Missing in action: America ought to help revive and reinvent the WTO

Despite its strength, the US is still certain to underperform if the recent surge in trade scepticism prevails.
Despite its strength, the US is still certain to underperform if the recent surge in trade scepticism prevails.

Summary

  • The Trump and Biden administrations have neglected world trade, but an international trade body is vital for the cooperation needed to address the collective challenges we all face.

As the 13th Ministerial Conference of the World Trade Organization (WTO) begins, the question is not whether this once-important gathering will fail, only if it will fail in a way that’s even worth noticing. The prevailing sentiment seems to be, “True, this broken relic of neoliberalism is barely any longer functioning. Who cares?" Regardless of your views on globalization, you should care. Unrepentant neoliberals like myself see the rising tide of trade protection and deliberate economic fragmentation as a grave mistake. On our view that liberal trade is good, a suitably refurbished and effective WTO is an essential component of rising global prosperity. But even dedicated advocates of tariffs, subsidies, planning, industrial policy, friend-shoring, re-shoring, etc, ought to see the need for a well-functioning WTO because fragmentation ought to be at least orderly and cooperative rather than chaotic. But chaotic fragmentation is where the world economy is heading.

The meeting in Abu Dhabi has an agenda that touches on fishing subsidies, farming, e-com taxes and so forth. Subsets of like-minded governments might reach deals on some of these issues, enough for ‘success’ here and there, though the current mood of mutual hostility on trade policy will make even plurilateral agreements hard to achieve. But the deals that most need to be struck aren’t about specific sectoral issues. What matters is restoring the WTO’s role as a forum for economic cooperation.

For that, the US would need to resume its leadership of the WTO. Instead, the Trump and Biden administrations found common cause: not so much in benign neglect as in outright hostility. The US refusal to appoint members to its appellate body has shut down the most crucial part of its system for resolving disputes. Changes to the WTO rules are essential to overcome the veto that countries (notably India) often use to block agreements supported by the great majority of members. With neither plausibly in prospect, cooperation on trade policy is vastly more difficult.

Granted, the US can throw around its weight on disputes and is unlikely to be the biggest loser if global trade slows and shrinks; poorer countries will fare less well. But despite its strength, the US is still certain to underperform if the recent surge in trade scepticism prevails. Tariffs, subsidies and ‘Buy America’ restrictions like those of the US Inflation Reduction Act will raise domestic costs. As trade partners respond with their own tariffs, subsidies and restrictions, US exporters will lose customers. Merchandise trade in the G20 economies contracted in value terms last year. Policies aimed at greater self-sufficiency will likely keep shifting as contending pressures come to bear, and this in turn will make long-term investment decisions riskier. The country’s policies to build a domestic supply chain for EVs are a case in point.

Closer economic cooperation makes vital goals of economic policy, including supply-chain resilience and the transition away from fossil fuels, easier to achieve. They might be impossible otherwise. Neoliberals see unimpeded trade as the best form of economic cooperation.

Depending on countries that might be adversaries in future conflicts is unwise, but that does not dictate self-sufficiency. Liberal trade among the widest possible circle of friends and allies remains far more efficient. This needs a framework of rules, agreements and processes for settling disputes. A reformed WTO could provide it.

The fight against climate change is an even clearer case. Necessarily, this is a global undertaking. If countries pick policies that impose unduly heavy costs on others (as well as on themselves), the collective effort will founder, free-riding will increase and global targets will go unmet. Here too, you need a WTO-like entity to coordinate national commitments.

Countries imposing explicit or implicit taxes on carbon emissions need to apply the same policy to imports; otherwise domestic producers are at a disadvantage. The EU has designed a tariff system called the Carbon Border Adjustment Mechanism. The US has objections; it prefers a subsidy-based approach. Formulae for carbon taxes, green subsidies and clean-energy regulation are sure to vary from place to place. There’s no need to impose one approach on everybody, so long as governments have a consensual system for adjudicating such measures, ruling them equivalent and assuring that they don’t discriminate against particular producers.

It doesn’t matter if you’re a neoliberal, Bidenomics fan or a believer in the world according to Trump: The WTO is among the things which, if they didn’t exist, would have to be invented. Right now, it still exists, though barely. The sooner the US and others recognize the need to revive and reinvent it, the better. ©bloomberg

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