Leibowitz on Trade: WTO Inches Back Toward Relevance

The ministers also agreed to a goal of reestablishing a fully functioning WTO Appellate Body by 2024. The Appellate Body has not been active since 2019. Thus, WTO disputes cannot be decided because there is no tribunal to resolve them.

These developments are positive, to be sure—but they are thin gruel. The basic work of the WTO, reducing barriers to trade and global economic growth, was not discussed seriously at the conference. Global support for the WTO is still lacking in the United States and other countries. The world since 2016 has retreated from the post-World War II idea of reducing trade barriers. The pandemic and supply chain disruptions have not helped build confidence in global institutions.

Support for open global markets has all but collapsed politically. The contributing factors are well known:

• The financial meltdown in 2008-09, the exploding trade deficits of the United States
• Frustration with China’s failure (at least according to the US Trade Representative’s Office) to live up to its obligations under the WTO agreements after joining the WTO in 2001
• The COVID pandemic and attendant lockdowns
• Persistent supply chain disruptions making it harder to rely on foreign suppliers
• And the Russia-Ukraine war, which caused dislocations in energy, in agriculture and in broader supply chains

In the United States and elsewhere, the changing world has caused countries to rethink their support to multilateral agreements to keep trade barriers low. In the US, both major parties show little interest in opening foreign markets to US exports. We hear constant complaining that foreign suppliers are unreliable, while ignoring the fact that domestic suppliers can be unreliable too. If you buy baby formula, you know that domestic production alone is no guarantee of a smoothly operating market.

Inflation is caused by unreliable domestic and international supply chains. And now, with unemployment at a 50-year low, people still clamor for moving production back to the United States, as though that would have no impact on inflation.

One factor in pushing for more US production is organized labor. The leadership of labor unions has been loyal to Democrats for nine decades. But union members sometimes stray from the leadership. In 1980, and again in 2016, labor union members voted Republican in large numbers, contrary to union leadership.

Certain companies and industries have been against trade liberalization, such as steel, textiles, sugar, and shipping. Those industries have been slipping in their international competitiveness, although the reasons for that slippage are not solely due to trade “cheating” by foreign competition. Moving production in those industries back home will probably make inflation worse over time.

Many other industries are in favor of global supply chains to reduce costs and to maintain diversity of supply. But in “import-sensitive” industries, labor and management are united in favor of barriers to trade.

How did we get to the point where labor and management in the US agree on international trade? Labor and management generally don’t agree on much, including on trade issues. In steel, for example, labor-management friction led to frequent strikes from the 1940s to the 1960s. Once a new labor contract was reached with cost-of-living increases built in, labor and management both turned their attention to controlling imports, a joint enterprise that continues to this day.

Americans have long disagreed on whether international trade is good or bad. Before the Civil War, northern business desired protection from imports, and southerners wanted to export cotton and import almost everything else. After the war, when Republicans were politically in the ascendancy, Congress imposed protective tariffs to help northern industry grow and prosper. The South was unable to compete. But trade was never prohibited in those years, in part because American industry was growing and at the cutting edge of development worldwide. All sections of the country benefited.

Things came undone in the 1930s. Trade withered because of protectionist tariffs first introduced by the United States (the Smoot-Hawley Tariff). Republicans after 1932 became the party of protectionism and isolationism as Fascism and Communism took over in Germany, Russia, and Italy. Creation of new empires by Germany and Japan, intended to rival the then-existing empires of Britain and France, grew until the world exploded into war.

After that war, the leading nations of the world thought that, to prevent the next global war, a system of collective security based on basic rules was necessary. The United States was a leader in creating institutions to grow trade and interdependence. This was largely successful until the 21^st century. While there have been small wars, there have, thankfully, been no large ones. Trade rules were part of this structure. While some countries or trading blocs (such as the European Union) can supply many of their own needs internally, no country can claim to be fully self-sufficient.

The culmination of this rules-based trading system was the creation of the WTO, with its binding dispute settlement system a key institution. This was a vast improvement over the old GATT system, in which disputes rarely resulted in meaningful change because members that lost cases did not have to pay if they did not follow the rules.

After the WTO system came in, the United States lost some cases, primarily arising under US antidumping and countervailing duty laws. Political angst and anger arose in Congress because the openly protectionist antidumping and countervailing duty remedies in the United States were an important political offset for organized labor and import-sensitive industries challenged by international competition. In short, the US laws addressing dumping and subsidies provided protection for import-sensitive industries that sensed that the WTO decisions against the US system threatened their future prosperity. But the trade remedies did not keep those industries from shrinking.

This was only one factor weakening popular support for the WTO, but it was important. When Donald Trump took office in 2017, his administration quickly set to work to undermine the WTO’s effectiveness in dispute settlement cases. Then it imposed the Section 232 and 301 tariffs, and the United States refused to negotiate even with our friends and allies about them.

The popularity of these tariffs continues to this day because the US economy is buffeted by forces that extend around the world, like supply chain disruptions and inflation, especially in energy and agriculture. Many larger countries have followed the US lead and imposed their own trade remedies.

With the onset of military conflict in Ukraine, continuing conflicts in the Middle East, and the increasing threat of conflict in new places (such as Taiwan), the global trading system seems to be failing to prevent conflict by increasing interdependence. Last week’s WTO ministerial declaration was a small but potentially significant step in at least slowing the decline in stature and influence the WTO has suffered since the failure of the Doha Round in 2003 and 2008.

The future peace of the world (and perhaps its fate, given the existence of nuclear weapons) depends on enforceable rules. These rules should cover geopolitics as well as international trade. Geopolitically, if large countries can forcibly conquer and subjugate small ones without consequences, the world’s stability and perhaps its existence will become increasingly fragile. Smaller countries need to know that annihilation of their independence by force will be resisted by the world community.

Global trade also needs rules. Most countries depend on trade to meet their needs for health, defense and food supplies—no country can go it totally alone. While the United States may be self-sufficient to a greater degree than most in food and energy, it still needs international trade. And it needs reliable rules. The WTO Ministerial Conference gives reason to hope that progress can continue.

Lewis Leibowitz

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