Leibowitz on Trade: The Crisis in the WTO

Before World War II there was no WTO. The countries of the world pursued trade policies that they believed were in their own interest. In the aftermath of the stock market crash of 1929, Congress passed a tariff bill that, they believed, would blunt the economic downturn that was rapidly turning into the Great Depression. Formally known as the Tariff Act of 1930 and widely remembered as the Smoot-Hawley tariff, it became a Christmas Tree for as many members of Congress as possible. Members heard from their constituents facing international competition. The bill enacted tariff increases on many products. The intent was to discourage imports and bring production and jobs back to the United States.

It did not work.

The Smoot-Hawley tariff raised U.S. duties to more than 50 percent on average. Other countries, angered by the American tariff increase, retaliated with high tariffs of their own on U.S. exports. World trade plummeted and spread the Depression around the world. In the 1930s, the only countries that prospered were those that wanted to conquer—they built armies and navies while the Democracies languished. World War II might have happened without the trade war—but the trade war was definitely a factor in causing it.

Politicians and economists knew this—they got together toward the end of the war at Bretton Woods in New Hampshire to plan the postwar economic order. Three basic pillars of the global structure took shape—the World Bank (officially known as the International Bank for Reconstruction and Development); the International Monetary Fund, or IMF; and the General Agreement on Tariffs and Trade (GATT). The World Bank was about rebuilding Europe and the Far East after the war, and it succeeded admirably. The IMF was concerned with international finance and keeping inflation in check around the world, and it succeeded pretty well. And the GATT set basic rules for tariffs and other trade barriers to prevent the disaster of the 1930s from repeating itself. That worked well too, but politicians and businesses interested in keeping cutthroat competition in check prevented it from setting rules that were truly enforceable.

In the 1980s, a consensus emerged that the world trading system needed to be overhauled. Too many countries were ignoring the rules and acting parochially. The U.S. was one of the leaders (along with the European Union and Japan) that wanted to improve the system. The Uruguay Round, which started in 1986, was the vehicle.

After about nine years, the GATT countries agreed on a new framework. A big part of it was a revamped system of settling disagreements between the countries of the world—a dispute settlement system administered by a new international organization—the WTO. More than 20 agreements were concluded and periodic sessions were committed to so that changes could be negotiated to keep up with the times.

It is fair to say that the countries of the world have not updated the WTO to take account of changes. Populist pressures have prevented change and the old institutions, 25 years old now, satisfy WTO members less and less. There have been some constructive changes—the Information Technology Agreement and the Agreement on Government Procurement are two examples. But the dispute settlement system has angered WTO members, most notably (but not exclusively) the United States

The U.S. has, since 2017, effectively broken the dispute settlement system by crippling the “Supreme Court” of the WTO, known as the Appellate Body. The seven members of the Appellate Body decide appeals from decisions of the dispute settlement panel. Three AB members sit on each appeal. As of December 2019, due to the refusal of the U.S. to agree to the appointment of AB members as the old members’ terms expired, the Appellate Body ceased to function.

The U.S. and other WTO members have made literally no progress in resolving their differences. This reflects the absence of agreement on most important issues affecting world trade. The WTO will continue to be a place where very little gets done. With the coronavirus, even the complaining needs to occur remotely.

That is where we are—but where are we going? There are still dispute settlement cases being filed and some are being decided at the panel level, the first stage of the process. Several WTO members (not including the U.S.) have agreed on an interim procedure to resolve appeals without the Appellate Body. But there is no progress on resolving the issues that divide the membership.

Since 2017, countries, let by the United States, have acted unilaterally to impose tariffs and other trade restrictions, which has led to retaliation. If you like tariffs, this is the world you have—much like the world our grandparents had in the 1930s.

I remember a wise man telling me the reason that the Bretton Woods agreements were so important. “The world figured out,” he told me, “that when goods cross borders, armies don’t.”

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