May 5, 2020 9:35AM

Senator Hawley’s Many Misunderstandings of the WTO

Senator Josh Hawley has a NY Times op‐​ed today entitled “The W.T.O. Should Be Abolished.” Debates about the scope and nature of the World Trade Organization (WTO) and the trading system in general are important, but this op‐​ed gets so many facts wrong that it cannot serve as the basis for a useful discussion. In this blog post, I’ll go through a few of them. If the early response on Twitter is any indication, plenty of other pro‐​trade folks will be doing a similar exercise, so keep an eye out for other commentary on this.

Hawley starts off with this:

The W.T.O. was created in 1995 as the crown jewel of a new global market, a system designed by ambitious Western policymakers after the fall of the Soviet Union. Their aim was to create one giant, liberal international economy to support a new liberal international order.

The reformers wanted all the world to follow the same economic rules, so that capital, products, and people could move easily across national boundaries. Nation‐​states themselves would become less important in setting economic policy and new, multilateral institutions, like the W.T.O., would take on the role of managing the global economy.

One crucial point missing here is that the WTO carried over the previous system that existed under the General Agreement on Tariffs and Trade (GATT), which was created after World War II. The GATT covered trade in goods, and the WTO expanded that system to cover trade in services and intellectual property protection. The WTO also strengthened the dispute settlement system a bit and created a better monitoring system for evaluating governments’ trade policies.

But what the WTO certainly does not do is “manage the global economy.” Under both the GATT and the WTO, nation‐​states are in charge of “setting economic policy.” Thus, Hawley’s expressed concerns are moot, and he could have stopped writing at this point.

The way I like to think of the main function of the GATT and then the WTO is as mutually agreed constraints on protectionism. Governments recognize their weakness in giving in to protectionist interest groups, and they all agree, through the GATT and WTO, to limit their protectionism. Not to eliminate it (which would be nice!), because protectionism is still allowed. There are plenty of famous examples, such as the 25% U.S. tariff on imported trucks.

Thus, nation‐​states are still clearly in charge of their economic policy, as there is flexibility for governments to act within the rules and protect their domestic industries if they choose to do so. But through their actions in the WTO, nation‐​states have chosen to moderate their protectionism. It’s a small, sovereign step towards trade liberalization.

Hawley seems to want to downplay the continuity between the GATT and the WTO. He says: “[The WTO] was a bold vision, and a major departure. The economic system it replaced had been created by America and its allies at the close of the Second World War and pursued more modest aims.” The reality is that the GATT and all of its various agreements were carried over into the WTO. The WTO is not a “major departure.” Rather, it was a modest expansion, and it’s worth noting that key aspects of this expansion — adding trade in services and IP protection — were pushed by the United States.

Hawley then explains his understanding of the WTO as follows:

Its mandate was to promote free trade, but the organization instead allowed some nations to maintain trade barriers and protectionist workarounds, like China, while preventing others from defending themselves, like the United States. Foreign agriculture won concession after concession, while American farmers struggled to get fair access to markets. Meanwhile, the W.T.O. required American workers to compete against Chinese forced labor but did next to nothing to stop Chinese theft of American intellectual property and products.

For what it’s worth, the WTO Agreement does not refer to “free trade,” but rather “entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations.” But he is right that “the organization instead allowed some nations to maintain trade barriers and protectionist workarounds.” What he gets wrong is that WTO rules allow all nations to do this. Remember the 25% U.S. truck tariffs I mentioned earlier? Again, those are permitted.

Now, there is a real issue with China and other nations who are less wealthy taking on fewer commitments, and an op‐​ed by Hawley arguing that China should do more as it has gotten wealthier (like this one from me and one of my colleagues) would be useful. But pulling out of the WTO would be counterproductive for the goal of opening up the Chinese market. Chinese tariffs were higher before it joined the WTO, and if the U.S. pulls out of the WTO, U.S. producers would face higher tariffs on their exports to China than their competitors do.

Along the same lines, Hawley complains that “the W.T.O. … did next to nothing to stop Chinese theft of American intellectual property and products.” He has it backwards here. In fact, the GATT did next to nothing here, whereas the WTO, with its agreement on Trade‐​Related Aspects of Intellectual Property Rights, does a lot. If the U.S. pulls out of the WTO, it loses one of the key mechanisms to press China to improve its protection of these rights.

So what does Hawley want instead of the WTO? Here is his vague prescription:

The United States must seek new arrangements and new rules, in concert with other free nations, to restore America’s economic sovereignty and allow this country to practice again the capitalism that made it strong. History can be our guide. For nearly 50 years before the W.T.O.’s founding, the United States and its allies maintained a network of reciprocal trade that protected our national interests and the nation’s workers. We can do it again, for the 21st century. That means returning production to this country, securing our critical supply chains and encouraging domestic innovation and manufacturing. It means striking trade deals that are truly mutual and truly beneficial for America and walking away when they are not. It means building a new network of trusted friends and partners to resist Chinese economic imperialism.

As I mentioned above, “for nearly 50 years before the WTO’s founding,” we had the GATT. Does Hawley want to go back to that? If so, that means he loses the IP protection that he was concerned about. But he doesn’t mention the GATT by name, so it’s not really clear what his vision is here. And to the extent that he offers a vision, it is pretty cloudy. He talks about “returning production to this country,” but also mentions “building a new network of trusted friends and partners.” But you kind of have to pick one of these. You can’t really have both. If you adopt a trade policy that forces production back to the United States, you will aggravate your friends and partners (and also raise prices for U.S. consumers). In doing so, you will lose their trust.

Now, he doesn’t say this, but I can imagine a policy that fulfills his goals. Basically, the United States would negotiate trade liberalizing agreements with our European and Asian friends, building up trust with allies in both places and putting China on the defensive a bit. Does that strategy sound familiar? It’s pretty close to what President Obama did with the Transatlantic Trade and Investment Partnership and the Trans‐​Pacific Partnership. It’s actually not a bad strategy, although it obviously needs some tweaking to make it work this time. But of course, Hawley doesn’t want to seem like he is endorsing an Obama initiative, so he has to obfuscate a bit here.

Ultimately, you are not going to learn much about the WTO, its actual problems, or its future by reading the Hawley op‐​ed. But it will probably generate a number of useful tweets, blog posts, and op‐​eds explaining the real issues. I hope this blog post was a start, but keep an eye out for all the others.