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Opinion: Global trade is broken, and Trump is sparking the crisis needed to move ahead

April 09, 2018

President Donald Trump’s trade actions on aluminum and steel and his confrontational stance with China on broader trade and investment issues have allies alarmed about both a trade war and the future of the World Trade Organization. It is important to be clear that the rise of China made that institution far less relevant long before Trump came along.

[Peter Morici | April 9, 2018 | MarketWatch]

After World War II, the GATT (General Agreement on Trade and Tariffs), which became the WTO, was created to foster freer trade among Western market economies and to encourage developing economies to embrace free-market reforms.

The membership grew to 164 nations and through eight rounds of multilateral negotiations — the last concluded in 1995 — tariffs were dramatically reduced and quotas on non-agricultural products virtually eliminated. Rules were expanded to include domestic policies like product standards, health regulations, government procurement, taxes and subsidies that may unfairly discriminate against imports or promote exports, and to intellectual property, licensing and other regulations affecting trade in services.

Over time, the WTO membership encompassed increasingly diverse nations. For example, Saudi Arabia joined in 2005, is not a democracy and hardly has a market economy. It’s a monarchy and dependent on oil, its government seeks to rig petroleum markets through OPEC.

Nondemocratic, nonmarket economies were admitted on the premise that participation in the system would encourage reforms but as Saudi Arabia demonstrates — similar to Mexico in the 1980s — political and economic progress mostly happens when autocratic regimes are threatened by financial crisis. For the oil kingdom, it took the U.S. shale boom and prospects of oil permanently depressed at about $65 a barrel to inspire House of Saud to select a progressive crown prince.

China joined the WTO in 2002 but has hardly liberalized. Beijing is perfecting Orwellian mechanisms to monitor its citizens’ activities and squash political dissent. President Xi Jinping is enhancing the role of state-owned enterprises, extending state influence over private firms and foreign subsidiaries, and compelling the latter to form joint ventures with Chinese firms and embrace Beijing’s propaganda strategies.

China’s state capitalism clearly creates unfair advantages, imposes trade deficits and job losses on other nations, and has been the target of many unfair trade complaints in the WTO, but Beijing has invested in top flight U.S. lawyers — for example, Steptoe & Johnson.

And the activities of its complex mix of state-owned and state-supported private enterprise have proven difficult to discipline under WTO rules, which were written to constrain governments operating in a market context.

From 2011 to 2017, the United States was frustrated in many dispute settlement processes covering nearly 50 industries. In 2016, the administration aides cited a long list of complaints in an effort to block the reappointment of a South Korean judge to the appellate body.

Since then, Mr. Trump has been criticized — as he seems to be for every principled action — for continuing this policy by blocking the appointment of other judges to compel reform.

It may be time to recognize that China is not a market economy — and is not likely to become one anytime soon. And it is not likely possible to rewrite the WTO rules just to suit its peculiar system.

It may be time to negotiate a separate deal with China. Given how slow international negotiations go, it will likely be necessary for the United States to instigate a crisis in the system to compel action — something Trump seems to be particularly adroit at accomplishing.

Instead of imposing tariffs on $50 billion to $150 billion of imports from China to offset the losses from piracy of intellectual property, it would be better to impose broad measures aimed at rebalancing trade.

For example, the United States could require licenses to import Chinese goods. Exporters could be issued resalable import permits equal to the value of their sales in the Middle Kingdom. Those wishing to purchase items from China would then bid for these through an online marketplace—similar to eBay. Those would be purchased by those businesses and consumers placing the highest value of products from China.

This regime could be phased in over several years and would challenge the Europeans, NAFTA allies and others to do the same. It would also create crises for policy makers in Beijing and the WTO but that’s what it’s going to take to effectively reorder our relationship with China and reform the WTO.


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