Free Trade Critics Overlook WTO's Role
Trump recently threatened to pull the United States out of the World Trade Organization (WTO), calling it a “disaster.” His comments align with a larger trend: Free trade agreements have faced heavy criticism from both parties in this election season.
Are the critics right?
Most arguments focus solely on the losses the U.S. suffers from market openness. But the WTO has benefits far beyond trade promotion. It provides vital rules and regulations that govern the manner in which countries may trade. The result is a more stable global economy.
The main line of attack on trade agreements rests on a misunderstanding of how they work. Trump and Clinton have both called for a more “even playing field” in the America’s commitments. They argue that current trade agreements ask America to give up too much and fail to protect ailing domestic industries.
That’s wrong. For one thing, the WTO doesn’t force members to set tariffs at specific rates. Instead, states commit to tariff “bindings,” which are ceilings above which members cannot raise their rates. Like most other WTO members, the U.S. agrees to artificially high bindings. This affords lawmakers leeway when making policy decisions about specific rates.
The U.S. does have lower tariff bindings than many other WTO members, averaging approximately 3.5 percent. But America’s commitments are similar to those of Canada (5 percent) and the EU (4.5 percent). And, like these other members, the U.S. maintains robust subsidies programs in several sectors, including $20 billion spent annually in agriculture.
Critics have singled out China in particular. One reason for this is that China has higher bindings that the U.S., allowing it to impose steeper tariffs. But this isn’t unfair; the U.S. agreed to these terms when China joined the WTO. Membership in the WTO requires the consent of existing members.
There’s little evidence to support the argument that the WTO systematically disadvantages the U.S. relative to its trade partners. The U.S. makes concessions comparable to its peers, and it closely monitors new member accession.
In fact, instead of being worse off, the U.S. enjoys key benefits from membership.
The WTO does far more than encourage trade liberalization. It also provides an expansive regulatory framework. Its legal agreements are far-reaching, relating to areas such as intellectual property, health and safety standards, and government procurement. Each portion of the WTO text is unified by a core purpose: encouraging cooperation through policy harmonization and stability.
Those rules are a good thing for the American economy. Unpredictable trade policies lead to unpredictable markets. Economists have shown that new trade barriers create volatility in the price and volume of traded goods. For example, the 45 percent tariffs that Trump wants to levy against China would do more than alienate a key U.S. trade partner; they would also interrupt the flow of goods and services around the world, contributing to trade volatility both at home and abroad.
Limiting the extent of such policy changes is precisely why trade agreements are so valuable. The WTO helps governments resist the temptation to introduce new entry barriers. The result? The WTO stabilizes trade flows.
The current presidential candidates may fail to understand the importance of this stability, but President Obama doesn’t. In his comments on the eve of the latest G20 meeting, the President stated that trade agreements are essential to US economic interests. He defended the Trans-Pacific Partnership — an agreement that includes many of the same rules as the WTO — as a valuable piece of global market regulation. He also stressed the importance of America’s participation in writing the rules of the game, saying it’s a mistake to “pull up the drawbridge.”
The President is correct. There’s strong evidence that these rules work. WTO members are significantly less likely to target one another with protectionist policies. This makes U.S. producers better off because it means that members are less likely to reduce U.S. exporters’ market opportunities. There’s also new data showing that the WTO dispute settlement process — the formal system by which members protect themselves — may help deter violations.
Even if the WTO did not promote freer trade, it would still serve an important purpose by promoting economic stability. Of course, the system is far from perfect. But the rules and regulations that trade agreements introduce make members better off. The same legal system that Trump criticizes so vehemently provides a way for the U.S. to protect its economic interests abroad. Maintaining a central position in this system should be a priority for the next president.