The U.S. and World Trade Disorganization Paul Blustein Journalist in Residence The Brookings Institution Lawrence University April 16, 2009

After 7 Years, Talks Collapse on World Trade GENEVA World trade talks collapsed here on Tuesday after seven years of on- again, off-again negotiations By STEPHEN CASTLE and MARK LANDLER July 30, 2008

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 rounds troubles, combined with other factors, could lead to a collapse of the WTOs authority

Eight completed trade rounds GATT 1947 (creation of the multilateral system) Annecy Round 1950 Torquay Round 1951 Geneva Round Dillon Round Kennedy Round Tokyo Round Uruguay Round

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 Dillon Round Kennedy Round (reduced tariffs on mfd. goods by about 35%) Tokyo Round (reduced tariffs further, by about one-third) Uruguay Round (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 ( ) 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 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 worlds poorest nations will help to erode the helplessness that can breed hate. –Pierre Pettigrew, Canadian Trade Minister, in an October 2001 op- ed calling for a new round Trade is a critical elementperhaps the most important elementin economic development. By promoting the WTOs 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 Todays decision offers fresh hope for the worlds 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%. 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 dont 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 Rounds travails have ominous ramifications for the health of the multilateral trading system Events of recent years cast disquieting doubt on the WTOs ability to maintain its status as the central rule-setter and arbiter for international trade

The long-term risk: The WTOs 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 WTOs capacity to strike trade deals, countries will resort to filing more cases, in politically- explosive areas such as climate

PTAs: The spaghetti bowl Big and consequential: NAFTA, the EU Medium-sized: Japan-Mexico Minuscule: Singapore-Jordan; Thailand-Bahrain; Trans- Pacific Strategic Economic Partnership (NZ, Brunei, Chile, Singapore); EFTA-SACU (Iceland, Norway, Switzerland, Lichtenstein, South Africa, Botswana, Lesotho, Swaziland, Namibia Bush administration PTAs: 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 PTAs They make a hash of the principles of multilateralism They threaten to erode the WTOs 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 quasi- protectionism, 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

Theres gotta be a better way (or is there?) The consensus rule: Inconvenient though it may be, its vital to the WTOs 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 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 Thats just a sliver of the total economy; exports are less than 8% of GDP (2007 figures)