After the so-called Uruguay Round (1986-1994), the World Trade Organization (WTO) not only failed to further substantially liberalize global trade, but also to reflect the economic balance of power of the 21st century in its institutional set-up. In order to maintain global economic integration and to keep countries open to trade, a tariff renegotiation is inevitable.
The WTO has succeeded to globally promote free trade and to economically integrate developing countries over the last 25 years. As a consequence, the WTO was probably the most successful approach in fighting global poverty in history. With the US as guarantor for a multilateral ruled-based trade order, the triumph of free trade and market economy seemed irreversible until recently. However, the US has apparently become sick of its role as ‘benevolent dictator’—not only in free trade but also in security aspects—and thus, it increasingly challenges what it has proclaimed for decades. In the light of this remarkable turnaround in US foreign policy, we must rethink the global order.
At the time of the founding of the WTO, the US was undoubtedly the only economic world power. While the rise of China was in its infancy, while Russia fell into chaos after the break-up of the Soviet Union, while young democracies took over the military dictatorships in Latin America, and while the broad catch-up growth of Eastern Asian countries was still inconceivable, the US made large concessions to all those countries for their participation in the WTO. Hence, US bound tariffs were comparatively low; they amount to approximately two percent on average. In return, the US was able to assert its understanding of the protection of intellectual property rights, manifested in the Agreement on Trade-related Aspects of Intellectual Property rights (TRIPS). The European Union, for its part, also massively lowered its trade barriers, with the exception of still very high protection of its agricultural sector. From a development perspective, that is disastrous: in which sector, if not in agriculture, should African countries have a comparative advantage in trade with the EU? Not only is this policy harmful to third world countries, but also European consumers are suffering from high food prices, which are about 17 percent above world market prices. As a side note: especially poorer households, which spend higher income shares on food, suffer the most in relative terms.
First, we have to admit that the foundation of the WTO reflects the negotiation balance of the world as it was 25 years ago. Subsequently, no significant tariff reductions can be achieved, and the reason for it is quite clear: With asymmetric tariffs between the advanced and developing countries, the former have little bargaining power; that means ‘not much to offer’, for which developing countries would lower their tariffs in return. Therefore, any attempt for broad and unanimously negotiated tariff reductions will fail.
Second, we have to admit that every major player has over-stretched well-intentioned policies which might allow protectionist measures under certain circumstances. Both the EU and the US have a long history of questionable anti-dumping duties, not only against China, but also to other countries. From a welfare perspective, an economy cannot lose if it receives goods sold below cost of production; this is rather a unilateral transfer. However, anti-dumping duties generate winners (domestic producers) and potential winners will lobby for new duties. China’s hidden protectionism, by contrast, refers to market access—the obligation to establish joint ventures, or to use of web-servers located in China—, which leads to a lower degree of intellectual property rights protection. The EU as well as the US (long before Donald Trump) lamented on this self-will interpretation of TRIPS. The reference to national security with respect to US steel imports is probably to most obvious example of protectionism, which could be legally in line with WTO law, but which contradicts the idea of free trade in its most brazen manner.
Thus, what is needed are multiple zero-solutions that leave no room for exceptions, as those exemptions will be selfishly misused and by subsequent safeguard measures retaliated. All exemptions inherently lay the foundation for trade disputes and potential escalations. If the US gives notice about their dismissal from the WTO, there may be opportunities to fundamentally renegotiate the global trading system, which would be based on today’s balances of power.
Martin Braml is a Junior Economist at the ifo Center for International Economics. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of ifo. Follow the author on Twitter (@MartinBraml).