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Archive for the ‘World Trade Organization’ Category

Because of Trump’s poor grasp of trade issues, I warned at the end of July that trade negotiations with China might yield “something gimmicky (like purchasing X tons of soybeans or importing Y number of cars).”

Well, Trump announced an agreement yesterday and I can pat myself of the back for being prescient.

The New York Times reports on the meager features of the purported deal.

President Trump said Friday that the United States had reached an interim deal with China… If completed, …Mr. Trump said the “substantial” agreement would involve China buying $40 billion to $50 billion worth of American agricultural products annually, along with guidelines on how it manages its currency, the renminbi. …The deal is far from the type of comprehensive agreement Mr. Trump has been pushing for, and it leaves some of the administration’s biggest concerns about China’s economic practices unresolved. …Mr. Trump’s defenders say China’s concessions will generate positive momentum for future talks… Mr. Trump and his advisers also did not mention any progress in areas that the American business community has identified as critical to its ability to compete with Chinese companies — including China’s subsidization of industries, the role of the government in the economy.

There are two things worth noting, one of them a minor point and the other a major point.

The minor point is that an agreement to buy $40-$50 billion of agricultural products is managed trade rather than free trade. Consumers in a competitive market should be determining how much is being purchased, not politicians.

The major point is that the Trump Administration has been following the wrong strategy. After nearly three years of bluster against China, we have a deal that is anemic at best. Just imagine, by contrast, where we would be if Trump had joined with our allies and used the World Trade Organization to go after China’s mercantilist policies. We’d be in much better shape today.

And with none of the collateral damage that Trump’s tariffs have caused for American farmers, exporters, consumers, manufacturers, and taxpayers!

To use a bit of economic jargon, failing to utilize the WTO is an “opportunity cost” – an approach that we overlooked and neglected because Trump preferred a trade war.

By the way, I realize that there are some people who viscerally oppose the WTO. I hope they can be persuaded to change their minds. But if that’s impossible, I want to point out that Trump’s approach is wrong even for those who advocate U.S. unilateralism.

There are things that the United States could do that specifically target China’s anti-market policies.

For instance, James Pethokoukis of the American Enterprise Institute, shares an exchange he had with Claude Barfield.

…there’s an alternative to the sweeping protectionism of the populists and progressives. …here is a podcast exchange from last April between AEI trade expert Claude Barfield and myself: Pethokoukis: As far as the enforcement mechanism, should the stick be tariffs? Should we be going after individual Chinese companies that we feel are breaking these rules, that are engaged in tech IP theft? What should be the punitive aspect? Barfield: In terms of intellectual property, if a Chinese company is found having participated in some sort of theft or — and here we have to be more vigilant in following this ourselves — using some technology or system that they’ve stolen, I would ban them from the US market. I would ban them and I would go after them in capital markets around the world. If the Chinese, for instance, continue to refuse to allow real competition and particular sectors are closed off for investment, I would ban the Chinese companies here and again, I would go after them in capital markets. In other words, I think it’s the investment side that is more productive and from the beginning has always been more productive, for me, than the tariffs.

And Derek Scissors, also from AEI, outlines additional options.

…there are many available actions which are more focused and, often, stronger than tariffs. But the Trump administration has neglected them… China’s centrally-controlled state-owned enterprises are very large and never allowed to fail due to commercial competition — the ultimate subsidy. It is thus impossible for the US to achieve balanced market access, much less free trade. …Chinese enterprises are not accidental recipients of protection from competition… These activities are orchestrated by the state. …The last step is what, exactly, to do. There are…many options.

Here’s the table he put together.

The bottom line is that there are plenty of tools available to specifically target anti-market interventionism (subsidies, cronyism, theft, etc) by China. Including options that are too onerous, or perhaps even not compliant with our WTO obligations.

Not that any of that matters. Trump wrongly thinks the bilateral trade deficit (i.e., investment surplus) with China is the problem. So we’ve wasted almost three years with a bad strategy, hurt the U.S. economy, and failed to get pro-market reforms in China.

P.S. If successful, the right approach (i.e., using the WTO or unilateralism to go after China’s anti-market policies) would produce benefits for America, and it would produce even greater benefits for China.

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Earlier this year, I shared a short video about the benefits of the World Trade Organization.

Here’s a more substantive version (though still only four minutes).

I wanted to keep the video short, so I focused primarily on how the United States disproportionately benefits because other nations are pressured to reduce their trade taxes down to American levels.

Though I also pointed out that all countries benefit as global trade increases.

This is particularly relevant when you ponder President Trump’s trade spat with China. Yes, it would be good for the United States if China liberalized its economy and got rid of its mercantilist policies.

But it also would be good for China.

That’s why free trade is a good idea. It’s good if it’s unilateral free trade. It’s good if it’s bilateral free trade. And it’s good if it’s multilateral free trade.

Since we’re discussing the WTO, let’s look at some scholarly evidence.

An article by three Stanford political scientists for International Organization finds that the WTO has been beneficial for global trade.

The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) have been touted as premier examples of international institutions, but few studies have offered empirical proof. This article comprehensively evaluates the effects of the GATT/WTO and other trade agreements since World War II. Our analysis is organized around two factors: institutional standing and institutional embeddedness. We show that many countries had rights and obligations, or institutional standing, in the GATT/WTO even though they were not formal members of the agreement. We also expand the analysis to include a range of other commercial agreements that were embedded with the GATT/WTO. Using data on dyadic trade since 1946, we demonstrate that the GATT/WTO substantially increased trade for countries with institutional standing, and that other embedded agreements had similarly positive effects. Moreover, our evidence suggests that international trade agreements have complemented, rather than undercut, each other.

Meanwhile, a French think tank looks at some of the evidence in favor of the WTO’s rules-based approach to reducing trade taxes.

…the World Trade Organisation (WTO) which held a dominant position after WWII with its multilateral rules has lost influence…. From the point of view of a consumer or producer, the higher volatility of trade policy is nothing positive. …Handely and Limao (2015), Handley (2014), Pelc (2013) as well as Bacchetta and Piermartini (2011) also find empirical support for welfare gains from a rules compliant trade policy. …After WWII the average level of tariffs decreased constantly and predictably as part of the General Agreement on Tariffs and Trade (GATT), and its successor the WTO, which are based on member commitment and reciprocity. …multilateral agreements such as the WTO offer mechanisms which provide incentives even for mercantilist politicians to reduce barriers of trade.

Here’s a chart from the study, which shows how trade taxes have been falling in the post-World War II era.

In other words, the WTO process has been successful. President Trump’s tactic of escalating tariffs, by contrast, has not worked.

By way of background, the WTO is actually nothing more than a dispute-resolution forum for the GATT system (General Agreement on Tariffs and Trade) that was created back in the late 1940s.

And, unlike the International Monetary Fund or Organization for Economic Cooperation and Development, this is a part of the “post-war order” that’s worth preserving.

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Time for the final installment in my four-part video series on trade-related topics.

  • Part I focused on the irrelevance of trade balances.
  • Part II looked at specialization and comparative advantage.
  • Part III explained trade and creative destruction.

Here’s Part IV, which looks at the very positive role of the World Trade Organization.

My basic argument is that it is a good idea to get other nations to reduce trade barriers, but tit-for-tat protectionism is not the right approach.

As I explained when writing about Chinese mercantilism, the U.S. would have far more success by using the WTO.

Let’s look at what experts have said.

Writing for the Wall Street Journal, Greg Rushford explained why the WTO is good for the United States.

President Harry S. Truman and Secretary of State George Marshall successfully pressed America’s war allies to create the General Agreement on Tariffs and Trade more than 70 years ago. Leaders across the globe, mindful of how economic nationalism in the 1930s had contributed to the devastation of World War II, wanted to open the world up again. The agreement focused on slashing of tariffs and other barriers to trade—bringing unprecedented prosperity to hundreds of millions of people. The GATT, which evolved into the World Trade Organization in 1995, became the world’s most successful international economic experiment. …Despite Mr. Trump’s assertion that the WTO has been “a disaster” for the U.S., Washington has won 85% of the 117 WTO cases it has brought against foreign trading partners. Japan complained in 2003 that WTO jurists had stretched the law by determining that Japanese health officials used phony science to ban American apples. The real U.S. gripe is that foreign governments have won most of the 145 cases that they have brought against American protectionist policies. …Both political parties would be well-advised to consider the wisdom of Truman and Marshall. They understood that true national-security imperatives meant resisting protectionism.

And here’s some more background information from a column in the WSJ by James Bacchus, who served as both a Member of Congress and as a Chief Judge at the WTO.

…let’s say Mr. Trump managed to get his way and pull the U.S. out of the WTO. The consequences for the world and U.S. economies would be immense. Among them: diminished trade growth, costly market and supply-chain disruptions, and the destruction of jobs and profits, especially in import- and export-dependent U.S. industries. The resulting trade barriers would compel some American companies either to downsize or move offshore. The global economic spiral set in motion by Mr. Trump’s reckless trade actions on steel, aluminum, Canada, Mexico, China, and Europe would accelerate. …WTO membership provides goods and services produced in the U.S. with protection against discrimination in foreign markets. Nondiscrimination rules are the heart of the WTO trading system, which currently applies in 164 countries and to 98% of all global commerce. …Instead of waging war on the WTO, the U.S. should help modernize it by making it more effective in addressing digital trade, services, subsidies, sustainability and intellectual property. Internationally agreed rules for international trade—and a process for resolving disputes about those rules—are an indispensable pillar of national prosperity.

I agree with everything in both columns.

And I’ll add one very simple – and hopefully very powerful – point.

Here’s a chart from the WTO showing that the United States is one of the world’s most pro-trade nations, with average tariffs of only 3.48 percent. Not as good as Hong Kong (0.0 percent) or Singapore (0.1 percent), but definitely good compared to most other nations.

In other words, it would be good if we could convince other nations to lower their trade barriers to our level.

Yet that’s exactly what’s been happening thanks to the WTO (and GATT, the predecessor pact). Here’s a chart prepared by the Confederation of British Industry, which shows how trade barriers have been continuously dropping. And dropping most rapidly in other nations, which is something Trump should be happy about.

The bottom line is that the WTO unambiguously advances U.S. interests, as I noted in the conclusion of the video.

But it actually advances the interests of all nations by gradually reducing global barriers to trade.

Is it as good as unilateral free trade? No, but it is a big win-win for America and the rest of the world.

Which is why, despite my usual disdain for international bureaucracies, I’m a big fan of the WTO.

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