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Industryweek 23945 Wto Protest

Remember the WTO?

Aug. 17, 2017
Despite past criticisms from President Trump, his administration continues to work within the WTO process. Here's why it is a good thing.

With all its talk about the deficiencies of trade agreements, such as NAFTA, and promises to take unilateral action against the unfair trade practices of other countries, the Trump administration has diverted attention from the World Trade Organization (WTO). Candidate Trump famously said “the WTO is a disaster,” but his administration is, thus far, working within the WTO process. This is a very good thing for U.S. manufacturers. Here’s why.

The U.S. has free trade agreements (FTAs) with just 20 countries. According to the Peterson Institute for International Economics, 60% of U.S. trade is with non-FTA partners. Should the U.S. ever withdraw from the WTO, U.S. exporters would lose most favored nation trading status (and the lower tariffs that come with this designation) with these countries for which we do not have an FTA. Exporting will become more expensive. Similarly, withdrawal from the WTO would decrease access to foreign imports for domestic manufacturers. In other words, through U.S. membership in the WTO, domestic manufacturers have greater market access—which is very important in a world where supply chains are becoming ever-more complex.

The WTO sets rules for international commerce and provides a forum for negotiations to lower trade barriers. In addition, since its inception in 1995, it has created a forum for its members to resolve trade disputes through a system that is more “rules-based” (and therefore predictable) than its predecessor, the dispute resolution process under the 1947 Generalized Agreement on Tariffs and Trade (GATT).

The WTO dispute resolution process—with its binding third-party adjudication—is arguably its most successful endeavor. Its 164 member countries utilize it extensively—the number of cases is approaching 600—suggesting satisfaction with the process. It consists of sequential steps: consultation (between the complainant and respondent countries), the panel process (in case consultation doesn’t resolve the issue), appeal and suspension of concessions. The vast majority of cases are resolved in the consultation phase.

A recent statistical analysis of the WTO dispute settlement system, by Arie Reich of the European University Institute, sheds light on the effectiveness and efficiency of the system:

  • Who uses the system the most? The United States. The U.S. is a party to almost half of the total cases, apportioned roughly equally as a complainant and as a respondent. After the U.S., the most active member is the European Union, followed distantly by Canada, China, India and Brazil. The richest countries use it the most; the poorest countries use it the least.
  • What is the compliance rate? About 80%. Most of the time, nations comply with WTO rulings.
  • Who complies the least? The U.S. Looking just at suspension requests (i.e., when a nation seeks to impose a trade sanction on a country for noncompliance with a WTO final decision), the U.S. is by far the most frequent target—nearly two thirds of suspension requests target the U.S., compared to 16% for the EU. Interestingly, China has not yet been a target, suggesting a higher rate of compliance with WTO decisions.
  • How long do WTO settlement procedures take? About 28 months. The process is getting longer over time, even though the number of disputes is decreasing.

These statistics, as well as other published studies, suggest that the WTO could do better in resolving disputes. Here are two recommendations worthy of consideration.

First, the WTO should take steps to resolve disputes earlier in the process, perhaps before they even arise. For example, back in February, when Congress was assessing the merits of the so-called border adjustment tax as part of the ongoing debate over tax reform, an important question was whether such a tax would be compatible with WTO rules. The answer is not obvious—the experts are divided. Unfortunately, the WTO does not opine on such questions—a policy must be in place, damages incurred and a case filed before such a question can be answered. This seems very inefficient, especially when the economic stakes are high.

Second, the WTO should carefully evaluate the way it assesses economic damages in trade disputes. If damages are assessed objectively and reflect the full economic cost of a rules violation over time, then the respondent in a case has every incentive to resolve the matter quickly for fear of losing. But because there is some indication of delaying tactics to avoid compliance with a WTO decision, there is reason to believe damage assessments may be too low.

In fact, many other reforms are worthy of consideration (e.g., WTO rules need to evolve to keep pace with a dynamic economy increasingly focused on services and digital commerce). And yet, given the historical failure of so many international institutions to resolve disputes between nations, the record of the WTO on trade disputes is remarkable. Although far from perfect, the WTO is beneficial for U.S. manufacturers, and with reform, could be even better.

Keith B. Belton is director of the Manufacturing Policy Initiative at Indiana University’s School of Public and Environmental Affairs

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