Business and Economics

The World Trade Organization under attack 7-21-18

Source - Economist, Nov 10, 2018: "Trade blockage"     

The Trump administration is trying to break an international system that has kept tariffs low and trade free since the end of WW 2. The average tariff rate between Europe, the US and Japan was 22% in 1947. It has been averaging about 3% since 2000, thanks to the WTO. The WTO has 164 member nations and accounts for 98% of all world trade. To be a member means you agree to keep your tariffs low and apply them to "most-favored nations" equally. Ex: China must put the same (low) tariff on cars imported from the US as it does on cars imported from the EU. The tradeoff: a member nation can't protect its own industries through high tariffs - but it doesn't have to worry about them on its own exports.  Trump would like to leave the WTO and be free to increase or renegotiate tariffs as he sees fit. Leaving the WTO would require Congressional approval (not likely).  

Summer of 2018: the Trump administration has enacted new tariffs affecting $90 billion worth of imports (one-third of which comes from China) and has plans to impose an additional $200 billion in tariffs on Chinese goods alone. These new tariffs are generating disputes normally heard by WTO judges - but Trump is blocking confirmation of new judges. There are 7 WTO judges who must be unanimously confirmed. 3 are assigned to hear disputes. The Trump administration has refused to confirm new judges, meaning by December 2019, the WTO will no longer have enough judges to hear new cases. 

Robert Lighthizer is the US Trade Representative. He believes in the advantages of the WTO but thinks China cheats. Chinese firms often appear to be independent but in fact receive large subsidizes from the Chinese government, meaning that privately owned companies cannot compete. China also requires other firms in joint ventures with Chinese companies to hand over proprietary technology, which is then pirated. The Obama administration sought to tempt China to the negotiating table by trying to enter into deeper trade partnerships in the Pacific Rim (the Trans-Pacific Partnership) and with the EU. The idea being that China would have to change its ways if it wanted a similar beneficial relationship with the US. The Trump approach is to use threats and tariffs to force the Chinese to change their ways. The Reagan administration did this to a certain extent with Japan back in the 1980's - but Japan's economy was only 40% of the US, China's GDP should be 90% of the US by 2023.