Many reasons are offered for the lack of trade support: China’s record in support of trade norms or simply the rapid rise of China; the role of technology and automation and the erosion of job security; the shift from a manufacturing to a service economy; the fear of diminished sovereignty in a global setting; the distribution effects of trade; and now some might add Covid-19 as a metaphor for the costs of greater connectivity. For its part, the WTO is faulted for its inability to complete a trade round and faulted by the U.S. in particular for alleged bias in its appellate system.
Whatever the validity of these complaints, none of them negate the central truth: Countries that engage in trade move ahead, and those that do not, stagnate. Trade rhetoric is easy, but trade policy is hard. Is an effective WTO possible? What steps can the new director-general take to advance trade?
The WTO and the Decline of Trade Policy
To put it politely, the WTO is not designed for success. Unlike the World Bank or the IMF, the WTO has no weighted voting based on a member’s economic role or financial contribution. Cape Verde has the same voting power as the U.S., China, and every other member. Unlike the U.N., there is no Security Council, nor an executive committee. Decisions are not made by majority vote, nor even by a supermajority. They are made by “consensus.” Harmless enough sounding, but in practical terms this means unanimity among every one of the 164 members. This requirement for unanimity seems to assume an almost religious hold on decision-making, allowing the process to take precedence over goals. With no successful trade round in 25 years, the WTO has become a prisoner of its consensus requirement.
Since all results–all results–have to be done by consensus, power is in the hands of outliers, those with diverse or exotic goals. Minor trading states with niche agendas can grind the entire body to a halt. Negative power–the ability to obstruct or veto–exceeds positive power.
Historically, these defects were tolerable because the U.S. and other trading nations were willing to provide the leadership to push through successful rounds. But there is little appetite for trade in the Trump administration, nor is there alternative leadership in Europe or elsewhere. Trade is unloved, unsupported, and even unwanted.
WTO provides the architecture, but not the vision or mechanism. To move ahead on trade, some changes are needed. The new WTO chief cannot be a steward of the status quo but must identify initiatives that will be significant enough to be economically consequential yet will not fall victim to trade posturing. It doesn’t matter if he or she makes small moves. But move.
Steps to Make Trade Work Again
Augment the consensus with an a la carte approach. The new WTO director-general should encourage members to adopt trade liberalization policies even in the absence of unanimity. This means that various groupings will undertake steps on a voluntary basis, each beneficial but none universal.
To the argument that a process without the traditional unanimity would undercut the WTO, the response is precisely the opposite. The WTO will not move unless it is spurred. At a minimum, recalcitrant WTO members would no longer hold veto power over initiatives, allowing the trading community to pursue an alternative, yet complementary, approach.
To those who argue that an a la carte approach would lead to a “spaghetti bowl” of different tariff rates, my response is “more spaghetti please.” Let’s take the complexity of uneven lower rates over the simplicity of consistent higher rates. Let’s take the partial victory of incomplete participation over a non-existent purity of complete participation. Let’s take the real-world success of improving trade over the theoretical success of complete harmonization.
There are more serious arguments against an a la carte WTO, chiefly the trade diversion argument. But the best way to defeat trade diversion is for every country to enlist in liberalization initiatives. The trade diversion concern could be offset with a trigger mechanism in which countries would sign up for a trade initiative, with the initiative to take effect only if a countries representing a given percentage of world trade, say 50%, subscribed. This would provide for the soundings and informal understandings that would allow trade to move ahead.
Here are the examples of initiatives that could be taken on an a la carte basis:
No harm, no foul. Each WTO member should commit to zero tariffs on any items not produced in its particular market. In other words, as the United States no longer produces jeans, television sets, or light bulbs, why should it maintain tariffs on those items, currently at 5.9%, 1.9%, and 1.3%, respectively? It is harder to liberalize sectors that have mature domestic producers. It is easier to be virtuous when virtue is cost-free.
No nuisance tariffs: Tariffs should be eliminated on items where the current tariff is less than 2%. Not high enough to deter imports, but still high enough to burden trade. Some 29% of the EU’s tariff lines; 11% of Japanese tariffs; and 17% of the U.S.’ are less than 2%. Eliminating these nuisance tariffs could add $16 billion to total trade.
Mind the social costs. Remove tariffs on health products and green tech. Duties are already waived on products for the disabled and for educational, scientific, and cultural materials, but let’s include other sectors that have high social benefit (Disclosure: I serve on the board of a medtech firm.) Scrapping tariffs on these two sectors would encourage additional trade of up to $7 billion in these goods as well as collateral health and environmental benefits.
Harmonize down. Finally, each nation should commit that on every tariff line item it will be no worse than the next worse. In other words, each WTO member will agree to reduce its tariff on every line item where it is the worst (the highest tariff). Instead of the WTO exhorting that countries move toward the best-in-class, the goal now is just that they not be worst-in-class. This rule could achieve $22 billion in additional trade.
The approach outlined above allows the WTO to get back in forward motion through a series of mid-tier steps. While falling short of a full WTO round, these steps would nonetheless be a material addition to global trade.
Yes, the WTO can be saved. It needs to be smart enough and nimble enough to pursue a few wins and remind its members that improvement in trade is more important than institutional rigidity. In a non-trade era, it would be useful to have the world trade body produce progress on trade.