Trump Is Trying to Dismantle the WTO. That Can’t Happen.

It’s one of the stealthier battles in the trade war, and one of the most vital.
April 26, 2019
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Trump's war on trade is bad for everyone. (Photo by Tim Graham/Getty Images)

Last week, the Trump administration announced a new round of restrictions and sanctions meant to punish Cuba, Venezuela, and Nicaragua for their collective status as the ‘three stooges of socialism.’ Among many other draconian measures, tighter restrictions on tourism to Cuba in particular has countries like Spain, which has a long-established industry on the island, vowing to fight the United States at the World Trade Organization. And while most Americans don’t worry much about the WTO — largely because we haven’t had to — if the Trump administration has its way about it, we’ll no longer have the luxury of taking it for granted.

To understand the WTO’s importance to everyday Americans, a basic overview of how the organization came about is necessary. Before 1948, no overarching, global, rules-based trade system existed, so individual nations were largely free to determine their own trade practices. While this may sound preferable from a nationalist perspective, the results were decidedly not. As it turns out, when countries are unrestricted in this manner, they tend to act in ways that may seem beneficial in the short term, but in the long term, aren’t so much.

Global trade is a delicate balance — a catch-22. Nations naturally want their own industries to be more successful, but that very success depends on the free flow of goods across borders, including both exports and imports. In fact, 95 percent of the world’s consumers live outside of the United States, and thus reaching them is of paramount concern for American businesses. Accordingly, if we make it difficult for other countries to sell their goods here (goods that American families and businesses demand), countries will most likely retaliate in kind against us.

The best historical example of this came in 1930 when, over the objection of more than 1,000 economists, President Herbert Hoover signed the now-infamous Smoot-Hawley Tariff Act, which increased about 900 tariffs. Perhaps unsurprisingly in hindsight, this triggered retaliation from our trading partners, including Canada which, at the time, was the ultimate destination for about 20 percent of American exports.

The subsequent spread of beggar-thy-neighbor protectionism across the world led to an international acknowledgment that some formally agreed-upon rules were necessary to guide trade between countries and to keep them from acting on their worst impulses. The result was the General Agreement on Tariffs and Trade, or the GATT, which codified the rules for tariff imposition. The GATT mostly stabilized things for a while, but it had a fundamental flaw: namely, that there was no binding process to resolve the inevitable trade disputes that arise between nations. Without “teeth,” even a formal agreement is just — as Captain Barbossa might say — “more like guidelines than actual rules.”

It was largely for this reason that when the WTO was created as the GATT’s successor in 1994, one of its primary mechanisms was a binding dispute resolution system, which is applied equally to all member nations and is meant to keep countries from ‘going rogue’ simply because they claim they’re being unfairly treated. And yet that’s precisely what President Trump’s tariffs are currently attempting to do.

As many experts have pointed out, Trump’s claims about the WTO’s unfairness to U.S. trade — and about the national security threat posed by steel imports, for example — are dubious at best. At worst, they’re flat-out false. In fact, the United States fares pretty well in the WTO’s dispute settlement system, as it wins more than 85 percent of the cases it brings.

The good news is that, despite his threats, the president lacks the authority to withdraw the United States from the WTO unilaterally. What he can do, however, is dismantle it from within.

In order for its rules to matter, the WTO must retain its power to enforce them. Binding decisions are rendered by its Appellate Body — the world’s highest international trade court. Under normal circumstances, it’s comprised of seven members. Currently, however, it has only three — the bare minimum to hear appeals — because the Trump administration is actively blocking all appointments to the court. If it continues to do so, by the end of this year, the Appellate Body will have only one member, effectively rendering it powerless — and along with it, any mechanism to force members to adhere to international trade law.

Such a strategy is a dirty way to sidestep years of international law and agreement, but it’s standard operating procedure for this administration. Much like the WTO, Trump dislikes the missions and rules of many of our own government agencies — particularly when they’re designed to limit unilateral authority. If you can’t get rid of, say, the Environmental Protection Agency or the Department of State, what you can do is refuse to staff it properly or attempt to slash its budget to the point where it struggles to function (thankfully, Congress acts as a check on the latter). If you don’t like the courts deciding against you when they deem your actions illegal, you attempt to staff them with judges you think will interpret the law in ways more favorable to you. If you don’t feel like following the national security recommendations of your own intelligence agencies, you attack the credibility that their very existence relies upon. If you want to unilaterally impose tariffs that might be challenged by other nations at the WTO or choke off an entire nation’s economy without regard for our allies’ investments there, you dismantle the court that would likely issue a ruling against you.

And while reasonable conservative arguments can be made that some agencies are too bulky and powerful or that courts have too broadly interpreted the law over recent decades, or even that the WTO has struggled to keep up with some developments in global trade, to unilaterally dismantle important institutions without regard for the consequences is a dangerous step backward. And to what end for the average American citizen?

“Tariff,” after all, is just another word for a tax that is automatically charged on foreign goods or services when they enter the United States to be sold to Americans. And, much like sales taxes, in practice they raise costs for consumers. In fact, two recent studies found that the entire brunt of the president’s 2018 tariffs was borne by American consumers.

But the tariffs are harmful to everyday Americans in other ways, too — most notably because lower-income Americans reap some of the largest benefits from strong, competitive international trade. There are many complex reasons for this, but at least two are quite simple. First, about 50 percent of imports are “intermediate inputs,” or materials American companies use to make their products more globally competitive. Certain materials, such as the lower-grade steel used in automobiles and air conditioners, are simply more expensive to produce in the United States. Without less-expensive imports, countless goods that lower-income families rely on every day would simply be financially inaccessible.

Second, forcing reliance on more expensive materials merely because they’re made by American industries is actually counterproductive in terms of American jobs and the overall economy. According to 2015 census data, American mills that produce steel employ only 140,000 Americans and add about $36 billion to the economy. On the other hand, industries that consume steel, including those that rely on imports, employ 6.5 million workers and add about $1 trillion to the gross domestic product.

For these reasons, using unilateral tariffs to prop up industries in ways that harm American consumers and manufacturers — no matter how expensive or untenable that situation might get — is simply reckless.

And this is precisely why we need the WTO. History has already taught us that protectionism is dangerous to the health of the American economy and to the finances of American consumers. Compounded by this recent unilateral decision to stifle other countries’ trade, now more than ever the dispute mechanism of the WTO must be adequately staffed such that it can fulfill its role as a check to dangerous actions that threaten the global economic balance. Accordingly, the Trump administration must stop blocking the appointment of its members — and American manufacturers and consumers alike must speak up to demand it.

Lauren L. Rollins and Clark Packard

Lauren L. Rollins is the editorial director of the R Street Institute, a nonprofit, nonpartisan public policy research organization that promotes free markets and limited, effective government. Clark Packard is trade counsel for the R Street Institute.