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Trump’s fight with the World Trade Organisation

Food for Thought: The desire of one power to achieve absolute security means absolute insecurity for all others. ~ Henry Kissinger

Almost no other country has such a strong influence on the multilateral trading system as the United States. But with the ‘America First’ policy, U.S. President Donald Trump is increasingly undermining international trade law. This comes with a huge cost not only for its trading partners but also for the United States itself.

Withdrawal of the U.S. from the Trans-Pacific Partnership (trade agreement between a small group of Pacific Rim countries), renegotiation of the trade agreements with Mexico and China (NAFTA) and South Korea (KORUS), blocking of the appointment of the members of the Appellate Body of the World Trade Organisation, and the ongoing trade war with China, Trump has clearly broken the traditional liberal trade policy of his predecessors.

And now, taking forward its tiff with China, U.S. President attacked the World Trade Organisation (WTO) for allowing countries, singling out China and India, to take undue advantage of the Special and Differential Treatment (SDT) provisions. His argument being that since the WTO allows countries to unilaterally classify themselves as ‘developing’, even grown economies are enjoying preferential trade treatment over developed countries such as the U.S.

In order to understand the logic behind Trump’s argument, it is important to have knowledge about the Special and Differential Treatment provisions. The SDT or ‘developing country’ status is a mechanism that offers some respite to poor countries while they try to adjust to a new global trade order marked by lower trade barriers. Thus, after self-designating as ‘developing’, a country can benefit from longer time frameworks, softer tariff cuts, procedural advantages in disputes and technical assistance from the WTO. This means that while the developed countries need to lower various barriers to foster trade, ‘developing’ countries can continue to impose heavy tariffs and quotas to protect domestic producers from cheaper and better quality imports.

While this was supposed to help poor countries ease gradually into a more globalized world economy, it has had other unintended effects. Many developed countries, such as Singapore whose per capita income level is higher than the U.S., have made use of the provision to classify themselves as ‘growing’ economies. China’s per capita income has grown exponentially in a few decades ($592 per year in 1995 to more than $9,000 per year in 2018). However, China justifies it by saying that while their per capita income level has increased many-fold, these are still below that of high-income levels in countries such as the U.S. ($62,000 per year in 2018). As many as two-thirds of the 164 members of the WTO have been happy to make use of this freedom.

This is, however, not to say that WTO rules always work to the advantage of developing countries alone. The U.S. and other rich countries have always enjoyed enforceable SDTs in the agreements on textiles, clothing, and agriculture. For instance, subsidies given in the West to rich farmers continue to operate unopposed. This means that every cow in the West gets a dollar per day as a subsidy, while the poor in India is just about earning a dollar per day.

So, what lies ahead?

If the U.S. were to push for genuine reforms, it would have been useful for the global economy in the long run. If some of the old issues concerning agricultural subsidies and new issues about digital trade were taken up, it would have benefitted all players. However, Trump’s ‘America First’ agenda is very limited. His trade policies focus on the national interest of the U.S. He wishes to bring back jobs to the U.S., but his policies are fundamentally flawed. His reasoning behind imposing heavy tariffs on Chinese imports is that a negative bilateral trade balance is an indicator of losses, which is not the case. A negative trade balance implies that a country’s imports exceed its exports. It is not losing money but spending the money in exchange for the goods it ‘wants’. Similarly, criticizing that the WTO is no longer ‘able to keep up with modern economic challenges’ won’t solve its problems. The root of the U.S.’ trade problems is embedded in its own competitiveness, not the WTO, and thus targeting the WTO or other economies won’t get it anywhere.

Nevertheless, it is true that the members of the WTO need to acknowledge the need for reforms, making them a little bit more relevant to today and to 21st-century realities. This does not mean abolishing the special and differential treatment for all poor countries, instead just fine-tuning them. Swaminathan Aiyar, a famous economics journalist, suggests that countries can be asked to graduate from the lowest to highest levels of development, getting fewer and fewer concessions as they rise up the development ladder. Perhaps the WTO could specify four levels of development based on per capita income, meriting separate levels of concessions. For instance, low-income countries with a per capita income below $1,000 could continue to get all the benefits available today. And those above, say $8,000, could be graduated fully and treated as advanced countries. Between this, there could be slabs subjected to a reduced set of concessions.

Now, what can be the final consensus that remains to be seen since developing countries are likely to oppose any efforts to stop them from protecting their domestic economic interests. However, if the U.S. acts on its threat to pull out of the WTO, the consequences of the unraveling of the WTO would be unilateralism, economic nationalism, and trade wars that are largely unconstrained. This would particularly be undesirable for smaller economies, as they would be on the short end of the stick should they negotiate bilaterally with an economy which is far bigger. Since it is not easy to find promising proposals for reform of the WTO, the member countries must tread carefully and have a back-up plan ready in case of a breakdown of the deeper global trading systems and economic arrangements.

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1 Comment

  1. Anurag Aggarwal

    Very insightful and well written article. Deep research and understanding of the issue is impressive. Good read.

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