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U.S. Trade Policy: Going it Alone vs. Abiding by the World Trade Organization

By Jeffry Frieden and Joel Trachtman·June 15, 2018
Harvard University and The Fletcher School of Law and Diplomacy, Tufts University

The Issue:

The World Trade Organization (WTO) administers a multilateral system that promotes world trade. The Trump administration has complained that the WTO is unfair to the United States, and seems to favor America acting outside WTO rules to induce other countries to enter into better deals with the U.S. Recent administration policies, such as unilateral tariffs imposed on steel and aluminum, and a wide range of other tariffs on China, may mark a departure from the United States’ advocacy of a rules-based system that has prevailed since the end of World War II. What does this mean for the United States, and for the world?
Unilateral action is sometimes attractive, especially to a large country like the United States. But unilateralism has costs and often induces retaliation.

The Facts:

  • Over the course of several decades, the World Trade Organization (WTO), together with its predecessor the General Agreement on Tariffs and Trade (GATT), facilitated substantial reductions of tariff barriers around the world, especially among developed countries. Created in 1947, the GATT was proposed by the U.S. in the wake of World War II. From an initial participation of 23 countries the agreement grew in membership and was consolidated into the WTO in 1995, including 161 economies as of 2015 (see here). Today, U.S. tariffs have similar average levels to those of the European Union, Canada, and other major developed countries. The WTO agreement prohibits discrimination against and among imported products, requiring that imports be accorded “national treatment” and “most-favored nation” treatment, and establishes rules limiting protectionism by use of product and services regulation designed to favor domestic over imported products and services. There are exceptions for environmental protection, national security, and other important goals. These rules, and even some of the tariff rules, require interpretation, and member countries have often disagreed as to the scope of their rights and obligations.
  • One important innovation of the WTO was to establish a mandatory Dispute Settlement System (DSS) whereby trade-related disputes are resolved by independent judges at the WTO. The system helps hold member states to the rules of the WTO, and addresses disagreements about their interpretation. The Trump administration argues that the WTO's Dispute Settlement System is biased against the United States. Yet the United States, like other WTO member states, wins the vast majority of the cases it brings against other states, and loses most of the cases brought against it. This is because states rarely bring cases unless their claims are relatively clearly justified by the law. One count finds that the U.S. wins more than the average when it is complainant, and loses less than the average when it is respondent. The DSS system is widely believed to have increased confidence in member state compliance with their WTO obligations. The U.S. has been dissatisfied with what it considers judicial overreaching and procedural infractions by the WTO Appellate Body, and has been blocking appointment of new members of the Appellate Body. This has already impeded appeals, and will prevent appeals entirely by December 2019, eliminating a critical feature of WTO dispute settlement (see here).
  • China’s accession to WTO membership in 2001 has raised challenges. When China joined the WTO, there were expectations that it would be on a path of economic reform, dismantling many of its existing state-led practices and policies. But, the U.S. believes that China’s reforms have stalled and that the Chinese government exercises subtle and pervasive power throughout its economy (see this report on China by the U.S. Trade Representative). By using government influence to subsidize production and limit imports, China’s government has stimulated production of steel, aluminum, and other products in ways that have caused global gluts. Some WTO dispute settlement decisions have reduced the ability of the U.S. to raise its concerns about Chinese trade practices. This is in part because WTO rules address more transparent interventions made by governments in traditional market economies, rather than the pervasive control exercised by the Chinese government and Communist Party.
  • The Trump administration has undertaken unilateral trade measures that appear to be specifically forbidden by the WTO Treaty. These include punishing China for its intellectual property practices, and imposing extra tariffs on imports of steel and aluminum. The rules of the WTO prohibit countries from acting unilaterally in response to what they perceive as violations by other countries. WTO members are instead required to use the WTO dispute settlement system for their complaints. This is intended to eliminate the possibility of a retaliatory spiral of protectionist measures. Recent moves by the United States to impose tariffs, justified as important to national security, are widely regarded by other countries as unilateral action that is illegal under WTO law. These moves threaten to ignite trade wars between the United States and its trading partners, as well as similar actions by other member states that will undermine the reliability of WTO commitments.
  • Unilateral action is sometimes attractive, especially to a large country like the United States. Supporters of the administration’s strategy argue that the U.S. can obtain better deals from its trading partners by acting on its own. Under the rules of a multilateral organization like the WTO, they reason, the U.S. is artificially restrained in exercising its power. Acting unilaterally allows the United States to use its enormous bargaining power to pursue its own interests. The United States has indeed extracted concessions from other countries in this way. For example, in the 1980s, the Reagan Administration forced the Japanese government to impose “voluntary” restraints on exports of many goods — foremost among them automobiles — to the United States (see this EconoFact post).
  • But unilateralism has costs and often induces retaliation. It is generally impermissible under WTO law for countries harmed by unilateral action to retaliate with tariffs of their own, unless they are authorized to do so by the Dispute Settlement System. However, Canada, the European Union, and China have announced such retaliatory tariffs in response to the Trump administration’s actions. These will harm American producers, and if they proliferate they will create serious problems for the many American firms and farms that rely on foreign markets. This unilateral action will also further undermine the rules of the WTO. But, even without retaliation, unilateral barriers raise the costs of goods to consumers and producers. For example, the “voluntary” restraints the U.S. pushed on Japan in the 1980s raised the price of Japanese cars by $1200 in 1983 dollars (equal to $3,000 today), according to one estimate. When tariffs are imposed on such intermediate goods as steel, their price goes up domestically, which can harm American manufacturers who make use of steel in the production process, and cost jobs in those industries. Tariffs can, therefore, reduce the ability of American industries to compete in world markets.
  • A weakening of the multilateral order may not be in America’s interests. No other government appears to share the Trump administration’s desire to dismantle or fundamentally alter the international trading system. The administration’s course may leave the U.S. isolated. Already, eleven countries in Asia and the Americas are moving forward with a Trans-Pacific Partnership without the United States. The European Union has concluded a free trade agreement with Canada and is negotiating with Latin American countries for trade agreements that would not include the United States. China has been rapidly building up economic ties with countries in the rest of Asia, and in Africa, and will take advantage of America’s more belligerent position to strengthen its own. As these agreements reduce tariffs among the participants, the U.S. will face comparatively greater trade barriers, and find that its exports are less competitive. More broadly, some fear that the administration’s actions may push the Europeans closer to Russia, which would have disturbing economic and geopolitical implications.

What this Means:

Unilateral action violating WTO rules risks destroying a system that the United States has led for decades, and that has benefited this country. If America’s goal is to change Chinese policies, the United States might do better to join with its allies to pressure China. Whether or not President Trump is right that unilateral action aimed at China will secure the United States a better deal than it could get from the WTO system, there is little evidence that this is the case for American trade relations with Europe, Canada, Mexico, Japan, and its other trading partners. With regards to our allies in Europe, Japan, Canada, and elsewhere, there are real dangers in engaging in a “war of each against all,” which could reduce the welfare of the entire world, including the United States. When the United States imposes unilateral trade barriers on the products of these allies, they are likely to retaliate. In fact, most of the countries that the U.S. has threatened have followed a strategy of tit-for-tat retaliation: they plan to respond to U.S. unilateralism with equivalent trade barriers. The result could be an unrestrained trade war if, as President Trump has promised, the U.S. retaliates against the retaliation. Such a trade war would reduce opportunities for U.S. industrial and agricultural producers that export to the rest of the world, and increase costs for U.S. consumers and manufacturers.

Topics:

China / International Trade
Written by The EconoFact Network. To contact with any questions or comments, please email [email protected].
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