Who Needs the WTO?

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by James M. Sheehan

Recently, the Cato Institute‘s Jerry Taylor has taken to publicly criticizing libertarian opponents of the WTO and Nafta. I think his defense of federally funded reciprocal trade negotiations misunderstands the case against these treaties. This memo attempts to clarify some of the issues he raises, and to set the record straight.

TRADE LIBERALIZATION: Taylor argues that there is no “natural upwards trajectory” towards freer trade, and thus it requires the aid of bureaucratic talks. This was not true in the period before Nafta when countries had to compete against each other. There was a great deal of unilateral trade liberalization in places like Mexico, Argentina, and Chile in those days. It came about as a result of frustration with the continued failures of planning. Paul Craig Roberts details this process in his book about trade liberalization in Latin America. The only thing that interrupted this process was Nafta, which emboldened Mexico to raise barriers against Asian imports and to suspend its successful trade liberalization under way previously. Mexico has since imported American antidumping laws, which it uses as a substitute for tariffs.

Of course, there is no guarantee that every nation will liberalize just because their competitors are doing it, but at least there is an incentive to do so. In trade negotiations, bureaucrats have an incentive to maintain trade barriers as bargaining chips for the negotiating process. This is why the GATT/WTO have been at it for over five decades and we still do not have free trade. It is not in the bureaucrats’ interest to adopt free trade, because they would have nothing left to do. They would prefer a perpetual series of negotiations where they can broker power between various governments and interest groups.

DOES THE WTO OPERATE BY CONSENSUS?: Taylor keeps repeating this claim, which is broadly true. However, unlike the GATT, the WTO can be amended by a three fourths majority. In the Seattle conference, there was great frustration with the consensus rule, and efforts were made to evade it. The Third World is getting suspicious of these maneuvers, but in UN, World Bank and IMF contexts, the Americans usually find ways to co-opt certain key developing countries. Watch for this tactic at the WTO.

Another way to end run the consensus rule is for Appellate Body to issue its own rulings. In the shrimp-turtle case, the AB decided to accept NGO amicus brief submissions, though the treaty does not provide for this. India and several other LDCs complained that this ruling amended the WTO agreement without a vote of the members. Of course, they were right. But there was nothing they could do about it.

DIFFERENCES BETWEEN GATT AND WTO: Parties can no longer block hearings, but they also cannot veto the retaliatory sanctions. These sanctions are not “carefully circumscribed,” as Taylor describes them. The WTO established the new practice of cross-retaliation, in which industries not part of the dispute can become entangled. This happened in the banana case, when the US announced which innocent bystander industries in Europe it would target. GATT sanctions, which could be vetoed, did not allow for cross-retaliation.

GATT rulings were considered advisory, whereas WTO rulings are binding, even on sub-federal governments. While few sanctions have been imposed under WTO, few were imposed under GATT. So, WTO is not a noticeable improvement. Violating the WTO has a different meaning than defying the GATT. WTO-illegal laws actually violate international law, while GATT-inconsistent laws were just “inconsistent” with a non-binding convention. The penalty for violating the WTO is not huge for a superpower, but for a Third World country it can be devastating.

NAFTA’s TRACK RECORD: Taylor accuses Nafta opponents of having a bad track record on that treaty. It seems to be holding us to a standard whereby worst case scenarios have to be played out in order for the treaty to be a net negative. This is a time-dependent value judgment. It depends also on whether the Nafta you get is worth the risk of bad things happening from the side agreements, which Cato has pre-judged.

We know from experience that the green establishment will resort to side agreement mischief when they think the time is right. There are bad parts of the Clean Air Act which did not get utilized until very recently, and some parts could be used to go after C02 someday. We can never know when or if the environmental establishment will attempt to use these provisions, but when they do we usually lose. This observation is not a prediction of the future, but a judgment about how badly designed political institutions tend to operate. We are never safe so long as the Nafta side accords remain on the books — a situation most libertarians would find unacceptable but which the Cato Institute maintains is part of the bargain we must accept for Nafta.

Why have the side agreements not produced much mischief yet? (Visit their web page to see the evil being perpetrated — i.e. regional action plans against chemicals.) First, there has been no regulatory rollback to prevent in the US. Newt Gingrich saw to that. Second, Mexico has not attempted to deregulate its market, which the side agreements are designed to sanction. Mexico has not openly defied the US on environmental policy. In tuna-dolphin, Mexico caved in to US demands and applied the US regulations internally. It received all sorts of Nafta “technical assistance” to do so. Thus, Nafta thwarted our best hope of stopping eco-imperialism: the tuna dolphin complaint at GATT.

Even without the Nafta environmental commission, a good case can be made against the treaty: trade diversion, rules of origin, offsetting tax increases, the peso bailout, the loopholes which allowed Clinton to suspend trucking deregulation, the Nadbank, etc. Taylor is ignoring these other substantial problems with the agreement. To pretend as if the environmental side agreements make or break the treaty is really a misleading way to frame the debate.

Recall also that Cato predicted Nafta would lead to a glorious era of classical liberal reforms under that great leader, Carlos Salinas, who they were touting to head the WTO. It turned out that he was a lying, peso devaluing, election-stealing murderer in cahoots with the drug mafia. Now he is living in exile, afraid to return for fear of being thrown in prison with his hatchet-man brother Raul. If bad predictions are the measure of Nafta, this one takes the cake.

SHRIMP-TURTLE WAS DECIDED CORRECTLY: Taylor calls the WTO shrimp-turtle decision “a salutary one.” However, GATT had previously that process and production methods in the country of origin could not be used as an excuse to raise trade barriers. They are extra-territorial, and only powerful countries can enforce their rules abroad using trade coercion. Taylor makes the incredible claim that countries ought to be able to enact trade policies for a “defensible environmental purpose.” But this simply disguises trade protectionism behind phony environmental purposes. The traditional libertarian argument is that trade restriction is never a proper tool of environmental policy. The people of Thailand have a sovereign right to determine their own policy with respect to sea turtles, without trade coercion from a foreign power. The first shrimp turtle decision, which the Appeals Body overruled, would have re-affirmed Thailand’s sovereignty.

Cato’s Taylor claims that the WTO decision resulted in better US trade policy. To comply with the WTO, however, the shrimp embargo was modified so that the regulation could be applied to all shrimp instead of just shrimp from three countries. So this was not a favorable outcome, especially compared to the overruled first panel. Taylor reverts back to protectionist logic, arguing that if the WTO allows the US to embargo shrimp then it has protected our sovereignty. But the WTO’s power to define exceptions to general treaty obligations is what makes it so dangerous. The exceptions offer unfair advantages to politically powerful countries.

MEAs: “Under the GATT,” Taylor claims, “nations that wished to adopt trade policies consistent with an MEA [multilateral environmental agreement] were free to do so because it could unilaterally block any GATT hearing on the matter.” This is inaccurate. The US Trade Representative was deathly afraid that an MEA would be challenged, because a US veto would be a tacit admission that MEAs violate GATT principles. Any use of the veto would have stirred deep resentment in the Third World, as did the Mexico tuna dolphin case. Repeated use of the veto would have collapsed the entire edifice of the GATT, provoking many countries to ignore GATT rulings. USTR preferred to sweep this issue under the rug.

The environmental crowd too, would not tolerate de facto violation of GATT by using the veto. They insisted on GATT legitimacy, even if they had to take it to the UN for a separate ruling. They were banking on the fact that later-in-time MEAs would supersede the GATT and the 1995 WTO.

In terms of amending GATT to accommodate MEAs, that required unanimity. WTO requires a lower threshold of two-thirds or three-fourths depending on the type of amendment.

SOVEREIGNTY: Early in ’99, WTO overruled foreign sales corporations, which are tax shelters for exporters. This shows that the power to overturn national laws can also be used to raise taxes. Taylor accuses those who fear such outcomes of “paranoia.” Check out this analysis by David Sanger in the December 4, 1999 New York Times:

Questions of labor rights and safety go to the core of any country’s political system, Tarullo said. “The real danger,” he warned, is that the global trading system is becoming “identified with restricting the authority of governments to protect health, workers, environment and consumers.” Or, he might have added, requiring them to impose such regulations.

I guess the New York Times is guilty of paranoia too! Again, the question is not how many “light years” away this is from happening. The question is, should libertarians endorse unaccountable institutions where such outcomes are possible? I would much rather take my chances with the bad institutions we have already, which are closer to the people.

Taylor claims the Greens are “light years away” from capturing the WTO. This comment really betrays a great deal of ignorance about the Basel Convention, Biosafety, and the other treaties which are on our doorstep right now.

HAS THE WTO BEEN A NET PLUS?: Taylor correctly claims that the WTO has had positive influence in several areas, but you must look at the whole picture. Trade related intellectual property rights globalize US patent monopolies. Antidumping, green subsidies, and shrimp-turtle were all bad for free trade. As to the claim that WTO repealed Section 301, a recent WTO ruling in the EU banana case argues to the contrary.

There are many federal agencies that did some good things — OTA, Bureau of Mines, Republican Study Committee, etc. However, it is wrong and ultimately counterproductive to tax people for “good purposes” like promoting trade, even if it “has but 500 employees and a $80 million budget.” Corporations are quite capable of promoting trade themselves, with their own money. Perhaps they could form private voluntary consortia to negotiate with foreign governments. They would do a much better job than the Barshefskys and Daleys of the world!

Cato’s Jerry Taylor argues it would be foolhardy to withdraw from the WTO. But why not? Why not get out of the WTO, dismantle USTR, the International Trade Commission, and the Department of Commerce, and return the tax revenue to the people who rightfully own it? Have that lazy House Majority Leader Dick Armey call a meeting of the Business Roundtable CEOs, and tell them they can no longer depend on the federal government to pry open foreign markets on their behalf. Recommend that they fire their multimillion-dollar trade lobbyists, and use those considerable resources to better serve consumers.

This trade policy stance would endear the Republican Congress to every taxpayer in America. It appears that we can’t trust the Cato Institute to recommend it.

January 1, 2000

Jim Sheehan is an international trade analyst.

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