Commentary

The WTO vs. the TPP

One of the reasons for the recent push for new trade initiatives such as the Trans Pacific Partnership (TPP) is a feeling that the WTO system is not working. At a recent event held at CSIS, Congressman Devin Nunes, the chairman of the Subcommittee on Trade for the House Ways and Means Committee, expressed that view as follows (subscription only):

From my perspective, the WTO is barely functional. It allows for a lot of bad actors, and a lot of lawyers to make a lot of money, and nothing ever happens. And so [the TPP] is so critical.

This view is probably not an uncommon one. But is it correct? It is worth looking at just what the WTO does, and how it compares to the TPP as a possible alternative trade agreement and organization.

The most important function of the WTO is probably its extensive rules constraining domestic protectionism. These rules take a number of forms.

First, all 159 WTO members have made promises not to charge tariffs above rates that are set out in legally binding schedules. If the tariffs are higher than agreed, the WTO’s highly effective dispute settlement mechanism can — and has been — invoked.

Second, WTO rules also discipline special tariffs imposed against dumping and subsidies. Through the WTO, these tariffs are subject to detailed rules to prevent them from being abused, which they frequently have been over the years.

Third, WTO rules govern customs procedures, including valuation and classification issues, to prevent these procedures from being used as a disguised means of protection.

Fourth, WTO rules include general prohibitions on using domestic regulations and taxes for protectionist purposes. The WTO’s jurisprudence on these issues is widely respected, and WTO rulings have addressed a range of regulatory protectionism.

Fifth, WTO rules also put limits on subsidies, imposing constraints on the use of subsidies to give an advantage to domestic producers.

And sixth, WTO rules include a number of commitments to open up particular services markets to foreign competition, and as with trade in goods they prohibit the use of services regulation as a means of protectionism.

From the perspective of a free trader, there can be little doubt that the existing rules are important and valuable, and contribute greatly to constraining protectionist impulses.

In terms of negotiating new commitments, it is true that the WTO has struggled in recent years (and there is probably enough blame to go around here — no single country is responsible for the deadlock). Nonetheless, trade officials continue to press forward at the WTO, and the recent Trade Facilitation Agreement was a modest success. Important talks on various other issues are ongoing.

Let’s turn now to the TPP. Will the TPP prove to be a viable alternative to the WTO? On many of the issues noted above, the TPP is unlikely to do much. It will not address anti-dumping/countervailing duties or subsidies at all. And the WTO’s rules on regulatory protectionism are already working quite well, so it is difficult to imagine what the TPP would do in this regard.

The TPP does have the potential to go further than the WTO in terms of tariff reductions and services liberalization. Of course, such commitments would be preferential, only given to a handful of trading partners, and thus would not be truly free trade. There are significant economic benefits to having free trade cover as many countries as possible, including the avoidance of complex and trade-restricting rules of origin.

The TPP would also go beyond the WTO in areas such as intellectual property protection, foreign investment protection, and environmental and labor regulation. But further is not necessarily better. These items have been added to the trade agenda to drum up new support. However, they have also stirred up a good deal of new opposition, and made trade negotiations more complex and difficult.

In a comparison between the WTO and the TPP, it seems clear that the WTO continues to function well as an enforcer of existing rules. The U.S. has brought and won important cases against, inter alia, Chinese export restrictions and European tariffs on IT products; and claims against discriminatory U.S. regulations have been brought successfully by our trading partners, which is a win for American consumers. Even though its negotiating process has struggled recently, it still plays an important role in trade liberalization as an administrator of the rules.

By contrast, the TPP is still speculative (we are not very close to an agreement at this point), it has many significant gaps in coverage, and it is expanding into new areas that are problematic.

The “lawyers and bad actors” that Nunes cites will always be with us. That’s just the nature of things these days. On balance, though, the WTO has kept the bad actors in check, and done so with far fewer lawyers, making less money, than many areas of public policy (imagine how many lawyers there will be if the TPP includes an investor-state dispute settlement process). It deserves praise for this, and those pushing for the TPP may eventually realize that the WTO is functioning pretty well after all.

Simon Lester is a trade-policy analyst at the Cato Institute.