Who is going to police the new world trading system?

BY GREG IP | UPDATED 1月 14, 2023 05:32 凌晨 EST

As the World Trade Organization is increasingly sidelined, the future is going to look more like the past—and it won’t be a level playing field

The globalization boom that began in the 1990s didn’t happen by itself: It was lubricated by the biggest economies’ willingness to write, enforce and obey shared rules of engagement.

That consensus is now crumbling. The World Trade Organization, the embodiment of this rules-based order, has increasingly been sidelined as countries turn to export controls, subsidies and tariffs to promote domestic industries or kneecap adversaries.

Many blame this on the U.S., as first President Trump and now President Biden rejected WTO authority and enacted tariffs and subsidies that riled trading partners.

In reality, the WTO’s credibility began to erode much earlier with the rise of China, whose authoritarian, statist economy has proved incompatible with the trading system the market-based democracies built after World War II.

Mr. Biden has governed as a champion of the international order, yet on trade, he has stuck with many of the policies enacted by the avowedly nationalistic Mr. Trump. He has maintained Mr. Trump’s tariffs on China and blocked appointments to the WTO appellate body, which has the final say on enforcement decisions, leaving it unable to function.

Last month, in two separate decisions, WTO panels ruled that the Trump administration had violated its WTO obligations by imposing tariffs on imported steel and aluminum, and requiring that products made in Hong Kong be labeled as made in China. The WTO allows a member to impose trade barriers in the interests of its national security, but the U.S. had not met the criteria, the panels said.

A spokesman for U.S. Trade Representative Katherine Tai criticized the decision. The WTO, he said, had no right to even rule on the U.S. actions. The U.S., he noted, has for more than 70 years insisted that it, not the WTO, gets to decide what qualifies as national security.

Systemic tensions

This clash exemplifies the tensions chipping away at the world trading system. Under the WTO and its predecessor, the General Agreement on Tariffs and Trade, members tacitly agreed not to invoke national security, says William Reinsch, a trade expert at the Center for Strategic and International Studies. That tacit agreement no longer exists.

If others follow U.S. precedent, “the whole system is useless: It invites everyone to make a national security claim every time.”

The European Union has also threatened to take the U.S. to the WTO because the law dubbed the Inflation Reduction Act only provides subsidies to electric vehicles assembled in North America. Beijing has filed a case over U.S. restrictions on exports of semiconductor technology to China.

Yet complaints about U.S. behavior is at best a partial diagnosis of what ails the world trading system. A more complete picture needs to address why the Americans have become so obstreperous.

The U.S. had originally pushed for the WTO’s binding dispute mechanism out of frustration that under its predecessor, GATT, enforcement decisions could be easily blocked by any one country.

The unintended consequence is that countries unhappy with U.S. trade laws, rather than negotiate, sue the U.S. at the WTO, and often win because WTO judges take an expansive view of their own authority to interpret and, critics say, make trade law.

As frustrating was the WTO’s inability to discipline China’s protectionist and discriminatory practices.

In market democracies, for example, the state deals with companies at arm’s length, and subsidies are transparent and rules-based. In China, there is no bright line between the state and the private sector. Subsidies are pervasive and opaque and thus difficult to police.

For example, for years only electric vehicles equipped with batteries made by Chinese companies qualified for Chinese government subsidies. But as Brad Setser of the Council on Foreign Relations notes, because this discriminatory behavior wasn’t codified, a violation in trade laws was hard to prove—in contrast to the U.S., where subsidies are written into laws and regulations.

A WTO complaint typically requires evidence a company was harmed. But Western companies that complain about their treatment in China can expect the government to retaliate—for example through an antitrust or cybersecurity investigation—and thus they stay silent. China routinely punishes countries that cross it diplomatically by blocking imports or tourism, without making a formal connection. This makes it hard to bring a WTO complaint.

The net result is that today the WTO is unable to discipline either its largest or second largest member, leaving a deglobalizing world without an effective cop on the trade beat.

Where it leads

This doesn’t portend a return to the 1930s, when countries dramatically raised tariffs and retreated into autarky. The WTO still exists, and most members still abide by their commitments. Some have used alternative channels to adjudicate disputes while the appellate body remains defunct.

U.S. officials say their imposition of trade barriers on national-security grounds won’t precipitate a flood of frivolous copycat actions. Any country making such a claim accepts the right of affected trading partners to retaliate—and would thus think twice. “There’s a self-regulating nature to invoking national security,” one official says, noting that the U.S. faced retaliation for its steel and aluminum tariffs long before the WTO ruled.

Rather than a single set of rules imposed on fundamentally incompatible systems, such as China’s and the U.S.’s, the world will migrate toward a series of regional pacts. This lets countries pick partners and sectors where their values and interests happen to align, such as Singapore’s digital trade agreement with Australia. The Biden administration’s Indo-Pacific Economic Framework represents a la carte economic cooperation: Participating countries pick from a menu of fields in which to participate—tax, infrastructure, supply-chain resilience and trade.

Dispute settlement mechanisms will still matter. The U.S. and Canada have each won disputes before panels formed under the U.S. Mexico Canada Agreement, over dairy and solar products, respectively. On Wednesday, a USMCA panel sided with Mexico and Canada in finding the U.S. had applied too strict a definition of North American content to automobiles. A spokesman for Ms. Tai said, “We will engage Mexico and Canada on a possible resolution to the dispute.”

But the future will resemble the pre-WTO past in that many disputes will be resolved through negotiation rather than litigation. U.S. officials point to the resolution with the EU of a long-running fight over each other’s subsidies for commercial airliners, which includes a joint approach to dealing with China. Ms. Tai has suggested Europe respond to U.S. electric-vehicle subsidies by introducing its own. The implication: Rather than sue each other in pursuit of a world without subsidies, the U.S. and Europe should accept that China has made such a world unattainable.

One thing this won’t be is a level playing field. Just as hockey without referees favors the team with the largest players, trade without binding dispute settlement favors those countries best able to retaliate, or withstand retaliation—i.e., the U.S., China and the EU. Smaller countries must accept whatever these bigger countries offer.

“This is the U.S. going back to ‘Might makes right,’” says Jennifer Hillman, a trade expert at Georgetown University who has also served as a panelist in trade disputes, including at the WTO. “If you’re a large country with a significant ability to retaliate, it’s self-limiting. If you’re a small country, I’m not sure how much difference it makes to have the right to retaliate.”