Why we need to update the WTO.
Economists and trade policymakers agree that impediments to international trade affect not only the world but also the well-being of the countries that impose them. If trade barriers have to be imposed, experts prefer a price-effect measure in the form of an import tariff.
Following the damage done by high import tariffs under the 1930 Smoot-Hawley Tariff Act, the United States in 1934 began to reduce the barriers to cross-border trade. The desire to achieve trade flows between countries with minimum government interference intensified after the Second World War. It came at a time when the US had emerged as the new economic, political and military power with financial strength and export manufacturing capacity.
Replacing the General Agreement on Tariffs and Trade of 1947, the World Trade Organisation continues to allow tariffs in multilateral trade. Examples include countervailing levies against unfair foreign trade practices. Tariffs may also be used for closer economic integration. Regional blocs like the European Union and the Gulf Cooperation Council are permitted a common external tariff to non-members.
The WTO, dominated by the advanced nations, is largely founded on conventional commercial wisdom that liberally regulated flow of goods and services under mutually agreed rules can multiply the rewards. It can result in the best products, with the best design, at the best price.
The notions of absolute and comparative advantage are, however, not static. Competitiveness can easily shift from one country to another depending on the availability of natural resources and technological advances. For decades, companies have been searching for locations to produce competitive products under the most favourable conditions. So the decisions on the flow of goods and services, cost-effective relocation of businesses and even entire industrial sectors are not new.
The interconnected and interdependent global trade configuration that gradually rose on the eve of the new millennium began to evolve in the second decade of the 21st century. Now advanced countries are anxious about who benefits from liberal cross-border trade.
The WTO is focused on open, fair and undistorted trade flows. It is also mandated to achieve greater coherence in global economic policy-making with other multilateral economic and financial organisations. But the WTO-sponsored Doha Development Agenda (launched in 2001) failed to deliver. Moreover, street protests that were not seen until the late 1990s in Genoa and Seattle continued to gather momentum. Public opinion turned against the WTO in the belief that its rules facilitated the powerful phenomenon of economic globalisation. Workers and industry umbrella organisations are concerned about the socioeconomic consequences of the tremendous speed of change and reversal. Other interest groups cite the damage to the environment. US President Donald Trump understood the sentiment early on and commensurately played it out.
The US Congress is usually careful about regulating commerce with third countries with periodically renewable reciprocal trade acts. The interpretation of power delegated to the US president and/or the US trade representative can create some room for manoeuvre as the unilateral imposition of import tariffs has just demonstrated.
Although EU Trade Commissioner Cellicia Malmstrom took the US to the WTO over tariffs on steel and aluminium, Trump has now said that the US will sit down with the bloc for a fairer US-EU trading relationship. But that was before he threatened to impose more import tariffs on China.
The EU is unlikely to give in to the US tariffs and has already responded with retaliatory tariffs. But a common ground has to be found for overhauling the 23-year-old WTO. Both the EU and the US are facing the consequences of a situation largely created by themselves. Moreover, there is a mutual desire to contain China economically. An updated multilateral trading model capable of keeping trading nations in check might be the start for mending ties between the transatlantic power blocs.
Johann Weick consults on trade policies and analyses relations between the EU and the GCC.
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