The US need an honest debate about trade policy, focusing on the WTO is a distraction
VoxEU Blog/Review International trade

The US need an honest debate about trade policy, focusing on the WTO is a distraction

As the US heads into recession, Joshua Meltzer argues that what US trade policy should be and how the country can lead again on trade is a debate we need to have.

On the 75th anniversary of VE Day, it is worth reflecting on how out of the ashes of this global war, the US created and led what we now call globalisation – the free movement of capital, goods and services across borders. This includes the WTO, the international organization where agreement is reached on the rules for international trade. Yet, 75 years later, US leadership of the WTO is being called into question. President Trump has made clear his desire to leave the WTO and recently, Senator Josh Hawley called on the US to abolish the WTO.1 Putting aside whether this particular goal is achievable, it is worth considering in more detail why this turn away from the WTO. 

Senator Hawley expressed two key concerns: that the global economic system has enabled China’s rise and has weakened American workers. These are certainly important issues for the US. Yet the notion that the WTO needs to be abolished for the US to address these issues overstates the WTO’s power and distracts from the challenges at hand.  

The WTO does not control the US, instead the WTO is a reflection of US trade policy. Through standing up the WTO, the US globalised its preferred trade policies. It also happens that until Trump, what the US considered good trade policy – open markets and non-discrimination – was a basis for global cooperation, as everyone could gain from trade conducted on these terms. Why did the US decide these were optimal trade policies? Because it is widely understood that tariffs are a tax on the country raising the trade barrier. And that when one country raises tariffs, other countries often retaliate, also cutting off export opportunities. 

While the WTO has served the US well, the WTO does not prevent course corrections or stop the US negotiating new trade rules outside the WTO. 

First, it is helpful to right-size the WTO. The WTO has a staff of 627 people and a budget of a little over US$200 million, contributed by 167 governments that are its members.2 The WTO cannot finance itself independently of its members. The WTO has no power beyond what its members allow it to have. 

Second, the fact that the WTO has no power to prevent the US changing its mind has been made abundantly clear by Trump’s trade war with China. US tariffs on Chinese imports are not consistent with WTO rules, yet the WTO did not prevent the US raising tariffs. 

Third, the US had negotiated the Trans-Pacific Partnership (TPP) agreement under Presidents Bush and the Obama – a 12-nation trade real that was the beginning of a new trade architecture aimed at addressing the range of Chinese trade practices this Administration is concerned about. Yet, Trump pulled the US out of the TPP in his first week in office. 

The fact is US trade policy has been and will always be up to the US to decide. This push to leave or abolish the WTO obscures the need for an honest debate about how US trade policy can most effectively address the challenges Hawley identifies, of China’s rise and the impact on jobs. This requires an honest reckoning with the costs and benefits of different approaches to international trade. If the US wants to raise tariffs, then we should discuss who wins and who loses from this. We know that the costs of higher tariffs on Chinese imports have fallen on US consumers and business and lead to higher Chinese tariffs on US exports.3 Maybe China presents such a systemic threat that the costs of higher tariffs are necessary,4 but saying that China pays the tariffs prevents a clear reckoning with the challenge.5  

The US also needs to address the importance of stability in rules for international trade.  For instance, WTO commitments to transparency of trade measures grows international trade,6 as business are better able to assess commercial risk. Yet, US trade policy under Trump has introduced enormous uncertainty for business, reducing investment and trade.7 USITC modelling of the impact of USMCA found most of the benefit of the agreement stemming from reduction in policy uncertainty.8 While avoiding uncertainty is not itself a trade policy, the point is that the US needs a much clearer articulation of what its trade policy will be, before ripping up the deals it already has.  

Finally, let’s be clear about what this Administration’s trade policy means for US global leadership on trade. The challenge of negotiating new rules at the WTO is not new and the need to negotiate new rules outside the WTO has been a bipartisan staple of US trade policy since President Clinton. Yet, the issue for US leadership is not where to negotiate new deals but what is US trade policy. US allies are simply not buying into this administration’s approach to trade. These governments understand that higher tariffs and the retaliation it engenders creates economic harm, and in a world of global supply chains makes their domestic industries less competitive. And while many US allies share US concerns with China, they have also been hit by US tariffs on steel and aluminium and threatened with tariffs on autos, making US-led efforts to deal with China much harder. 

In the lead up to WWII, a breakdown in global cooperation and rising tariffs worsened Germany’s economy and helped create the conditions that gave rise to fascism. As we commemorate VE Day and the US heads into recession, what should be US trade policy and how the US can lead again on trade, is a debate we need to have.