March 8, 2018: The day the World Trade Organization died. Twenty-three years and sixty-seven days after its launch on January 1 of 1995. RIP.
U.S. President Donald Trump did not single-handedly kill the WTO yesterday by announcing he would impose tariffs on imported steel and aluminum. It had been dying a slow death for a long time. China in particular never accepted the norms of the WTO, and its spectacular economic success pursuing policies that too often defied the organization’s market-based principles did more than any other country to weaken the legitimacy of the system. The failed Doha Round negotiations, launched in 2001 and never successfully completed, showed that member nations had no capacity to find the compromises needed to update the WTO’s rules. Trump only gave it the final nudge over the cliff yesterday.
But that should not reduce the shock and surprise that it was the United States—which championed the WTO’s creation—that is left holding the murder weapon. For the past quarter century, the United States has been both a leader and a model citizen of the WTO, almost always hewing closely to the rules even when that meant making politically difficult decisions at home to comply with adverse rulings.
The White House announcement yesterday threw the rulebook out the window. The Trump administration is set to impose tariffs under a flimsy national security pretext that flouts if not the rules then at least the widely-shared norms of the WTO. It has further launched a free-for-all negotiating process in which its trading partners are now expected to come to the White House hat in hand begging for exemptions, a clear violation of the understanding that trade will be conducted under internationally agreed rules, not ad hoc negotiations.
To be clear, none of this necessarily means the end of global trading rules and a reversion to 1930s-style trade conflicts, though the world is closer to this than it has been in decades. The United States and its trading partners managed for many decades under the General Agreement on Tariffs and Trade (GATT)—the organizational precursor to the WTO—to expand trade enormously under a much looser system. The GATT had many agreed rules, but no binding dispute mechanisms to force countries to abide by them. The decisions by GATT panels were accepted or ignored by countries acting in their narrow sovereign interests. Messy compromises—such as the multiple instances of Japan “voluntarily” restraining its exports of steel or cars or television sets to the United States and Europe—were the norm.
It can be argued that the old system was better suited to political facts. In creating the WTO, the United States and other countries tried to fashion a law-based predictability that would provide the certainty to allow global commerce to expand even faster. The establishment of WTO courts to resolve trade disputes promised the sort of commercial predictability that previously had previously been available only within well-governed countries. It was an ambitious vision indeed.
But the system lacked the flexibility to adapt to changing political and economic circumstances, particularly the rise of stronger developing countries like China and India. Too often WTO dispute panels have chipped away at the tools that countries had used to respond when rising imports resulted in job losses and stoked the anger of voters. The so-called “safeguards” rules, invoked by the George W. Bush administration in 2002 to slap temporary tariffs on steel imports, were the most important tool, and successive WTO panel rulings made the provision much harder to use. It was no surprise then, that when Donald Trump went looking for a vehicle to impose tariffs, he dusted off a rarely used 56-year old law, Section 232 of the Trade Expansion Act of 1962, which allows for tariffs in the name of protecting national security.
The United States and other countries also did too little for too long. The "special safeguards" negotiated as part of China's entry into the WTO in 2001 went unused except for a single case involving Chinese tire imports. And it was only in the second term of the Obama administration that the United States began to use the WTO more aggressively to try to constrain China; ironically, the final WTO case filed by the Obama administration was a complaint about China's subsidies to aluminum producers.
So what happens now? The corpse of the WTO will likely stay warm for a while. The European Union (EU) has said that it will challenge the Trump tariffs before a WTO dispute panel. But the case cannot be won. If the WTO rules against the EU, it will acknowledge that Article XXI of the WTO agreement—the national security exception—allows countries to restrict imports however they choose as long as they cry “national security.” If the United States loses, it will almost certainly reject the ruling, rendering the dispute process null and void.
Regardless of how any dispute plays out, the tariff fight—unlike every other major trade skirmish for the past quarter century—will not be resolved within the framework of WTO rules. The EU, Japan, Australia and others will now be forced into some sort of negotiation with the Trump administration to try to ease the impact of the tariffs. Canada and Mexico, which have been exempted temporarily from the tariffs, will have to decide what if anything they are prepared to offer in the current renegotiation of the North American Free Trade Agreement to preserve that privileged status.
And all of this is just a warm-up for the main event, which is the coming U.S. trade confrontation with China. The Trump administration has signaled clearly that it is prepared to impose new tariffs and investment restrictions on China as part of its Section 301 investigation into China’s trading practices—another old law that was temporarily rendered obsolete by the WTO’s creation. China may well complain to the WTO, but the dispute will only be resolved, if it can be resolved, by direct negotiations between the United States and China.
This new approach could have its merits, though the United States would be better served by not alienating its close allies right before picking a fight with China. Even critics of the Trump administration acknowledge that the problems with China have been building for many years and that WTO rules have proved inadequate. A tougher, more direct approach might have greater success.
But that should not close our eyes to what has been lost. The WTO was the crown jewel in the effort to build international governance—it was a visionary and courageous effort to create predictability and consistency in the trade relations among nations. For a brief period, it gave smaller countries something close to equal status with their larger counterparts—little Antigua and Barbuda, for example, could successfully sue the United States in the WTO for its restrictions on cross-border internet gambling, and win respect and modest compensation.
The world will now revert to the historical norm in which the strong do what they can and the weak suffer what they must. That has long been the reality of international politics, and it can indeed create a sort of workable order, one that will allow countries to respond to the domestic political pressures they all face.
But something important and valuable was lost yesterday with Donald Trump’s White House tariff proclamation. The WTO was a lovely promise of a more rational, predictable, and fairer global economic order. Its death should be mourned.