Posted by on December 21, 2020 11:52 am
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Categories: Geopolicy

Some Comments on a NY Times Op‐​Ed on the WTO”

By Simon Lester, courtesy of the Cato Institute


Yesterday, Farah Stockman of the NY Times editorial board published an op‐​ed on the World Trade Organization entitled “The W.T.O. Is Having a Midlife Crisis.” The WTO is only 25 years old, so I’m not sure “midlife crisis” is accurate, but what really concerns me is the various errors and mischaracterizations throughout the piece. I thought it was worth offering some corrections. Here goes.


The first issue I have is that the piece seems to suggest that “the WTO” itself has a great deal of power. For example, the piece states: “When the W.T.O. was created in 1995 to write the rule book for international trade” (emphasis added); or “The W.T.O. wasn’t just powerful. It was ambitious”; or “People began to complain that the W.T.O. just wasn’t up to the task of regulating the world economy” (emphasis added). I’m not sure what the author had in mind exactly, but these statements could be taken to mean that the WTO’s Director‐​General, or the 625 staff who work in the WTO Secretariat (which I did many years ago), have much more power than they actually do (it’s worth noting that 625 is a pretty small number of employees compared to, say, the World Bank). In reality, virtually all the power over WTO rules is in the hands of the governments who are members of the WTO. Thus, generally speaking, it’s misleading to say “the WTO” did this or did that. The key decisions are made collectively by governments: Governments write the rules, and governments complain when they think other governments are not complying with the rules. And it is certainly not the case that “the WTO” is tasked with “regulating the world economy.” Again, it’s the governments who are in charge here. (The one exception to all this is rulings by WTO dispute settlement bodies, which are discussed a bit below, but keep in mind that these rulings cannot actually force governments to comply. The most they can do is provide authorization for the complaining government to withdraw some of its own trade “concessions,” in order to rebalance the overall trade negotiating bargain and provide an incentive to comply.)


There are also problems in the piece related to mythology about 1990s capitalism. In the 1990s, the piece states, “The United States, the world’s sole superpower, embraced an almost messianic belief in the ability of unfettered capitalism to improve lives around the world.” It is certainly true that many people were pretty high on capitalism in the 1990s, given the experiences with socialism around the world, but capitalism was hardly “unfettered” and the U.S. government was certainly not “messianic” about it at this time. Debates about deregulation and privatization have a real impact, and at times various governments move back and forth on the continuum a bit, in one direction or the other. But regardless of any marginal successes we on the free market side have had, we have never come close to making capitalism “unfettered.” There are plenty of fetters still in place. And the U.S. government was always pretty practical in its approach, advocating for and using subsidies and trade restrictions in areas where it wanted to impose them.


The piece also makes a common error by attributing rules to the WTO that it doesn’t have: “Americans pushed more than 100 nations to join together to create a strong international body to remove barriers to international trade and protect investors” (emphasis added). I’ve been as critical of international rules on protections for foreign investors as anyone, but the WTO, unlike many other trade agreements, does not have such rules. And just to be clear, on trade barriers in general, WTO rules expressly allows governments to maintain plenty of tariffs, subsidies, and product regulations. We are not talking about anything close to total free trade or a single world market here.


Then there are mistakes about how the rules have been applied in WTO disputes, such as this statement: “The W.T.O. has ordered countries to gut programs that encouraged renewable energy and laws that protected workers from unfair foreign competition, as if international commerce were more important than climate change and workers’ rights.”


When the WTO dispute settlement system has heard complaints that particular renewable energy programs violate WTO obligations, it has offered very narrow rulings, not a “gutting.” The violation was not because WTO rules prohibit governments from encouraging renewable energy – they most certainly can and do! Rather, it was because these programs discriminated against foreign companies in favor of domestic companies. There’s a pretty strong argument that an approach using nationality‐​based discrimination is actually bad for renewable energy, because it makes the industry less efficient and the energy more expensive (both at home and in foreign countries, if they copy the approach). And just to be clear, the “unfair foreign competition” at issue in WTO disputes does not directly address workers’ rights. Rather, it is about the so‐​called “trade remedies” — anti‐​dumping, countervailing duties, and safeguards. These laws protect domestic industries from foreign competition, but do not involve labor protections.


Also on WTO disputes, the piece says this: “The W.T.O.’s decision‐​making looked even more questionable after the body turned a blind eye to China’s bad behavior. Its judges ruled against government subsidies for locally produced solar panels in the United States and India, on the grounds that they were unfair to foreign producers. But a smorgasbord of subsidies in China were deemed no problem at all.” To be clear, the rulings on solar panel subsidies did not say you can’t subsidize solar panels; they just said that you can’t offer the subsidies in a way that discriminates against foreign producers. And the subsidies provided by China were not “deemed no problem at all.” Rather, the ruling was that the way the U.S. Department of Commerce calculated the subsidies was in violation of WTO rules. (It’s worth noting here that when governments have brought WTO complaints against China directly, they have been fairly successful.)


Along the same lines, the piece argues as follows: “The world has a historic opportunity to change the direction of international trade rules and carve out more space for countries to experiment with solutions to climate change and income inequality. Countries around the world could use economic stimulus funding to make strategic investments in green energy with subsidies. That’s what Mr. Biden’s Build Back Better plan is all about. But so much of the plan — from subsidies for green energy infrastructure to strong “Buy American” provisions — risks running afoul of W.T.O. rules.”


Putting aside the merits of these policies, when you look closely at WTO rules and their exceptions, it is clear that there is plenty of space “to experiment with solutions to climate change and income inequality.” Where governments get in trouble is when they add protectionist elements to their experimenting. For example, if you want to offer subsidies to consumers to buy an electric car, you will not be in violation of WTO rules. On the other hand, if you offer the subsidies to consumers who buy domestically‐​produced electric cars only, you will probably be in violation. But that finding of violation may actually be useful if your goal is to convince people to buy electric cars, because it means more choices and lower prices for electric car consumers. Adding protectionism to environmental regulations can make these regulations less effective for achieving their objective.


Finally, the piece also throws in this assertion, although it’s not clear how it fits with an op‐​ed on the WTO: “Investment banks pushed for financial deregulation around the world, rolling back laws like Glass‐​Steagall, which kept Wall Street from recklessly gambling away pension funds.” It may be true that investment banks pushed for this, but I’m not sure what that has to do with the WTO. Financial deregulation came about through domestic political efforts, rather than in response to any rules governments negotiated at the WTO.


It’s not necessarily worth a takedown of every piece that gets things wrong, but this one was in the NY Times and therefore I thought some clarifications might be in order. There are plenty of good criticisms to make of the WTO, and I and others make them all the time (e.g., WTO dispute settlement is too slow to be effective, something that the piece notes briefly, but which gets lost amidst all the errors). This piece was a missed opportunity in that regard.


Simon Lester is the associate director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies. His research focuses on WTO disputes, regional trade agreements, disguised protectionism and the history of international trade law.