Is the Global Trade System Broken?

The Economist posed the question "Is the Global Trade System Broken?" in an online debate between Greg Autry (University of Southern California), representing the "yes" side, and Chad P. Bown (PIIE) as the opposition "no." Bown's opening remarks, his rebuttal to Autry's opening, and his closing argument are reproduced here with permission. To view the full debate, held May 7–13, 2018, visit the Economist.

Opening Remarks

Chad P. Bown (PIIE)
May 7, 2018

Today's trading system may be bent, but it is not broken. Import tariffs are low. Quotas are relatively uncommon. In 2016, some $15.4 trillion of merchandise flowed between countries belonging to the World Trade Organization (WTO).

In the 1930s, the trading system was broken. The Great Depression was fraught with government-imposed tariffs, quantitative limits on trade, discriminatory deals and foreign-exchange controls. It got so bad at times that some international commercial relationships even devolved into barter. Economic historian Douglas Irwin recounts an example in 1932 of Hungary needing to come up with 29,000 pigs for the 20,000 wagons of wood it wanted to import from Czechoslovakia for fuel.

The major powers repaired the wreckage by founding the General Agreement on Tariffs and Trade (GATT) in 1947, which in 1995 became the WTO. Today that same system coordinates policymakers so that they do not collectively take the world into a trade war, in which most countries would lose.

To understand how the WTO prevents countries from scratching their itch for tariffs, a little economics is required.

Suppose the WTO did not exist. Because of America's market power, President Donald Trump would like increase tariffs on imports. And if that were all, his new tariffs could make America slightly better off than it is today.

But two things flow from Trump's would-be tariffs. First, they make exporting-country partners worse off and by more than America benefits. Tariffs are worse than zero-sum. Second, many partners have market power of their own and would act on it. China would reciprocate with tariffs, as would the European Union. Recent estimates from Alessandro Nicita, Marcelo Olarreaga, and Peri da Silva find average tariffs would increase from roughly 3 percent today to about 35 percent in such a WTO-less world.

Thus, a Trumpian tariff attempt to make America a little bit greater again would backfire. The small initial gain—when only he imposed tariffs—is more than offset by the costs suffered from bad reciprocal behavior. The WTO's innate value, as shown by the work of Kyle Bagwell and Robert Staiger, is to restrain countries by making the ultimate costs of that first tariff hike clear.

The WTO is facing challenges. Tariffs, it turns out, can be straightforward to haggle over and to monitor so that they are kept low. But Chinese, European, or American policymakers still have that market-power incentive to help out their producers. With duties kept low, sometimes governments switch to subsidies instead.

For the WTO, striking the right balance on subsidies is tricky. Rules are needed to ensure that they aren't abused. But the rules also require more nuance than with tariffs, because subsidies sometimes make good economic sense. And in an ever-changing world, it has proven hard for the rules-makers to know exactly where to draw the line.

Then there is China. After its entry into the WTO in 2001, its government cut tariffs and undertook domestic policy reform. But its economic model of state-infused capitalism, referred to by Harvard Law Professor Mark Wu as "China, Inc.," also evolved in ways that sat awkwardly alongside the world's trade rules.

The "Made in China 2025" industrial policy, its apparent tolerance of industrial espionage and intellectual-property theft from foreign companies, and its cheap loans from state-owned banks to Chinese manufacturers, all rub up against the spirit, if not the letter, of the global trading system.

American politicians remain vexed that American exports to China have not sufficiently materialized. While much of that is driven by natural economic forces, some of it may be due to these nontransparent, subsidy-like policies.

The WTO has not failed. No one has requested its judges rule on whether these latest Chinese policies are breaking the system. On the dozens of earlier occasions when asked to intervene over different policies, the WTO has largely ruled against China. And China has complied. When deployed properly, the WTO dispute-settlement system has succeeded.

President Trump could bring to Geneva a new set of sweeping legal challenges. His Section 301 investigation into China's allegedly unfair trade practices could result in unprecedented transparency, putting Chinese policies under the spotlight for the world to judge.

Even other WTO members' response to Mr. Trump's questionable trade actions—his steel and aluminium tariffs in particular—leaves room for optimism. The European Union established an early template, announcing plans to respond to Mr. Trump's unconventional behavior within the WTO's framework. China followed the European Union's example, making a similar WTO argument that served to constrain its own retaliation. And other countries have not given up on the WTO dispute settlement—some have even announced their intentions to formally challenge Mr. Trump's tariffs.

The WTO has proven resilient before. Despite the synchronised global downturn of 2008–09—which also included a trade collapse and the Great Recession—the system held strong, with no return to the trade policy of the 1930s.

While the WTO is not broken, the debate over a "broken" trading system could be referring to one that is "in despair." To that line of argumentation, I am much more sympathetic.

Rebuttal remarks

Response to Greg Autry (University of Southern California)

Chad P. Bown (PIIE)
May 9, 2018

My opening statement argued that the rules-based trading system is not broken. In fact, the World Trade Organization offers the best route to fix many pressing concerns.

Yet my opponent, Greg Autry, blames the system for a host of issues, from inequality to surpluses and deficits to overcapacity and overconsumption. He throws in conditions in the tourism industry, environmental degradation, totalitarianism...why not add racism, xenophobia, and America's problems with guns?

Many of these problems are serious. But the trading system is not to blame. Take, for example, the issue of inequality.

Begin with China's Gini coefficient. In 1978 China was a centrally planned, nearly autarkic, impoverished economy. Then China introduced some market competition and gradually opened to the world. Since 1978 more than 800 million people in China alone have been pulled out of poverty. China's growth and demand for imports helped millions more in Africa and Latin America.

Now this is not China's entire story, as my opening statement makes clear. But alleviation of massive human suffering cannot be ignored or pushed aside by a rogue Gini.

Mr. Autry also insinuates that a cabal of economists is to blame for falsely promising that expanded trade would deliver greater abundance for all and ensure an equitable distribution of wealth. Such a "chicken in every pot" pledge was never made and is simply not born out by the history of economic thought.

In 1941 the Nobel-prize winning economist Paul Samuelson explained clearly how trade creates winners and losers, even while making the economic pie bigger. What quickly became known as the Stolper-Samuelson theorem has been taught in introductory international economics courses for decades.

Has the trading system caused inequality? Not at all.

A country's decision to be open to trade is not equivalent to its acceptance of inequality as a fait accompli. Denmark is one of the most open, trade-dependent economies in the world. Yet it also has relatively low inequality. America is actually less trade-dependent but has much more inequality.

Why the difference? For one, Denmark embraces openness by ensuring supportive domestic policies to help workers adjust when they suddenly face an unexpected challenge. Danes also actively redistribute their economic wealth through tax and public spending policies.

American policymakers do neither. For decades, they overlooked both inequality and the challenges confronting American workers intrinsic in any market economy.

Mr. Autry ignores that all economic progress is disruptive. The desire for cleaner energy reduced demand for coal miners. Or take technological change, an even bigger disrupter than trade. Computers have wiped out millions of jobs. Electronic commerce emptied shopping malls and the need for retail labor. Robotics pushed workers without sufficient technical skills off assembly lines. And autonomous vehicles will displace taxis and truck drivers.

Trade is not irrelevant. It too can disrupt livelihoods. Yet even estimates from the well-known research of David Autor, David Dorn, and Gordon Hanson indicate that trade played a far lesser role in displacing American labor than technological advances or changes in what consumers want.

But again, even that disruption is about trade and not the rules-based system.

My opponent's fourth mistake involves the now tired misunderstanding of bilateral trade imbalances. America runs a trade deficit with the world that results when a country consumes and invests more than it saves. America's fiscal imbalance implies the need to borrow from abroad which must therefore show up somewhere in the international statistics. But whether America's bilateral imbalance gets assigned to China or South Korea, as opposed to Hong Kong or the Netherlands, is unrelated to the rules-based system.

Treating the American trade deficit seriously requires tackling America's fiscal misalignment. Treating American inequality seriously requires making its tax and social policy system more progressive. Treating the insecurity of American workers seriously requires balancing mobility assistance and social insurance so empowered workers respond positively to the disruptive, but inevitable, force of change.

This is the job of domestic policymakers, not the rules-based trading system.

My opponent's populist arguments are most disturbing because they distract. They shift blame for actual problems on to bogeymen. This irresponsibility lets domestic policymakers too easily off the hook.

Closing Remarks

Chad P. Bown (PIIE)
May 10, 2018

It is important to debate the future of the rules-based trading system. Since Brexit and the election of Donald Trump, the public has become increasingly curious about how the system works, why countries need and mutually benefit from rules, and where things currently fall short.

Yet all too frequently, this public discourse arrives at the length of a tweet. That approach just doesn't work. Talking trade requires a thoughtful, nuanced, and fully-throated conversation. I thus applaud the Economist for facilitating this discussion. Nevertheless, I have yet to see a well-articulated argument supporting the notion that the global trading system is broken.

I have three remaining worries about the tactics of the anti-traders.

First, while we can all agree that there are global problems that policymakers must tackle, the trading system is simply not to blame for most of them. Inequality is high by historical standards, and people feel excluded from the mainstream. But thinking that new trade rules could somehow coerce national governments to magically deal with these domestic problems is naïve. It is a recipe for trade agreement overreach as well as further backlash.

In fact, it is worse than that. Blaming the trading system for this or that problem is simply a political tactic for distraction. It is how governments avoid having to make difficult domestic-policy choices: let's just blame the nameless, faceless bureaucrats in Brussels. Or in Geneva. (Or, in Mr. Trump's case, America's horrible trade negotiators that foisted agreements like the WTO upon us!)

My second worry concerns practicalities. Simply, what is the alternative? If the global trading system is broken, what should replace it? A world without the current, rules-based system is a world of trade lawlessness. Lawlessness presents obvious problems, as the 1930s made clear. No one wins a trade war.

But third is the incredibly scary shift in rhetoric of today's anti-traders. They have pushed the tone of the debate well beyond a discussion over protectionism or even past concerns over labor and environmental standards. (That was so 1990s "Battle in Seattle.")

To them, the destructive power of trade has now reached a fever pitch. It threatens "national security." Populists warn that continuing to trade is equivalent to "economic warfare."

Why strike such a tone? Scare tactics are a classic strategy to end debate. Disagree with an economic nationalist? You are unpatriotic! Blowing up the system may be the only way to keep everyone safe! Fear-mongering is their ultimate Trump card.

But scarier than shutting down conversation is the specter that increasingly militant language becomes self-fulfilling. And unfortunately, this may now be pushing past a simple academic concern. Mr. Trump's unilateral decision to impose tariffs on steel and aluminum, as well as his threatened duties on China, arose after unprecedented seizures of executive authority. Even dozens of American allies face the seemingly unending threat of his tariffs being imposed on a whim. It is as if he has placed US trade policy under a constant state of martial law.

To conclude, my opponents' arguments have not convinced me that the global trading system is broken. Of course it could be improved. But populists seem completely disinterested in a conversation around the question of how.

Chad P. Bown is Reginald Jones Senior Fellow at the Peterson Institute for International Economics and former lead economist at the World Bank. With Soumaya Keynes of the Economist, he hosts Trade Talks, a weekly podcast on the economics of international trade policy. Follow him on Twitter @ChadBown.