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WTO: Developments, Challenges, and Prospects

G. William Hoagland und Alice Grant

"US-EU Trade Wars: Bananas, FSCs, Food Safety and Data Privacy: Implications on US National Politics toward the WTO and its consequences."

G. William Hoagland & Alice Grant
Committee on the Budget
US Senate

The creation of the WTO and its dispute settlement procedures was a monumental achievement in 1995 with the coming together of over 140 countries agreeing to a rule-based, member-driven organization. In the last 5 years the WTO has helped to open markets and liberalize trade, and the US economy has enjoyed the benefits of increased trade and investment. U.S. exports worldwide have grown to nearly $800 billion last year, up over 50 percent before the formation of the WTO.

The past Clinton Administration and Congress have generally supported the WTO working together to advance the 1996 Information Technology Agreement, the 1998 Agreement on Basic Telecommunications Services, and the 1999 Financial Services Agreement. Now as the US economy shows signs of slowing, as the country’s trade deficit balloons, as a new Administration takes the helm, and as long festering politically charged trade issues must be confronted, the WTO will face its most crucial test of support by member nations, particularly the US and its Congress.

US Congressional support

The concept of "world government" or loss of US sovereignty has been a historic lightening rod of controversy since the country’s founding. Nevertheless, an argument can be made that even though the WTO’s creation constitutes a clear loss of sovereignty to the US, Congress has shown benign acceptance of the world trade governing organization. In 2000, a year of exceptional trade disputes and confused US trade policy, the House of Representatives overwhelmingly reaffirmed US membership in the WTO by a 363-56 vote.

Why has the WTO been treated differently from other international organizations that have incurred the constant criticism and threats to funding levels by Congress? Mostly because there is a strong majority belief that free trade has benefitted the United States and indeed, benefitted the world. While always cautious, nevertheless most Americans and their elected officials do believe that trade remains the key to raising the standards of living in poorer countries.

Last year, the auditing arm of the US Congress the General Accounting Office (GAO), examined 42 completed cases at the WTO that involved the US and found that "overall, the results of the WTO’s dispute settlement process have been positive for the United States . . . most (cases) led to changes in foreign laws, regulations, and practices that offer commercial benefits to the United States. Conversely, none of the changes the United States has made in response to the WTO disputes have had major policy or commercial impact to date."

Are these 5-years of relatively benign and peaceful relations between the WTO and Congress coming to an end? The answer is probably yes, based on the following four recent domestic and global political developments.

European Union - United States Trade Disputes

The one glaring exception to the GAO review of cases completed by the WTO is the uncompleted EU dispute with the US foreign sales corporation (FSC) tax provisions. The politics of the FSC dispute are inextricably intertwined with the long festering beef and bananas disputes.

Still, in September 2000, the House of Representatives passed a bill to revise the FSC provisions to comply with WTO standards by a vote of 315 - 109 even though the Joint Committee on Taxation estimated that the bill would cost the federal government $4.5 billion in lost revenues over 10 years. In November 2000 the Senate passed the bill by unanimous consent.

Wasting no time, the EU filed its complaint with the WTO that the new FSC law failed to comply with fair trade practices. This dispute is not settled, and is not likely to be settled anytime soon.

Many skeptical Washington trade representatives, anticipate that the WTO will likely favor the EU complaint and see $4 billion in possible sanctions against the US as flowing not from a "rules-based" dispute settlement system but a "world political" system. These skeptics argue that such a resolution against the US passed FSC law would be a sought out victory by the EU to retaliate against WTO’s earlier sanctions imposed on them for over the US beef and bananas dispute.

A sign of the Congress’ wearying of this trade fight was the passage last year of "carousel" legislation that would shift the sanctions in retaliation for the beef and bananas disputes onto a new set of EU products. This was followed by legislation inserted in the closing hours of the last Congress to direct tariffs on imported steel directly to the American steel companies, a clear violation of world trade law.

The failure of the WTO to satisfactorily resolve US-EU disputes in the more traditional "old economy "trade sectors of bananas, beef, and manufacturing subsidies (e.g. steel, aerospace), raises questions about the organization’s ability to address "new economy" disputes. These new economy disputes are sure to arise in areas such as science based bio technologies, GMO foods, labeling, data privacy transmissions necessitated with global e-commerce, and the classification of digital products for trade purposes. Peoples’ extreme sensitivity - well founded in past historical practices as well as more contemporaneous food scares throughout Europe - give support to the skeptics that these new economy trade issues cannot be left entirely to a "rules-based" trade system, but must overcome deeply held political and emotional positions within the individual member states.

A New Administration’s New Look at Trade

With the lack of comity in EU-US trade diplomacy, why wouldn’t the US focus on bilateral trade agreements instead of advancing another WTO round? The new US President has shown less deference to world governance bodies - IMF, World Bank, UN - than his predecessor. If President Bush, in search of success on the trade front early in his Administration, sees no hope for agreement in the multilateral system, he might turn to regional and bilateral agreements at the expense of the WTO’s agenda. President Bush has a direct interest in NAFTA and a particular interest in Mexico. He might also choose to focus on Free Trade Area of the Americas (FTAA) negotiations or to finalize a trade agreement with Chile.

At the end of the Clinton Administration, the bilateral agreements completed (Jordan) and negotiated (Singapore) became easier instruments in dealing with the domestic lobby for labor and environmental standards. While it is unclear, although less likely, that the Bush Administration will push for such conditions, the incremental gains in trade achieved by Clinton through bilateral agreements will be more attractive to Bush than larger multilateral agreements particularly in an evenly split US Senate.

While it can be argued that bilateral and regional agreements do not impede the future of the WTO, traditionally with the US Congress, there is only limited time for trade debates each year. This is especially true as long as the President is not granted fast track procedures or "trade promotion authority" for trade agreements. Since Congress’ consideration of trade agreements each year is a zero-sum game, bilateral trade agreements certainly could crowd out global ones.

US Economic Slowdown

Free trade produces winners and losers, but political leaders throughout the world often find it more expedient to respond to the cause of the losers. The winners, consumers who benefit from higher quality and lower cost goods and employees whose jobs are supported by exports, are usually not organized and often would only realize the gains from trade if they were taken away.

As long as the losers are more easily identified (layoffs, plant closings), protectionism will never disappear from the US Congress. Economists agree that in the long-term protectionism keeps industries from feeling the commercial pressure to diversify and modernize.

The long US economic expansion has been key to the WTO’s "honeymoon" with Congress. If the US economy continues to slow, if the US trade deficit continues to expand, long-term considerations become less and protectionist tendencies will strengthen. The US Trade Deficit Review Commission, a panel of economists appointed by Congress to explore the causes and consequences of the nation’s trade deficit, in its final report last fall could come to no agreement - the partisan divide was evident with two reports one from Republicans citing the trade deficit as a sign of the strength of the US economy while the Democratic report citing unfair trading practices by other countries that had hollowed out the US manufacturing sector.

Such partisan divides might only intensify if the US economy continues to slow, and therein jeopardizing any multilateral or bilateral treaty agreements from finding the requisite two-thirds vote for ratification.

China

China will most likely become a member of the WTO this year once its negotiations with Geneva are complete. China’s economic growth potential could propel it from being the world’s 10th-largest economy to one of the top three, therefore the WTO’s future as a world trading organization depends on including the Chinese economy. Conversely, China’s poor history of implementing and complying with international agreements could imperil the WTO’s reputation and influence.

China’s protectionist tendencies as a trading partner are also a concern exemplified at its worst by China’s implementing of the agreement on international property rights. After the agreement was signed, piracy of movies, music and computer programs boomed and became a major industry in China.

Regardless of the WTO agreement reached with China, if the government does not have the political will or ability to enforce its provision, the WTO system of rules-based trade could eventually unravel.

Conclusion

The WTO has achieved its initial objective of bringing down stifling tariffs and addressing obvious unfair trade practices worldwide. This has taken place during a time of generally favorable world economic growth. Now, combined with a slowing in the US economy, trade dispute settlements will be injected with much deeper political and cultural differences as the global economy becomes even more integrated. All this at the very same time that nation-state’s independence is on the upswing.

Is the WTO the best place for this type of debate? If the US cannot negotiate an end to trade disputes with its historic allies of Europe over traditional "old economy" commodities, how will it resolve more daunting disputes over "new economy" goods and services? If the US cannot resolve trade disputes with its historic allies of Europe, how difficult will it be to resolve certain to arise disputes with China’s entry into the WTO?

An international organization is only as strong as it’s member-nations want it to be. The WTO existence will be challenged in the near future. It is time for the powerful governments of the world to decide if the WTO’s work is done, whether a more limited scope is required, or whether there remains an expanded and redefined role for the WTO in this dawning new century.