The United States is now violating the three core rules governing world trade: Tariffs are to be applied at rates that have been contractually committed (providing certainty); tariffs are to apply equally to all members (providing nondiscrimination, the exception: better treatment can be given if tariffs are substantially removed entirely among participants of a free trade agreement [FTA]); and trade measures are to be notified to the World Trade Organization (providing transparency). The April 2nd US model, erecting a national tariff wall, is not available under WTO rules or perhaps even desired by any other country. Since its predicate is that the United States is striking a new balance, having been wronged in prior years, the United States might retaliate against any new foreign tariff, as it did with China. In addition, few if any countries appear to wish to emulate what the United States says it is trying to do and what Brazil did decades ago, which was to apply a tariff to imports of products similar to those it wanted to make at home. It didn’t work.
This leaves the question of what other models are available. Many others, rather than embracing additional tariffs, have strived to eliminate them. The path that Canada has chosen is noteworthy: It has a zero-tariff agreement with the United States and Mexico (which the first Trump administration negotiated and which the second Trump administration plans to violate). It also has zero-tariff arrangements, including with 11 other countries under the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), with the European Union, and separately with Colombia, Israel, Korea, Ukraine, and a number of others. For its part, the European Union has free trade agreements in place or under negotiation with countries too numerous to readily count (a number which ranges up towards 100). China has free trade arrangements with 14 other Asia-Pacific countries in its Regional Cooperative Economic Partnership (RCEP) agreement and has an extensive list of bilateral FTAs. A multitude of other free trade arrangements can be found to exist on a regional basis.
Most trade negotiations if not all in recent years have been to remove tariffs, not impose them.
Can tariff reductions be part of the recovery from the current tariff war?
To facilitate the rollback of the current threatened and actual additional tariffs, the United States and the European Union could develop a joint duty-free list in their bilateral negotiations. (This would require Congressional approval).
Going further, former WTO director-general Supachai Panitchpakdi (in office 2002–05), speaking at an event marking the WTO's 30th anniversary, put forward the idea that WTO members treat the large number of bilateral negotiations announced by the United States as a starting gun to initiate their own bilateral negotiations with other trading partners. This could be accomplished by a “request-offer” process that could then be brought together and folded into a multilateral agreement applicable to all WTO members. Former European commissioner for trade Cecilia Malmström has suggested that the other WTO members consider launching a full new round of multilateral trade negotiations.
On a regional basis, my PIIE colleague Jeffrey J. Schott and other trade experts have suggested that the European Union’s 27 countries join more formally with the CPTPP’s 12 countries as a single large FTA. As the EU and Canada are also members of the Ottawa Group, a number of additional members from that group such as Brazil and Kenya might consider joining as well. At a minimum, a group of like-minded countries could forge a path forward together for trade policy coordination and then possibly deeper economic integration.
What can be done to improve the world trading system directly? Procedural reforms.
An initial but important step the WTO can take is to assure complete transparency with respect to protectionist trade measures imposed during the present crisis, both by the United States as well as by other members. It should do this by initiating a formal trade policy review (TPR) concerning the current conditions of world trade, which would include heightened monitoring by the WTO secretariat.
The next step would be to identify and then implement serious institutional WTO reforms. First, individual members should not be able to block adoption of agreements in which they do not participate. Denying hostage-taking vetoes would allow those willing to move forward to conclude plurilateral agreements at the WTO. Second, most members agree that there should be a binding dispute settlement system applicable to all. Replacing the system will take longer and will require a major negotiation, tied to improvements in the rules more generally, such as with respect to actions taken for claimed national security reasons, subsidies among state-owned enterprises, and the use of trade remedies generally. Third, workable WTO governance requires that members delegate the management of the organization to an executive board and expect the director-general to assist members in setting the organization’s agenda, actively facilitating negotiations, and, when necessary, proposing solutions. In addition, the members should assure the organization has stable, adequate funding: Large individual members should not be allowed to control the organization’s agenda through control of the WTO budget.
Making the WTO relevant to major trade challenges
There are much larger subjects that require multilateral negotiation. Principal examples include the use of trade to assure improved food security; being prepared to meet future pandemics through the sharing of scarce essential supplies; dealing with climate change to the extent that trade can assist with solutions; and adjusting to the disruptions caused by the next technological breakthrough, artificial intelligence. Regrettably, the record of serious engagement at the WTO on even these existential challenges is not good.
Director-General Ngozi Okonjo-Iweala, in recent remarks in Washington, pointed to a number of questions that the WTO could (and by implication should) address in a “re-positioning” of the organization and its members. In dealing with members’ concerns with China, she observed that the generations-old WTO subsidies agreement needs to be updated. (Some members had already suggested that industrial policies generally required greater scrutiny.) She pointed to a the newly recognized problem of overdependency in trade in select products (e.g., advanced semiconductors from Taiwan) and a need for diversification (a subject of heightened relevance for Canada at present). She noted that underconsumption (depressed domestic demand) on the part of a major trading country can cause systemic stress. She emphasized the importance of services trade, a subject with a built-in negotiating agenda that has not progressed. She agreed with the United States that the WTO members had placed an over-emphasis on litigation in solving trade problems, substituting for negotiation. She aligned herself with the World Bank view that African countries need to move up the value chain, so that they are not as often exporting ore without processing it. She heralded the new dynamism that the WTO requires to fulfill its promise, as exemplified by countries like Ethiopia and Uzbekistan working hard to gain entry into the organization. Engaging in the accession process itself brings needed reforms.
A recommitment to working together
The 39 mid-sized countries of the "Friends of the System" group, including Australia, Canada, Switzerland, Norway, and Costa Rica, have vowed to live up to their WTO obligations. The European Union has declared again the importance it attaches to the WTO. But the system clearly cries out for improvement. Suggestions are emerging, some of which are cited here, as to how those interested in enhancing the world trading system can proceed. They should proceed on the basis of their shared values. These were articulated in the Riyadh Initiative on the Future of the WTO, the report prepared for the Group of 20 Leaders meeting in 2020, that should be consulted anew. There is too much at stake in the current circumstances not to proceed.
Data Disclosure
This publication does not include a replication package.
