Download Misadventures of the Most Favored Nations

The U.S. and World Trade
Disorganization
Paul Blustein
Journalist in Residence
The Brookings Institution
Lawrence University
April 16, 2009
July 30, 2008
After 7 Years, Talks Collapse on World Trade
By STEPHEN CASTLE and MARK LANDLER
GENEVA — World trade talks collapsed
here on Tuesday after seven years of onagain, off-again negotiations
Globalization of money
• Benefits are a source of skepticism among
many economists
• Risks of panic have long been a source of
worry
• Confidence has been lacking in ability of
international institutions to govern the
system
To my children:
Nina, Nathan,
Dan and Jack,
whom I will always
love unconditionally,
even if they go
to work on Wall Street
The globalization of trade
• Benefits command a much broader consensus
among economists
• Little dispute that overall, the expansion of trade
has been a force for growth and higher living
standards
• Agreement is universal that a turn to
protectionism would be disastrous
• Agreement is also universal that a multilateral
system is preferable to alternatives
The trading system: At risk of joining the
financial system in crisis
Reasons:
• The economic downturn, which has greatly
magnified the chances that countries will turn to
protectionism
• The failure to conclude a robust and timely Doha
Round, which could have provided an
“insurance policy” against protectionism
• The danger that the round’s troubles, combined
with other factors, could lead to a collapse of the
WTO’s authority
Eight completed trade rounds
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GATT 1947 (creation of the multilateral system)
Annecy Round 1950
Torquay Round 1951
Geneva Round 1955-56
Dillon Round 1960-62
Kennedy Round 1964-67
Tokyo Round 1973-79
Uruguay Round 1986-94
Smoot-Hawley Tariff (1930)
Raised U.S. tariffs to average of 55%
Triggered cycles of Retaliation, including:
European tariffs on U.S. autos
The U.S.-Canada “Egg War”
GATT: Undoing the 1930s,
and then some
1947: The General Agreement on Tariffs and Trade
– Ceilings on tariffs of 23 signatory countries (“Bound” tariffs – duties
could be below the bound levels, but not above)
– Enshrined key tenets, notably the Most Favored Nation principle
• Annecy Round 1950
• Torquay Round 1951
• Geneva Round 1955-56
• Dillon Round 1960-62
• Kennedy Round 1964-67
(reduced tariffs on mfd. goods by about 35%)
• Tokyo Round 1973-79 (reduced tariffs further, by about one-third)
• Uruguay Round 1986-94 (created new rules on intellectual property
rights and other issues; also created the WTO)
But: Flimsy Justice
• Under the GATT,
defendant countries
could effectively veto
rulings against them,
and delay
proceedings
• This weak method of
settling disputes
inflamed protectionist
sentiment in
Washington
The Uruguay Round (1986-94) and
the Creation of the WTO
• Most sweeping trade agreement in
history
• Lowered tariffs still further
• Included new rules covering
intellectual property rights, trade in
services, health and safety
standards, etc.
• Created the WTO, which had much
sharper teeth. Defendant countries
no longer had veto rights over
rulings
The “Battle in Seattle”
The WTO: A crucial lynchpin of stability in the
global economy
Current embodiment of the
system established to prevent
reversion to the 1930s
– Keeps a lid on the import
barriers of member
countries
– Helps keep trade disputes
from turning unnecessarily
destructive, as member
nations take their
complaints to WTO
tribunals
– Guardian of the Most
Favored Nation principle
WTO headquarters, Geneva
The Doha Round:
a “Development Round”
• Main rationale: Concern that trading
system needed to bestow more of the
gains on developing countries
• Criticism was widespread about barriers
rich countries impose on goods from poor
countries
• Criticism also widespread about subsidies
rich countries pay their farmers
The rhetoric advancing the case for
a new round
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•
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•
“Trade is a key engine for growth, but currently developing country products face
many obstacles in rich country markets. By opening these markets, we can help lift
millions out of poverty. And the most effective way to achieve these market openings
is by launching a new round.” --Mike Moore, WTO Director-General, in an October
2001 speech
“Terrorism and hatred grow their strongest roots in poor soil. Economic and social
development in the world’s poorest nations will help to erode the helplessness that
can breed hate.” –Pierre Pettigrew, Canadian Trade Minister, in an October 2001 oped calling for a new round
“Trade is a critical element—perhaps the most important element—in economic
development. By promoting the WTO’s agenda, especially a new negotiation to
liberalize global trade, these 142 nations can counter the revulsive destructionism of
terrorism.” –Bob Zoellick, U.S. Trade Representative, in an October 2001 speech
“Today’s decision offers fresh hope for the world’s developing countries….It reflects
our common understanding that a new trade round can give developing countries
greater access to world markets, and lift the lives of millions now living in poverty.” –
President G.W. Bush, in a statement issued when the Doha Round was launched
Doha Dreams: Still Distant
• Cancun, 2003: Meeting
collapses
• Geneva, 2004: Agreement on
broad principles
• Hong Kong, 2005: Very low
expectations met
• Geneva, 2006: Doha Round
“suspended”
• Potsdam, 2007: Meeting
collapses
• Geneva, 2008: Nine-day
meeting collapses
“Doha Lite”
The deal on the table in July would have:
• reduced tariffs that high-income countries impose on
agricultural products from an average of about 15% to
about 11%
• reduced tariffs that developing countries impose on
agricultural products from an average 13.4% to 13.3%
This deal was still just a portion of what a final agreement
would constitute; negotiators had not yet dealt with other
issues such as anti-dumping and services.
(source of figures: World Bank)
But: “Anti-protectionism insurance”
• For many countries, “bound”
tariffs (legal ceilings) are much
higher than “applied” tariffs
(currently imposed levels).
• The deal that was on the table
in July 2008 would have
lowered bound tariffs fairly
significantly – not enough to
reduce applied tariffs much,
but enough to help constrain
protectionism.
• For example, developing
countries’ bound tariffs on
manufactured goods would
have fallen from an average of
19.1% to 11.8%.
40
35
30
25
20
15
10
5
0
Brazil India
Indonesia
(Manufactured goods; bound tariffs
In light blue, applied in dark blue)
Recent protectionism and
quasi-protectionism
• Russia raised duties on cars,
steel, meat.
• India imposed higher levies on
iron, steel, soybean oils.
• Indonesia issued regulations
limiting imports of some
products to certain ports.
• U.S. Congress included “Buy
American” provisions in
stimulus bill.
• U.S., other countries have
rushed aid to their auto
industries.
So far, these steps don’t constitute a protectionist epidemic.
But if the slump worsens significantly, the pressure to raise trade
barriers will be very difficult for politicians to resist.
The systemic issue
• Even if governments beat back
protectionist pressure, the Doha Round’s
travails have ominous ramifications for the
health of the multilateral trading system
• Events of recent years cast disquieting
doubt on the WTO’s ability to maintain its
status as the central rule-setter and arbiter
for international trade
The long-term risk:
The WTO’s authority will atrophy
• Reason: Disillusionment over the Doha
Round, which has made the WTO appear
increasingly irrelevant and ineffectual
• One plausible scenario: Because
confidence is lacking in the WTO’s
capacity to strike trade deals, countries will
resort to filing more cases, in politicallyexplosive areas such as climate
PTAs: The spaghetti bowl
• Big and consequential: NAFTA, the EU
• Medium-sized: Japan-Mexico
• Minuscule: Singapore-Jordan; Thailand-Bahrain; TransPacific Strategic Economic Partnership (NZ, Brunei,
Chile, Singapore); EFTA-SACU (Iceland, Norway,
Switzerland, Lichtenstein, South Africa, Botswana,
Lesotho, Swaziland, Namibia
• Bush administration PTA’s: Completed 3 bilateral
agreements that had been launched during the Clinton
years (with Chile, Jordan and Singapore), and
negotiated deals with Australia, Bahrain, Morocco,
Oman, Peru, Colombia, South Korea, and five Central
American countries plus the Dominican Republic.
Why we should worry about PTA’s
• They make a hash of the principles of
multilateralism
• They threaten to erode the WTO’s authority; the
more they spread, the more governments are
tempted to think of them as reasonable
substitutes for multilateralism
A toxic brew: Proliferation of PTAs, failure of the
Doha Round, the impact of the financial crisis on
trade policy
Central goals for U.S. policy
• Keep the trading system from sliding into
reverse, preserve gains
• Keep protectionism, and quasiprotectionism, from becoming long-lasting
features of the international economy
• Lowest priority: Opening markets more
than they already are
Teenage abstinence is “not realistic at all”
--Bristol Palin
Blanket pledges to eschew protectionist actions of all kinds
will be no more credible than promises by teenagers to abstain
from sex.
In a downturn this severe:
--Auto industries will be bailed out, in a discriminatory fashion
--Anti-dumping and “safeguard” duties will increase
--“Buy local” provisions will be inserted into stimulus bills
Refocus U.S. trade policy toward
shoring up the WTO
• Strike a Doha agreement (by recasting it
as an emergency anti-protectionism
round)
• Postpone contentious issues for the next
round, and start that round as soon as
slimmed-down Doha is implemented
• Declare a moratorium on PTAs
Doha Dreams: Still Distant
•
•
•
•
•
•
Cancun, 2003: Meeting collapses
Geneva, 2004: Agreement on
broad principles
Hong Kong, 2005: Very low
expectations met
Geneva, 2006: Doha Round
“suspended”
Potsdam, 2007: Meeting collapses
Geneva, 2008: Nine-day meeting
collapses
There’s gotta be a better way
(or is there?)
• The consensus rule: Inconvenient though it may
be, it’s vital to the WTO’s legitimacy
• One possibility: “Coalitions of the Willing,”
reaching plurilateral agreements
• But: Traditional rounds, in which countries can
trade off concessions in one area for gains in
another, may be the only way to resolve big
problems confronting the system
The U.S. and World Trade
Disorganization
Paul Blustein
Journalist in Residence
The Brookings Institution
Lawrence University
April 16, 2009
The hype over PTAs
150
100
50
0
100
50
0
Bush
PTA's
Plus
pending
Total
exports
GDP
• U.S. exports to all countries
with which Bush completed
PTAs = less than 7% of all
U.S. exports
• Add in exports to Colombia,
South Korea and Panama
(where PTAs are still pending
in Congress), and the figure is
still only about 11% of total
U.S. exports
• That’s just a sliver of the total
economy; exports are less
than 8% of GDP
(2007 figures)