher living standards

• Agreement is universal that a turn to protectionism would be disastrous

• Agreement is also universal that a multilateral system is preferable to alternatives

The trading system: At risk of joining the financial system in crisis

Reasons:• The economic downturn, which has greatly

magnified the chances that countries will turn to protectionism

• The failure to conclude a robust and timely Doha Round, which could have provided an “insurance policy” against protectionism

• The danger that the round’s troubles, combined with other factors, could lead to a collapse of the WTO’s authority

Eight completed trade rounds

• GATT 1947 (creation of the multilateral system)• Annecy Round 1950• Torquay Round 1951• Geneva Round 1955-56• Dillon Round 1960-62• Kennedy Round 1964-67• Tokyo Round 1973-79• Uruguay Round 1986-94

Smoot-Hawley Tariff (1930)

Raised U.S. tariffs to average of 55%

Triggered cycles of Retaliation, including: European tariffs on U.S. autos The U.S.-Canada “Egg War”

GATT: Undoing the 1930s, and then some

1947: The General Agreement on Tariffs and Trade– Ceilings on tariffs of 23 signatory countries (“Bound” tariffs – duties

could be below the bound levels, but not above)– Enshrined key tenets, notably the Most Favored Nation principle

• Annecy Round 1950• Torquay Round 1951• Geneva Round 1955-56• Dillon Round 1960-62• Kennedy Round 1964-67 (reduced tariffs on mfd. goods by about 35%)• Tokyo Round 1973-79 (reduced tariffs further, by about one-third)• Uruguay Round 1986-94 (created new rules on intellectual property

rights and other issues; also created the WTO)

But: Flimsy Justice

• Under the GATT, defendant countries could effectively veto rulings against them, and delay proceedings

• This weak method of settling disputes inflamed protectionist sentiment in Washington

The Uruguay Round (1986-94) and the Creation of the WTO

• Most sweeping trade agreement in history

• Lowered tariffs still further• Included new rules covering

intellectual property rights, trade in services, health and safety standards, etc.

• Created the WTO, which had much sharper teeth. Defendant countries no longer had veto rights over rulings

The “Battle in Seattle”

The WTO: A crucial lynchpin of stability in the global economy

Current embodiment of the system established to prevent reversion to the 1930s– Keeps a lid on the import

barriers of member countries

– Helps keep trade disputes from turning unnecessarily destructive, as member nations take their complaints to WTO tribunals

– Guardian of the Most Favored Nation principle

WTO headquarters, Geneva

The Doha Round:a “Development Round”

• Main rationale: Concern that trading system needed to bestow more of the gains on developing countries

• Criticism was widespread about barriers rich countries impose on goods from poor countries

• Criticism also widespread about subsidies rich countries pay their farmers

The rhetoric advancing the case for a new round

• “Trade is a key engine for growth, but currently developing country products face many obstacles in rich country markets. By opening these markets, we can help lift millions out of poverty. And the most effective way to achieve these market openings is by launching a new round.” --Mike Moore, WTO Director-General, in an October 2001 speech

• “Terrorism and hatred grow their strongest roots in poor soil. Economic and social development in the world’s poorest nations will help to erode the helplessness that can breed hate.” –Pierre Pettigrew, Canadian Trade Minister, in an October 2001 op-ed calling for a new round

• “Trade is a critical element—perhaps the most important element—in economic development. By promoting the WTO’s agenda, especially a new negotiation to liberalize global trade, these 142 nations can counter the revulsive destructionism of terrorism.” –Bob Zoellick, U.S. Trade Representative, in an October 2001 speech

• “Today’s decision offers fresh hope for the world’s developing countries….It reflects our common understanding that a new trade round can give developing countries greater access to world markets, and lift the lives of millions now living in poverty.” –President G.W. Bush, in a statement issued when the Doha Round was launched

Doha Dreams: Still Distant

• Cancun, 2003: Meeting collapses

• Geneva, 2004: Agreement on broad principles

• Hong Kong, 2005: Very low expectations met

• Geneva, 2006: Doha Round “suspended”

• Potsdam, 2007: Meeting collapses

• Geneva, 2008: Nine-day meeting collapses

“Doha Lite”

The deal on the table in July would have:• reduced tariffs that high-income countries impose on

agricultural products from an average of about 15% to about 11%

• reduced tariffs that developing countries impose on agricultural products from an average 13.4% to 13.3%

This deal was still just a portion of what a final agreement would constitute; negotiators had not yet dealt with other issues such as anti-dumping and services.

(source of figures: World Bank)

But: “Anti-protectionism insurance”

• For many countries, “bound” tariffs (legal ceilings) are much higher than “applied” tariffs (currently imposed levels).

• The deal that was on the table in July 2008 would have lowered bound tariffs fairly significantly – not enough to reduce applied tariffs much, but enough to help constrain protectionism.

• For example, developing countries’ bound tariffs on manufactured goods would have fallen from an average of 19.1% to 11.8%.

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Brazil India Indonesia(Manufactured goods; bound tariffsIn light blue, applied in dark blue)

Recent protectionism and quasi-protectionism

• Russia raised duties on cars, steel, meat.

• India imposed higher levies on iron, steel, soybean oils.

• Indonesia issued regulations limiting imports of some products to certain ports.

• U.S. Congress included “Buy American” provisions in stimulus bill.

• U.S., other countries have rushed aid to their auto industries.

So far, these steps don’t constitute a protectionist epidemic.But if the slump worsens significantly, the pressure to raise trade barriers will be very difficult for politicians to resist.

The systemic issue

• Even if governments beat back protectionist pressure, the Doha Round’s travails have ominous ramifications for the health of the multilateral trading system

• Events of recent years cast disquieting doubt on the WTO’s ability to maintain its status as the central rule-setter and arbiter for international trade

The long-term risk: The WTO’s authority will atrophy

• Reason: Disillusionment over the Doha Round, which has made the WTO appear increasingly irrelevant and ineffectual

• One plausible scenario: Because confidence is lacking in the WTO’s capacity to strike trade deals, countries will resort to filing more cases, in politically-explosive areas such as climate

PTAs: The spaghetti bowl

• Big and consequential: NAFTA, the EU• Medium-sized: Japan-Mexico• Minuscule: Singapore-Jordan; Thailand-Bahrain; Trans-

Pacific Strategic Economic Partnership (NZ, Brunei, Chile, Singapore); EFTA-SACU (Iceland, Norway, Switzerland, Lichtenstein, South Africa, Botswana, Lesotho, Swaziland, Namibia

• Bush administration PTA’s: Completed 3 bilateral agreements that had been launched during the Clinton years (with Chile, Jordan and Singapore), and negotiated deals with Australia, Bahrain, Morocco, Oman, Peru, Colombia, South Korea, and five Central American countries plus the Dominican Republic.

Why we should worry about PTA’s

• They make a hash of the principles of multilateralism

• They threaten to erode the WTO’s authority; the more they spread, the more governments are tempted to think of them as reasonable substitutes for multilateralism

A toxic brew: Proliferation of PTAs, failure of the Doha Round, the impact of the financial crisis on trade policy

Central goals for U.S. policy

• Keep the trading system from sliding into reverse, preserve gains

• Keep protectionism, and quasi-protectionism, from becoming long-lasting features of the international economy

• Lowest priority: Opening markets more than they already are

Teenage abstinence is “not realistic at all” --Bristol Palin

Blanket pledges to eschew protectionist actions of all kindswill be no more credible than promises by teenagers to abstainfrom sex.

In a downturn this severe: --Auto industries will be bailed out, in a discriminatory fashion --Anti-dumping and “safeguard” duties will increase --“Buy local” provisions will be inserted into stimulus bills

Refocus U.S. trade policy toward shoring up the WTO

• Strike a Doha agreement (by recasting it as an emergency anti-protectionism round)

• Postpone contentious issues for the next round, and start that round as soon as slimmed-down Doha is implemented

• Declare a moratorium on PTAs

Doha Dreams: Still Distant

• Cancun, 2003: Meeting collapses

• Geneva, 2004: Agreement on broad principles

• Hong Kong, 2005: Very low expectations met

• Geneva, 2006: Doha Round “suspended”

• Potsdam, 2007: Meeting collapses

• Geneva, 2008: Nine-day meeting collapses

There’s gotta be a better way (or is there?)

• The consensus rule: Inconvenient though it may be, it’s vital to the WTO’s legitimacy

• One possibility: “Coalitions of the Willing,” reaching plurilateral agreements

• But: Traditional rounds, in which countries can trade off concessions in one area for gains in another, may be the only way to resolve big problems confronting the system

The U.S. and World Trade Disorganization

Paul Blustein

Journalist in Residence

The Brookings Institution

Lawrence University April 16, 2009

The hype over PTAs

• U.S. exports to all countries with which Bush completed PTAs = less than 7% of all U.S. exports

• Add in exports to Colombia, South Korea and Panama (where PTAs are still pending in Congress), and the figure is still only about 11% of total U.S. exports

• That’s just a sliver of the total economy; exports are less than 8% of GDP

(2007 figures)0

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