Freedom to Trade
WTO's Promising Anniversary

by Brink Lindsey

The World Trade Organization, successor to the General Agreement on Tariffs and Trade, recently marked its second anniversary. On balance, friends of free trade should regard the WTO as an important new ally. The jury is still out, however, on whether it will prove an effective institution over the long run.

To begin with, dispute settlement panels now reach decisions on each complaint rather than having the process short-circuited, as was often the case under GATT. The WTO still cannot force a country to change policies or laws that violate its rules, but its rulings highlight practices that rob consumers of the freedom to trade.

The effects of the WTO’s dispute settlement procedures on U.S. policy have been salutary. A pollution control regulation that discriminated against Venezuelan oil imports was properly found to violate WTO rules, and efforts by the U.S. Commerce Department to undermine the Uruguay Round’s ten-year phaseout of textile quotas were also foiled. And the United States, fearing a WTO complaint, backed down from its threat to impose WTO-illegal Section 301 sanctions in the 1995 auto dispute with Japan, and President Clinton recently suspended operation of the inane Helms-Burton law under threat of a WTO challenge by the European Union.

Outside of dispute settlement, the WTO’s record has been mixed. On the bright side, a new agreement on telecommunications will promote competition in an industry traditionally dominated by monopolies. Further, a deal is in the works to eliminate all tariffs on information technology products. These deals show that it is possible to achieve liberalization on a sector-specific basis and avoid the unmanageable, glacial pace of negotiating "rounds" covering all sectors at once. Unfortunately, other sector-specific negotiations on shipping and financial services have stalled.

Steps taken in three new areas are best classified as the good, the bad, and the ugly.

First, the good: an expanded WTO role in investment. The WTO now bans investment restrictions that directly affect trade in goods, such as domestic content or export requirements. But most interference with free capital flows is still permissible. The United States has an enormous stake in changing this state of affairs.

The WTO’s flirtation with competition policy must be written off as bad, though many proponents have their hearts in the right place. Specifically, those proponents hope that talks will target the nakedly anticompetitive impact of national antidumping laws. However, the protectionist interests that favor those laws are too entrenched to be dislodged by indirect assault. Eventually, antidumping laws will need to be attacked head-on, without the distractions and diversions of attempts to harmonize competition policy.

Also, talks on competition policy are a solution in search of a problem: there is really no evidence that private anticompetitive conduct is a serious barrier to trade. Indeed, harmonization could end up causing significant harm if overly restrictive standards are used. All told, the best competition policy is simply continued trade liberalization.

Finally, attempts to mix trade and labor policy are just plain ugly. Enforcing international labor standards with trade sanctions will not improve working conditions in poor countries, rather, it will attack those countries at the heart of their comparative advantage. Keeping the WTO away from this swamp will take continued vigilance.

In the end the effectiveness of the WTO will hinge on the commitment of the major trading countries. Unfortunately, there is little reason to be optimistic about the Clinton administration’s ability to provide the requisite leadership. To his credit, President Clinton concluded the Uruguay Round and pushed it through Congress, but since then trade policy has been little more than a cheap political gimmick. Ultimately, the United States cannot provide strong leadership toward freer world trade except by example, and that means getting serious about our own trade barriers. Don’t hold your breath.

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