Fears for global trade as Trump fires first shots to kneecap WTO

Birthday parties for international treaties are never raucous affairs. But when old trade hands gathered in the pavilion of Washington’s Ronald Reagan building on a recent evening to celebrate the 70th birthday of the General Agreement on Tariffs and Trade — the 1947 document that still guides international commerce — the mood was decidedly maudlin.

“This feels more like a wake than a birthday party,” grumbled one veteran trade negotiator after listening to a procession of speakers extol the virtues of the Gatt and warn of a looming protectionist tide.

The reason, he did not have to add, was sitting just a few blocks away in the White House. A year on from Donald Trump’s election as US president, the populist property tycoon is delivering on his promise to shake up the international system. Viewed from Washington, the future of global trade now seems to be predominantly about ripping up its glorious past.

Soon after taking office in January, Mr Trump pulled the US out of the Trans-Pacific Partnership, an ambitious pact with Japan and 10 other economies that his predecessor, Barack Obama, painstakingly negotiated as a strategic response to a rising China.

He has demanded a renegotiation both of the 23-year-old North American Free Trade Agreement and of a 2012 deal with South Korea that was meant to help solidify one of Washington’s most delicate and important strategic relationships in Asia. He has made clear that any trading partner with which the US runs a trade deficit — starting with China — should expect a difficult conversation about how to achieve more balanced trade.

But Mr Trump has also signalled that he will pursue an even bigger scalp: the World Trade Organization, which as the Gatt’s successor since the 1990s, has acted as the global trade referee. “The WTO was set up for the benefit [of] everybody but us . . . They have taken advantage of this country like you wouldn’t believe,” Mr Trump told Fox Business in a recent interview. “We lose the lawsuits, almost all of the lawsuits in the WTO.”

Mr Trump’s view is not borne out in the data, experts point out. The US has won more than 90 per cent of the disputes it has taken to Geneva, though it has lost an almost equal share of the ones filed against it. While it has been frustrated by the institution’s consensual decision-making process, which requires agreement by all 164 members for anything to happen, it has also had a rare ability to shape the debate at the WTO as its dominant member.

But those facts matter little to an administration that has taken Mr Trump’s election — on the back of an anti-immigrant and anti-trade campaign that drew him enough Rust Belt votes to squeak into office — as an excuse to pursue America’s grievances.

The assault on the WTO, to be fair, is in its early stages and on the ground in Geneva has taken a technocratic form. The US is now blocking appointments for two vacancies on the seven-strong appellate body that ultimately rules in trade disputes, which could kneecap the global trade referee.

A third vacancy looms in December and a fourth in September 2018, which will leave just three adjudicators in place, from China, India and the US.

A custom of ensuring that the three-person panels that hear appeals do not include anyone from countries involved would make it difficult for the appellate body to rule in cases involving those three countries, effectively neutralising the appellate body.

Just what the US wants to see happen is unclear. But Robert Lighthizer, Mr Trump’s US trade representative, has long expressed his disdain for the WTO’s dispute resolution system.

The sheer scale of [China’s] co-ordinated efforts to develop their economy, to subsidise, to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented

In the 1990s he helped his political mentor, former Republican presidential candidate Bob Dole, push for the creation of a US commission to review WTO decisions that the US lost. One of his ideas would have required the US to consider leaving the body should it wrongfully, in US eyes, lose three WTO rulings in a five-year period.

In a recent speech, Mr Lighthizer spoke wistfully of the Gatt’s old non-binding dispute resolution system. He also repeated a longstanding US complaint that the WTO’s appellate body had engaged in judicial over-reach and begun to make law rather than simply interpret it.

“The United States sees numerous examples where the dispute-settlement process over the years has really diminished what we bargained for or imposed obligations that we do not believe we agreed to,” he said.

Mr Lighthizer’s criticism of the WTO and the system are broader still. He is now the leading proponent of the increasingly popular view in Washington that the WTO has failed to rein in China, permitting Beijing to game the international trading system in support of its economic rise.

“The sheer scale of [China’s] co-ordinated efforts to develop their economy, to subsidise, to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented,” Mr Lighthizer said. “The WTO and its predecessor, the [Gatt], were not designed to successfully manage mercantilism on this scale.”

The Trump administration’s assault on the WTO may be nascent, but it has already drawn concern from defenders of the multilateral system both inside and outside the US.

EU trade commissioner Cecilia Malmström warned the US stance on the WTO’s dispute settlement body risked “killing the WTO from inside” in a recent Financial Times interview. Days before, Roberto Azevêdo, the WTO’s director-general, issued a similarly gloomy warning. “If we ­compromise this pillar, we will be ­compromising the system as a whole. There is no doubt about that,” he told the FT.

Bill Brock, who as Reagan’s US trade representative served as Mr Lighthizer’s boss, has a dim view of his former deputy’s assault on a system that was born in the wake of the second world war following the protectionism that exacerbated the Great Depression.

“We’d seen what [the Smoot Hawley tariff act of 1930] and a tariff war started by the United States could do to destroy the world economy and put us into a 10-year depression that was impossible to recover from without having to go to war,” Mr Brock says. “The insanity of that left a pretty big impression on us.”

Born in 1995, the WTO created a binding arbiter for trade disputes. “We very much needed that because it was just too easy to get into a tit-for-tat. You hit me with a tariff, I hit you with a bigger one and back and forth,” says Mr Brock. “It was simply a formula for chaos.”

Yet the US is also not alone in expressing concerns about WTO dysfunction.

Since the 2008 collapse of negotiations in the so-called Doha Round the organisation has struggled to innovate and remain relevant. Importantly, the WTO is only just beginning to tackle the issues raised by digital trade and ecommerce.

Mr Azevêdo concedes that “the global system has been and will remain a work in progress,” as he told the Council on Foreign Relations in Washington recently. But the Brazilian also adds: “I think it represents the world’s best efforts to keep economic tensions at bay.”

If Mr Azevêdo and others cannot convince Donald Trump to buy into that idea, the Gatt’s next major birthday may indeed be marked with a wake.