Renee Bowen, director of the Center for Commerce and Diplomacy and professor in the department of economics and School of Global Policy and Strategy at University of California, San Diego, and Jennifer Hillman, senior fellow for trade and international political economy at CFR, discuss international trade policy and the future of the World Trade Organization.
CASA: Good afternoon and welcome to the CFR Fall 2020 Academic Webinar series. I'm Maria Casa, director for the National Program and Outreach here at CFR. Thank you all for joining us today. This call is on the record and the video and transcript will be available on the CFR.org website within the next couple of days if you would like to share it with your colleagues or classmates. We are delighted to have Renee Bowen and Jennifer Hillman with us today for a discussion of international trade and the future of the World Trade Organization.
Renee Bowen is director of the Center for Commerce and Diplomacy and a professor in the department of economics and School of Global Policy and Strategy at the University of California, San Diego. Her research focuses on political economy, micro economic theory, and international trade. Her recent work is on designing an international economic order. Dr. Bowen currently serves on the California Governor's Council of Economic Advisers. Previously, she taught at the Stanford Graduate School of Business, was a consultant at the World Bank working on international trade policy for Sub-Saharan Africa, and was an investment banking analyst at JP Morgan Securities working with emerging markets.
Jennifer Hillman is a senior fellow for trade and international political economy at CFR specializing in U.S. trade policy, the law and politics of the WTO, international organizations, and Brexit. She was most recently a professor of practice at the Georgetown University Law Center teaching courses in international business and international trade, along with an international trade and investment law practicum. In 2012, Dr. Hillman completed her term as one of seven members serving on the WTO’s Appellate Body. Previously, she served as commissioner at the U.S. International Trade Commission, adjudicating and conducting studies on the economics of trade policy and agreements. She has served as general counsel at the office of the United States Trade Representative, where she was involved in litigation before NAFTA and the WTO. And as USTR’s ambassador and chief textiles negotiator for bilateral agreements. Welcome, Renee and Jennifer, thank you so much for being with us today.
HILLMAN: Thank you. Delighted to be here.
BOWEN: Thank you.
CASA: As backdrop to today's discussion, we know that the World Trade Organization is closing in on selecting its next leader. The field of candidates has narrowed to Nigeria's Ngozi Okonjo-Iweala, and South Korea's Yoo Myung-hee. This will be the first time in the history of the GATT and WTO that the director-general will be a woman. And with that, I wonder whether the two of you could start us off by giving a bit of an overview on where things stand in international trade. Renee, maybe you could fill us in on some of the most significant international trade issues the world is currently facing. And then Jennifer could speak about how the WTO is poised to meet these challenges. Please, Renee.
BOWEN: Great, Maria, thank you so much. And thanks for inviting me to this great forum. I'm really looking forward to sharing my thoughts and probably even more looking forward to hearing Jennifer's thoughts on these issues.
Well, so, it goes without saying that we are in unusual times throughout the world. And how these times are affecting economies, and the global economy in particular, is sort of no different from how it's affecting other things. So the impact has been large, significant, and will be persistent for some time to come. So before I sort of go into my remarks, I do want to just mention the perspective that I come from. As Maria mentioned, I'm also an economic theorist, and I studied game theory in particular. So the perspective with which I come from in thinking about the economics of international trade and where things stand today is thinking about the institutional constraints, and thinking about the actors that are involved.
And so with that, let me just sort of describe where I think things are today. So international trade since the financial crisis of 2008 really took a hit. And the crisis of 2008, and sort of the domestic political issues really have persisted to this day. So a lot of what we're seeing in the conflicts in international trade between the U.S. and China, the U.S. and the EU, is really a function of an ongoing issue with domestic politics of international trade. So in the center that I direct, the Center for Commerce and Diplomacy, what we're aimed at is thinking about how international institutions, international economic institutions such as the WTO, can help to address not only international trade, but also the domestic politics that affects international trade. And then from the economic perspective, a lot of these domestic politics are clearly driven by distributional consequences. And these are distributional consequences within countries, but also distributional issues across countries. So we saw that the Doha Round of the WTO was really aimed at addressing concerns of developing countries. And as we know, the Doha Round was never concluded. So the WTO was never able to address those distributional concerns across countries. But then we asked the question, why was that? Why were we not able to address developing country concerns? And part of the answer is that we really didn't address domestic distributional concerns within some of the major economies, specifically the United States, and to some extent, the EU.
So in work by Gordon Hanson and coauthors, of course, the China shock has been identified as significant in affecting local communities. And so it's clear that effects of China's entry into the WTO and China's growth is significant, not only for labor markets locally, but also significant for politics. And so this is some of the research that's coming out of our center now. So not only can we show that international trade is affecting local economies, in terms of labor markets or output, we can also show that international institutions, the WTO in particular, appellate body decisions in particular, are affecting local politics, county-level votes for the current administration. So whereas before, we really couldn't make this direct link between international institutions, the decisions of international institutions, now we're able to see that entire chain of events and start thinking about what we call in economics, endogenous institutions. So we can fix the institution, the institution then affects the economics, the economics, then in turn affects the politics, which comes back to affect the institution. So we can finally start making that link. And through making that link, we can now start thinking about designing those institutions, and this is really where economists are at right now. So for a long time, we've been thinking about simply matching the data on trade flows, and we're very good at that, but what we're thinking about now is how to design these institutions to address distributional consequences locally. And so doing, going back to the institution and saying, how do we fix these things? So with that, I think I'll pause, and certainly let Jennifer take over from here.
HILLMAN: Well, terrific. And Renee, it's great to follow you because I think an awful lot of my thinking about it very much is that issue of a trade lawyer taking over from where an economist has left off, because I just wanted to as a way of opening up, describe what I think is the WTO in a significant amount of trouble. And why this matters is because really the WTO is at the core of our trading system. One hundred and sixty-four countries belong to the WTO. WTO rules cover 98 percent of the trade in the world. So in that sense, it's a very important organization. And I would say particularly in this time of COVID may be more important than ever, when it becomes really clear that countries that don't have the ability to make their own masks or make their own drugs or ultimately make their own vaccines are absolutely going to depend upon their trading partners. And so it's begging this big question of will your trading partner really be there for you? If the WTO were operating efficiently and effectively and everybody were living by the rules of the WTO? The answer to that would be yes. But the problem is that that's not really where we are right now. And again, just in this political season where you clearly are seeing a lot of condemnation of the WTO. And again, I think, led by the Trump administration. But again, there are leaders across the globe that are to some degree decrying the WTO, and decrying to some degree, the degree to which countries rely on China as the source of its PPE, or it's masks, or it's pharmaceuticals, or all of that. And so for me, it's a little bit of the question of why, I mean, why are we seeing this real push back to the WTO and the concept of a multilateral rules-based trading system? And to me, it is both kind of a failure of communication and a failure, to some degree, of substance. When I think about the failure of communication, to me, you see again the Trump administration, but again, leaders elsewhere, basically encouraging the American people to blame, whatever is their current ills, whether that's stagnant wages, whether that's crumbling streets, whether that's poorly performing schools, whatever that is that's ailing you, blame it on foreign. And again, it's partly blame it on foreign people, which is why I think you see this whole push to say no more immigrants can come in, I'm going to blame all my ills on any immigrants and refugees, anybody coming in. Blame it on foreign goods. So you've seen the Trump administration, again, pose tariffs on $370 billion worth of goods coming in from China, on steel, on aluminum, on lots of other products, you've seen this imposition of tariffs on this notion of all of those imported goods, again, are what you should be blaming for your problems. And recently, we're seeing even blamed foreign money coming in, we don't want foreign direct investment, we want to, again, do everything sort of here in the United States. So there is a big sort of communication issue out here. But is that appropriate to just sort of blame everything foreign? And then the message comes back to me and to Renee, so have we not just done a good enough job of explaining all the benefits of trade, why has this happened? And part of it is also to think about the substance of it. I mean, is it the rules or the WTO itself that is to blame for all of this pushback? And to some degree there, I think the WTO, there's no question, part of the reason why it's coming under all this criticism is, it's a system completely out of balance.
I mean, if you think about it, the WTO has three core functions. One is to negotiate new agreements, it's supposed to be the forum in which all countries come together to negotiate new agreements. And as Renee mentioned, there's been in many ways a complete failure. The Doha Round was never completed after literally more than a decade of negotiations. The only new agreement that the WTO has reached in the last twenty years has been on trade facilitation. An important agreement, but certainly, it suggests that it is failing in this idea of creating new agreements and new rules. And it's not that they're not important subjects to reach agreements on. I mean, there's a crying need for an agreement on digital trade. I mean, we've moved to heavily digital trade, the fact that we're all sitting here on a Zoom, etc., we are trading almost massive amounts of data and everything else are crossing borders. And yet, we have no global rules on digital trade, we need an agreement to limit the amount of subsidies that are going out for fish, we are overfishing our oceans, but we can't seem to come to an agreement and the list goes on. So the negotiating function is not doing its job.
The second part of the WTO is supposed to be kind of an executive function, a transparency function, everybody's supposed to tell everybody else what's going on. And the WTO is supposed to be the keeper of those documents and make sure everybody knows what's going on. And what's happened is a lot of countries are slow, if ever, getting around to their notifications, and China would head that list. It's important that we understand what China's doing with all of its subsidies, and yet the notifications are coming in years late, and very incomplete. So the executive function again, isn't really working as well as it should.
And then you shift over to the third function of the WTO, which is to resolve disputes. Here, I would say the WTO had been very successful until a year ago. A year ago, the United States —or whatever, ten months ago —the United States blocked all of the appointments for anyone to sit on the WTO’s Appellate Body, it's effectively its Supreme Court, if you will, its highest court. And so right now, there's not a quorum of members to hear any cases. And why that matters is because now if a panel, the way the dispute settlement system works is a panel first hears the case, the panel decides all the facts and all the law and says okay, if this is what's going on, has there been a violation of the WTO rules or not? The panel makes that ruling. If the side that lost the case, if they say you're violating the WTO rules, now what you can do if you don't want to come into compliance, you can file a notice of appeal because the rules of the WTO say that while an appeal is pending, nobody can do anything about that panel report. And if there are not enough members of the Appellate Body to hear the case, it will pen forever, meaning there will be no resolution of this dispute. So now you've taken away a lot of the incentive for countries to comply with the WTO rules. Because if they're found to be in violation, all they have to do is file a notice of appeal. And then, they don't, in theory, have to come into compliance.
So all three of these aspects of the WTO are clearly out of balance. And it's created an institution that is now really in fairly deep trouble. And the problem for the world is that this deep trouble for the WTO is coming at a time when we need the WTO more than ever. If we are really going to collectively solve the COVID crisis, we have got to have a trading system that works, we've got to have a trading system that is able to figure out the distribution of vaccines and medicines in a way that is fair and effective, and gets it to all the countries and the places that need it, not just to whichever country happened to have developed it, or not just to the countries that are rich enough. I mean, we are going to have to rely on open trading rules that are enforced now more than ever. So again, I'm very worried about where the WTO is, and at the same time, I'm going to be hopeful that we've got two incredibly capable women that may come in and take over things and show a lot of these folks how to run this organization and how to make it deliver for the people that it needs. So I'm going to remain optimistic. But I think there's a lot of questions that I hope we'll hear from you. Because this really is a chance to take a bit of a deep dive into where the WTO is and where it might go and what you all that are studying it might want to know about it or think about doing to fix it. So I'll stop there and really look forward to your questions.
CASA: Great, thank you so much, both of you for that overview. Let's open it up to the students and professors for questions. Please click the raise hand icon on your screen to request to ask a spoken question. When you are called upon, accept the unmute prompt and state your name and affiliation followed by your question. You may also submit a written question or vote for others’ questions via the Q&A icon in your Zoom window at any time, if you'd like. And why don't we start out today with Justin Hughes? Justin, are you there?
Q: Yes, I am. Give me a moment. I didn't know if you were going to unmute me or I was muting myself. My name is Justin Hughes. I'm a law professor at Loyola Marymount University in California and a former Clinton and Obama administration official. One thing I just want to clarify is the United States has been blocking appointments to the Appellate Body since the Obama administration. That was a decision that was made in the Obama administration for very clear reasons. So it's not something just to pin on the Trump folks. I was actually troubled by the comment that we need an effective trading system for the distribution of vaccines. I really hope that distribution of vaccines is not a trade-based issue. And I think that reflects a kind of old-fashioned belief that the free trade system or global free trade system is the best solution for anything. So I guess I would challenge Ms. Hillman and say, do you really believe that a WTO-lead trade system should distribute vaccines?
HILLMAN: Okay, let me— delightful question. I'll sort of slightly pick with the first, just your comment on the Obama administration blocking, because while that was true, to some degree, what the Obama administration never did was to basically say that nobody else could move ahead with Appellate Body members. So again, the United States may have blocked its own, but that's different from shutting down the entire system. So I do think there's a distinction there.
No, and I apologize if I misspoke. I was not trying to say that the WTO system would itself be engaged in the distribution. But what I do think is important is that countries not be using trade barriers to in essence make it more difficult to distribute the vaccines. And to some degree, we have already seen this start out where a number of countries started to impose export controls on some of the own ingredients or the parts that might go into something so that they were hoarding it and keeping it at home. And so, part of what I'm saying is that there needs to be a real monitoring to make sure that countries do not put in place these kind of export controls.
Secondly, are the WTO rules on TRIPS, which would get into the issue of whether or not there's a patent on any of these pharmaceuticals. And we saw this movie play out before during the HIV/AIDS crisis, where there was a perception that the WTO TRIPS rules basically allowed those that had the patents on those HIV/AIDS drugs could keep them out of the hands of others, or would not be required to provide them at a reasonable cost. I mean, the average cost of an HIV/AIDS drug during the really height of the crisis, particularly in Africa, was over $10,000 per person per year. So completely unaffordable. And so again, there were some modifications, small modifications, to the TRIPS agreement, but the whole idea was to make sure that you did not let the TRIPS agreement sort of get in the way.
And then the third thing is that the WTO, the WHO, and other organizations, again, have been working together on everything from patent pooling arrangements, to GAVI, the overall global vaccine alliance, to a whole series of sort of mutually reinforcing efforts among a huge number of NGOs, a lot of money from the Gates Foundation, but also, again, the WTO and the WHO, trying to work together to make sure that the trade rules are not getting in the way, if you will, and are continuing to keep open those supply chain links that need to stay open. But no, the WTO will not be involved directly in distributing pharmaceuticals.
BOWEN: Yeah, I'd love to add one tiny point to that. Justin, thanks for the question. And, again, from the economics perspective, trade and distribution of drugs in addressing a global pandemic is really a public good. And as economists will talk about, the only way to address the efficient provision of a public good is through coordination, and I think that's what Jennifer's really also getting at. So we need global cooperation, in order to provide the right level of having trade barriers reduced. In addition, ensuring that those supply chains are as clear as possible. So if you talk to drug manufacturers right now, they really identify the disruption in supply chains, through recent trade policy actions as one of the major stumbling blocks to getting those drugs to people. So, as Jennifer said, this is really not about the WTO providing these drugs. This is really about the WTO and other institutions, international institutions, facilitating the sort of cooperation that we need to get these drugs to people.
CASA: Thank you. The next question is a written in question. It comes from Mark Kluszewski. He's a student in the master in international affairs program at CUNY’s Baruch Marxe School. And his question is, “Can either of you comment on China's ongoing Belt and Road Initiative and its effect on global trade now and in the next five to ten years?”
HILLMAN: Yeah, I don't know Renee whether you want to start or whether I—
BOWEN: I'll start. This is, for me, really a political economy issue, not so much an economics issue. So clearly there are economics involved. But again, this goes to what are the motivations for China to be doing this Belt and Road Initiative. And from my perspective, a lot of it is economic. They want to form ties with a lot of these countries, these countries that needed infrastructure, and for the countries that are accepting the infrastructure investment, I'm sure they are fully aware of where it's coming from, and sort of the motivations involved.
From the United States perspective, one of the things that the United States has, in my view, been sort of absent on is thinking about the development of these countries, really, from the perspective of developing the infrastructure they need to grow. So of course, people would point to the World Bank and all the World Bank's infrastructure projects, but that was really coming from a perspective of mitigating poverty in these countries. And, I have had the fortune of talking to a lot of African leaders, from Rwanda, to Ghana, to other places. And what they continuously say is, they are really willing to partner with countries, with large countries, for growth, but they want to be seen as equal partners. They're not a charity case. And so they are viewing this Belt and Road Initiative, really as helping to boost their economies. And from the U.S. perspective, we should really be thinking about partnering with a lot of these countries in a similar way. So I'll leave it there. But I'd love to hear Jennifer's thoughts.
HILLMAN: Well, thank you. And I'm going to make a little plug because the Council on Foreign Relations in the process, I know because I'm codirecting it, of preparing a task force report. So we have put together a really commendable group of people that are really working on this, that is basically both a sort of a clear and, I hope, succinct description of exactly what's happened with BRI. And then secondly, and more importantly, what should the United States response to it be. And so that report is slated to come out in March. So I'd only urge you to keep looking at the CFR website for when it comes out.
But a couple things. One is, I think China has identified a clear gap in the system. And the BRI, to me, is a complete exploitation of identifying the gap between the kind of funding that the World Bank and the IMF and the IFC, and then on the U.S. side that EXIM Bank and OPEC [Overseas Private Investment Corporation] support, which at least on the World Bank side is much more heavily moved into social services and providing less of the just sort of hardcore infrastructure. Because what so far to date, almost 80 percent of the BRI funding has been in sort of on the ground transportation, that is railroads, roads, ports, basic infrastructure, and those are the kind of projects that require substantial amounts of money, very big deposits, and it's not something that our private sector has been quite as willing to do, because of all of the risks connected to it. So it is going to have a big effect that China will now have, 80 percent of all the ports in Africa will have been built by China, 80 percent of all the railroad lines moving from China over to Europe will have been built by China. So yes, China is going to have its hooks, if you will, very deeply into the region infrastructure.
The second place where I think it's going to have a big trade effect is going to be in the standards area, particularly in technology. China, again, is owning 5G and artificial intelligence and a lot of other technology related telecommunications. They're building, again, the electricity grids, they're laying all the fiber optic cable, getting very heavily in and doing it under Chinese standards. And they are trying to take over the international standard setting bodies to make sure that all of the standards are ones that China wants, that may make it a lot harder for U.S. companies to then try to come in after the system has already been built around and operating on Chinese standards. And there's going to be a huge debate over whether in 5G and other areas, whether there's interoperability or not, or whether once you're on the Chinese system, you have to stay on the Chinese system. So I think you're correct in saying that it may have very, very significant trade implications. I mean, the difficulty for any American companies that are trying to compete with China is that China is winning a lot of these contracts on the basis basically, of speed, because they're letting these contracts without doing environmental impact assessments, without doing debt sustainability assessments, without doing any of the kind of things that the World Bank or even a lot of our private sector would require. So they're winning on speed, and they're winning on price. And they win on price because they get huge government subsidies, and almost all of the financing is coming out of Chinese-subsidized banks.
So it is almost impossible for the U.S. or others to compete on either speed or price. So we have to compete on quality. And when I say quality, I mean both the quality of the products that would go in but more importantly, that we would compete on the basis of a sustainable project. And what is becoming very clear is that a significant number of these Chinese projects are not sustainable. Countries cannot afford them. And to the extent that you're building a high-speed rail line, okay, fine, but it will not pay for itself for thirty or forty or fifty years. And these countries simply cannot afford those kinds of debt burdens, particularly when COVID adds more of a debt burden.
There's no question that BRI has been very much cut back and truncated as a result of COVID. And it's shifting, instead of being all in these very expensive long-term infrastructure projects, to much more digital. I mean, China's now touting their digital Silk Road, and they're touting their health Silk Road. So again, they're providing a lot of health technology and a lot of digital technology, which is cheaper for China, but also, again, locks these countries into China and using its technology and using its standards. So I think the trade implications are very, very big. And I think this is an issue that America is going to need to really pay attention to and figure out how do we be smart, and how do we compete where we are competitive? And how do we compete on the basis of quality rather than trying to just match the Chinese dollar for dollar or some other process that I think would not be effective.
CASA: Thank you. Next, we'll go to Manuel Montoya.
Q: Yes, thank you very much, Maria. Dr. Bowen and Dr. Hillman, thank you very much for your time. My name is Manuel Montoya. I'm with the University of New Mexico, I teach international management and global political economy. I was interested in the Doha Round, as well. And some of the things you said about the unfinished business of the Doha Round related to identity politics. Now, as we know, Brexit also revealed, particularly along the north Irish border, the question of the hardening and softening of borders, having a direct effect on issues of ethnic violence and potential for other forms of identity politics in forming conflict, and the transferring of commercial challenges and trade wars into more physical domains. I'm very interested in what you think our international trade system is telling us about public—what is a public? You guys mentioned the idea that some of the goods like vaccines are public goods. And I'm often curious what exactly constitutes a public and if the WTO is mindful of its connection to a global public or an international public, and how that is actually either forcing people to move away from the WTO or embrace this concept of a global public. Thank you.
BOWEN: Great, I'm happy to start. And so I guess, I'll start with a concept that Danny Roderick came up with, which is thinking about political trilemma of international integration. And so this political trilemma of international integration has at its three points, thinking about democracy, thinking about national sovereignty, and then thinking about integration, global integration, and there's a tension between these three. And the tension means that you can really only have two of these at any particular point in time. So you can either have national sovereignty and democracy, or you can have national sovereignty and integration, or you can have integration and democracy. And really, it's not that stark, you can really sort of be anywhere within this triangle and the global institutions and domestic political institutions contribute to these things. So the way I sort of think about the identity politics that you mentioned, is that it really is thinking about the democracy and the democratic constraint. So within domestic politics, certainly identity plays a huge role and political scientists have identified this. It's there. So to the extent that domestic constituents can express their identity politics through voting through other means, this certainly presents a constraint for global integration, this is going to be present in countries that lean more democratic, so certainly in the EU and in the UK. And of course, in the United States, we've seen this. So this is what Jennifer mentioned as the foreign. So if your identity is thinking about yourself as American and America first, not an immigrant, then that identity politics plays into these domestic political institutions and consequently into the tensions pulling at international integration.
But this is in contrast to the other thing, the other lever, that's there is this national sovereignty lever. And so what we've seen in recent years in the UK, and in the United States is this pull on national sovereignty. So one of the things that gets brought up in discussions about the Appellate Body is the fact that the Appellate Body has restricted or has infringed on U.S. national sovereignty. And this is one of the reasons that has been given for at least the current administration to back away from the Appellate Body. Now, what's interesting in the United States is that this is really a tricky issue. Countries in Europe, on the other hand, are much more comfortable giving up national sovereignty. So they've been able to put together the European Union, and that is an act in and of itself of giving up national sovereignty. So they're much more comfortable with these global institutions helping to provide these global public goods. Whereas in the United States, their national sovereignty starts really pulling at global integration. And if we think about a country such as China, where clearly democracy is much less of a constraint, then they can think about their national sovereignty concerns and global integration. So that's sort of the framework that I think about your question in, and so I’ll sort of stop there, happy to keep going on that. I could talk for that ad nauseam. I'd love to hear Jennifer's thoughts.
HILLMAN: Well, I'm going to go right to the WTO rules to say that your question is an excellent one. And I think you see in the rules, the fact that the system doesn't work very well to account for public goods. And I'm going to point you to two places where I think that becomes very clear. One is in the just overall preamble to the WTO, where it says what is the purpose of the WTO. But the problem for the WTO system is that it’s not binding. That's just what —, it's recognizing that trade is supposed to raise standards of living, ensure full employment, ensure that a steadily growing volume of real income, expanding the production and trading goods and services, while allowing the optimal use of the world's resources in accordance with the objective of sustainable development. So all of the kind of public goods part of the equation, if you will, is to some degree in this preamble, but is not binding.
And the second one, to me, is the really more telling one, which is the exception to all of these WTO rules, that you can't discriminate, that you can't charge more than X amount of tariffs, that you have to protect intellectual property, that you have all these things that one has to do. To the extent that there is an exception to them, you can get out from under it. It's Article 20 of the GATT. And that's where you see this notion of some of the public goods kind of things. If you're taking an action that's necessary to protect public morals, an action that's necessary to protect human, animal, plant life, or health, that is done in to protect an exhaustible natural resource, all of those are considered exceptions to the rules, which to me sort of suggests that the rules do not really account for the public good. And when you want to account for the public good, you have to rely on the exception to the rule. It's probably overstating it, but I think my point would be I think your question is very much on to something. And the problem for the WTO system is that who's public? I mean, how do you define what is a public good? And the problem of whether there are any sort of general normative assumptions about what those public goods are. I think the answer to that is probably not, which is why we're still stuck at this issue of the basic rules are what they are. And when you want to invoke the public good, you're into the exception or the defense to a measure that is otherwise in violation.
Q: Thank you very much.
CASA: Thank you. Our next question is written in, it’s from Man Gi Lee, a graduate student at Duke University, who writes, “Due to growing mega regional agreements, the role of WTO will decrease. Do you think that WTO still has a chance to survive in the era of mega regional agreements or other trade agreements outside the WTO? How can the WTO harmonize with other trade agreements outside the WTO?”
HILLMAN: I'll start on this one. Look, it's a very, very good question. And I think the honest answer is we don't know yet. And I do think the point is very well taken of is the WTO even relevant anymore? Because if you think about where there has been trade liberalization, from an economic standpoint taking place, and where have there been new rules for trade developed, it's all been in the regional trade agreements. It's not been in the WTO. So there has been a significant amount of trade liberalization occurring either by countries just unilaterally liberalizing their trade, or doing it in bilateral or regional agreements. To the extent that we've seen new rules come up, I mean, we have really good digital trade rules. In the USMCA, we have this agreement with Japan that has rules on digital trade. We have agreements on state owned enterprises, and a whole host of other things in the TPP, which has become the CPTPP. In the USMCA, and again, in a whole host of other agreements. The European Union has added a lot of really interesting provisions to some of its agreements with Canada, with Japan, and others. So yes, you're correct in saying that where all the action is, in terms of both liberalization and rule development has been in the regional agreements. And so the big question for the WTO is what's left for them. And there I think it will depend, I think, to some degree on whether the WTO can become a more effective secretariat, if you will. So it becomes the transparency place, it is where everybody goes to figure out what are the rules, even under these regional trade agreements, help me understand what the rules are.
And the other place where again, not clear right now, but potentially down the road, whether the WTO serves, if you will, as the adjudicator. Again, that will depend on how much we resolve a lot of the current Appellate Body problems and others. But you can certainly see to date that every one of these regional trade agreements, hundreds of them, there's more than four hundred of them, they all have their own dispute settlement mechanisms written into them, all of them do, almost none of them have ever been used. Everybody chooses instead to go to the WTO. Everybody just ends up in Geneva for whatever their disputes are. Now that may very well change, as these agreements have new rules that can't really be litigated at the WTO. But for right now, the WTO is by far the preferred place to go to resolve disputes, we don't know yet whether this killing of the Appellate Body will mean it's no longer the preferred place, or whether the litigation is all over these new rules that are not WTO rules. But that may be the way that the WTO remains relevant is to be, again, the best repository of all of the information, and the adjudicator for all of the disputes, whether they're regional or not. If so, I can imagine it staying relevant.
And the other thing for the WTO is going to be what does it do about the fundamental conflict with China? I just don't see how you have a WTO continuing to exist, when it's fundamentally based on, in essence, market economy principles, and you have the single largest trading nation in the world not adhering to market economy principles, the system can't keep those two in the same place under the same set of rules. So the WTO is going to have to figure out all of those and figuring out what to do about China if it's going to remain a viable, I think, and active institution going forward.
BOWEN: So I'll just add a couple points to that. First of all, great question. And thanks, Jennifer. I think that was such a great summary, just a couple of economic things to think about. Whenever we think about these regional trade agreements, we're always thinking about the trade diversion aspect. So to what extent are you just taking trade from one place and putting it in another place that may be actually less efficient at producing the good, versus the trade creation, economic impacts, and so economically speaking, there's always that trade off. But then there's sort of the, as Jennifer is mentioning, the trade off, or actually getting things done within these agreements, and clearly these agreements being smaller, makes it easier for the bargaining parties to come to agreements and move things forward. And so in the WTO, in particular, everything is decided by unanimity when you have 132 plus countries trying to agree on everything, that clearly makes it difficult. But everyone agrees that the WTO needs some reform. And it's quite possible that we think of even the institutional rules and coming to an agreement as one of those things that we should consider. And the final note is the WTO does allow for preferential trading agreements. So in a sense, it's really not an either or, so we can have these regional agreements continuing. And it's not in contradiction of current WTO rules. So I'll just stay there. Let it be there.
CASA: Thank you. Next, I see res tan from Qazi Shahid Mehmood, if you could please state your affiliation. And then your question.
Q: Are you listening to me?
Q: Thank you so much for taking my question. And my question is to first, Jennifer, and then to the honorable speaker. What do we need right now, either structural reformation to WTO, and how we can mitigate existing gaps between the developing countries and the developed countries. So the second part of the question, do you think that how far the developing countries are pleased or displeased with the WTO in terms of trading baskets? Thank you so much.
HILLMAN: Your question raises a lot of interesting issues. And as I'm sure many of you may know, this has been another serious bone of contention at the WTO with the Trump administration leading an effort to try to change the rules by which a country can declare itself to be a developing country. So right now under the WTO rules, if you are a least developed country, according to the World Bank's criteria, so this would be, again, the poorest of the developing countries, you do get certain automatic provisions, and there's no questions about it, no dispute. The second category are developing countries, and under the WTO rules, countries can simply declare themselves to be a developing country for purposes of the WTO rules, which means that China, Korea, Singapore, I mean, a number of highly developed, if you will, countries have declared themselves and again, I would say past tense declared themselves, to be developing countries. And this has now been the source of a huge push by the Trump administration to say, no, no, we should have very clear criteria. If you're a member of the OECD, if you're above a certain level of GDP per capita, if you're in these various baskets, you may not be, if you're a trading country, if you trade at a certain level compared to your overall GDP, you may not simply declare yourself to be a developing country.
The debate has obviously been very, very fraught, because a lot of countries are saying, who are you United States to just set this criteria? And you just get to decide who's in one basket or another? And at the same time, I think it's caused a huge focus on sort of what do you win, if you will, to be a developing country at the WTO? I mean, it's a real examination of what the rules say about developing countries, and what it's turning out the rules say, to be honest, is not very much. What they say is that initially, developing countries were given a longer period of time to come into compliance, five or eight more years from when the WTO came into effect, before you had to be in compliance with the rules. Well, that five- and eight-year period passed a long time ago. So those rules are no longer making any distinctions.
Secondly, there's a lot of provisions in the WTO agreements that say that developed countries like the United States should do the following things for developing countries, they should take this into account, they should, but it's not a binding obligation. And so by and large, a lot of times, it's simply ignored. There are few places in the rules where it matters, whether you're a developing country or not. And the biggest one is in agriculture. So if you are a developing country, you are allowed to provide more subsidies to your farmers more support for your farmers, more support for your ag exports than would be permitted by a developed country. That's great if you're a relatively rich developing country where your government has a lot of money to give to its farmers. But again, it isn't going to help those developing countries that really don't have that kind of resources. So I think your question and all of this debate has really pushed the issue of do the rules, and an open trading system, really help developing countries or not? Because so far, a lot of the developing countries’ argument has been, we don't want to comply with the rules. We are a developing country, so it would be to our benefit not to comply with the WTO rules. And I think that's where a lot of the economists are coming in and saying, oh, wait a minute, actually, the countries that are more open and that are more engaged in trade are actually the ones that are doing better. And so maybe this idea of letting all of the developing countries not have to come in compliance and the rules is actually not helping with development. But your question and this debate is very much at the heart and center of a lot of what's going on in Geneva, I think is very caught up in the in the debate over who should be the next director-general of the WTO.
BOWEN: Great, I have very little to add to that. I mean, that was really excellent, an excellent question, only to say that developed countries need developing countries. Really, when we think about where the most recent global growth has come from, it's because of that trade between developing and developed countries, we need access to what they have that we don't have. So that's cheaper labor, cheaper raw materials. In order for global growth to really take off again, we need to keep incorporating these developing countries in the global trading system. Now, Jennifer, and other people will know how best to do that in terms of negotiating with these countries. But the fact is that we can’t exclude them and so we need to find ways to work with them.
CASA: Thank you. The next question is written in, it’s from Jian Xu, who's a PhD candidate in political science at Emory University. The question is, “How would transnational anti-corruption enforcement regimes such as the OECD anti-bribery convention and the U.S. FCPA [Foreign Corrupt Practices Act] affect global trade and investment going forward, especially those involved in developing countries and emerging economies?”
BOWEN: So I'll let Jennifer take this one. This is completely outside of my area.
HILLMAN: It's an excellent question. And I'll just only start with a caveat that obviously at this point, one of the real concerns about the WTO is the fact that it does not have any specific provisions relating to corruption. And yet we know from every study done out there, and again, from the work of the World Bank, from the work of NGOs, like Transparency International, that corruption is very, very significant in volume and very much on the rise, and that an awful lot of the corruption occurs in and around trade. So there is no question that I think if we're going to get our arms around it, there is going to have to be a much more global push. Now whether that global push belongs at the WTO, or whether it belongs somewhere else, again, is I think, not entirely clear. But there's no doubt and again, you see it even again, as I mentioned, I'm very immersed in this BRI project, you see it again, very clearly around a lot of the projects that China has been engaging in, in a lot of developing countries, where a huge part of the reason why these have become unsustainable, is because of the big drag that corruption places on them.
And on the other hand, you see, again, this vacuum being created, that China is filling, because for a lot of the World Bank, and the western investors, private investors, they are avoiding a lot of these markets because they're known to be hotbeds for corruption. So I think there's no question that a country that gets a reputation of being highly corrupt, has a tremendous difficulty in drawing in foreign direct investment. Investors simply do not want to go there. If, again, if a country is really high on the Transparency International index for corruption, it tends to be much, much harder for them to draw in private, foreign direct investment, which means you've got to have, again, something like the BRI, or something like funds coming out of the multilateral development banks, that have an effort connected to them to try to fight that corruption. And the problem is, it's very much on the rise. And, you're also starting to see a little bit of sort of pushing back once again, against the Foreign Corrupt Practices Act. I mean, again, when the United States initially enacted the Foreign Corrupt Practices Act, there was a huge pushback from a lot of American businesses that said, we cannot compete overseas, because all of our competitors are bribing, and we're not allowed to bribe anymore. And indeed, the Europeans, I mean, you used to be able to take it as a deduction on your taxes in Europe, whatever your bribes were, they were considered a business expense that you could take. So the United States has very much led this effort to say no, we need to stamp out this corruption, because it is such a waste of the developing countries’ money. I mean, it's just a huge amount of money. The developing countries cannot afford this corruption. I mean, they cannot be affording to add 20, or 30, or 40 percent of every project that is going to go into corrupt pockets. So the need is huge. The problem is there's just not, at this point, again, an overarching, again, the OECD has been to some degree leading the international charge, but the OECD can only go so far and isn't really in a lot of these countries. So I think it is going to take writing and worrying about anti-corruption as part of all of these kind of big lending projects, as well as all commercial contracts. And we're just not there yet. But I think the awareness is growing.
CASA: Renee, do you want to add something?
BOWEN: No, I think that was great. I really have nothing to add. Thanks very much.
CASA: Next, we're going to go to Lanning Wright who has a raised hand. Please identify yourself, and then your affiliation, and then ask your question.
Q: Hi, my name is Lanning Wright and I'm a student at Mountain Vista Governor's School. I really just want to thank you for doing this today. And so my question for you all is, so the United States and other wealthy countries have already bought, or reserved, hundreds and hundreds of millions, and even I think the new number is billions, of doses of Coronavirus vaccines. And so, as you had mentioned before, earlier in your overview, you were talking about how developed countries kind of forget like how developing countries are trying to or how their economies are working at that time. And so, I was wondering, do you believe that because we have already reserved so many of these coronavirus vaccines, is this edging out the developing countries from trying to stop the pandemic?
BOWEN: Yeah, I thank you Lanning for that great question. And I suppose, I don't have a ton to say on this particular topic, except to sort of reiterate that this is a public good. And we're going to have to figure out how to distribute these vaccines. This is not the time for countries to really be thinking unilaterally and be thinking about self-interest. Obviously, as the pandemic persists in other countries, it's going to affect our ability to control it in our own countries. Not only that, as the pandemic persists in other countries, it affects our ability to recover economically. So once again, this is a call for policymakers to simply coordinate and have these vaccines distributed in the fairest way possible to the greatest number of people possible.
HILLMAN: And I'd only add, I mean, that is exactly it. And the question is, it is such a strong push for politicians to treat your own first. And again, as Renee has said, there are a whole lot of reasons why that's actually in this kind of pandemic’s situation, why that isn't going to work. Because if there's COVID anywhere, there can be COVID everywhere. And so it is as much in our interest to make sure that there are not outbreaks everywhere else, as it is in our interest to make sure American citizens get the vaccine. The problem is, that's really hard for politicians to say or to sell. And so there's a huge issue there.
The second thing that makes this really difficult is that in many other pharmaceutical products, and again, I'm not an expert, I'm just going off of what I've read, but in many other products, what you do is a license to other manufacturers to make this product in all different markets all over the world. It's my understanding that the kinds of vaccines that we're now talking about or that appear to be the most likely, the manufacturing process itself is extraordinarily difficult. And so there are not going to be quite as many places to turn for companies that are going to be readily available to start making this particular vaccine, even if the patent holders are willing to provide a license, even if you end up going down the sort of more difficult road of forcing a compulsory license. The question is whether you have high quality, highly sophisticated manufacturers, and then when you get to the distribution, and it will really matter if the vaccine is one that has to be chilled, I mean, it has to be kept at refrigerator temperatures, and can only be administered via injection. Again, that just really makes it much more difficult on the distribution end. And that's really where you're going to need the Bill and Melinda Gates Foundation and others who have had great success at distributing vaccines be right at the fore of getting it out there. So COVID presents issues across everything that was raised in your question. And again, to me, it just underscores that more than ever, we are going to have to coordinate and work together on both the making of the vaccine and on the distribution of the vaccine. And it is just not a time for hoarding to occur to benefit one's own.
CASA: Thank you. I apologize, we have many more questions, but we don't have the time to get to them. We'll have to have you both back with us. Renee and Jennifer, thank you very much for this informative discussion. And thanks to all of you across the country and outside the United States for your questions and comments. You can follow Renee on Twitter @Renee_Bowen_Lyn and Jennifer @J_A_Hillman.
Before closing, I would like to say a word about two upcoming CFR events. The first is the final installment of CFR’s Election 2020 Virtual U.S. Foreign Policy Forum series. This will take place on Monday, October 26, from 3:00 to 4:30 p.m. Eastern Time. The speakers will be Secretary Madeleine Albright and Dr. Richard Haass. The nonpartisan discussion will address the foreign policy issues for Americans to consider as they vote and the challenges awaiting the winner of the 2020 presidential election. If you're on this call, you will have received an Eventbrite link in an invitation sent out on Monday. I hope you will join and encourage people in your networks to sign up as well using that same link.
The second event I want to mention is the next CFR Academic Webinar, which will take place on Wednesday, October 28, at 1:00 p.m. Eastern Time. Our speakers will be Paul Angelo, fellow for Latin America Studies at CFR, and Angela Banks, Charles J. Merriam distinguished professor of law at Arizona State University. The conversation will be on migration in the Americas.
In the meantime, I encourage you to follow CFR Academic on Twitter @CFR_ Academic and to visit CFR.org and ForeignAffairs.com for information and analysis on international trade and a host of other foreign-policy related issues. Thank you again for joining us today. We look forward to your continued participation in the series.