Since the beginning of 2018, the administration of U.S. President Donald Trump has waged an aggressive war on the global trading system. Although much of the media coverage has focused on the ongoing U.S.-Chinese trade conflict and the administration’s efforts to replace the North American Free Trade Agreement, a subtler development could prove more consequential: the United States’ reckless decision to disempower the World Trade Organization’s Appellate Body. This move could mark a real turning point in U.S. global economic leadership.
To understand why, go back to the early 1930s. As the world slipped into recession, Republicans in Congress passed and President Herbert Hoover signed the Tariff Act of 1930, colloquially known as Smoot-Hawley, which raised tariffs on about 900 products. Because Smoot-Hawley coincided with the severe deflation brought on by the early stages of the Great Depression, the average U.S. tariff on goods imported from other countries increased by about 45 percent between 1929 and 1932.
Smoot-Hawley burdened America’s domestic consumers with higher prices and triggered predictable retaliation from trading partners. Although the act did not cause the Depression, it certainly deepened and prolonged it while adding fuel to the fire of nationalism raging around the globe.
By 1934, it became apparent that the Smoot-Hawley tariffs were an economic and foreign-policy disaster, and policymakers began working to atone for America’s protectionist sins. In many ways, their efforts marked the beginning of the 80-plus-year U.S.-led international economic order.
Starting with the Reciprocal Trade Agreements Act of 1934, the trajectory of U.S. trade policy was radically overhauled. These efforts were largely driven by President Franklin D. Roosevelt’s first secretary of state, Cordell Hull. As a firm believer in the economic and foreign-policy benefits of trade liberalization, Hull was a fierce critic of Smoot-Hawley. Throughout the latter part of the 1930s, he pushed the Roosevelt administration to use the Reciprocal Trade Agreements Act to enter into freer trade agreements with several countries and eventually brought the average tariff rate down to about its pre-Smoot-Hawley level—with the added bonus of having other countries reduce their tariffs on U.S. exports in turn.
As World War II engulfed Europe in the late 1930s, the United States’ trade liberalization efforts were on put on hold. As the war raged on, however, the State Department began working on ambitious plans to help rebuild Europe following the war. A vital component of the plan involved rebuilding and expanding the global trading system.
When the war did end in 1945, the United States was the dominant global military and economic power. American policymakers leveraged their newfound position to create a postwar order that reflected the United States’ priorities: expanding market access for American exporters, rebuilding war-torn Europe, and promoting trade as a bulwark for future peace. Through a tumultuous round of negotiations in 1947, 23 mostly Allied countries formed the General Agreement on Tariffs and Trade (GATT), a vital component of the U.S.-led postwar order, which went into effect Jan. 1, 1948.
The GATT reduced tariffs and created basic trade rules to guide international commercial policy.
Global trade volumes exploded, and the related economic boom helped rebuild Europe and Japan. The United States led subsequent negotiating rounds to further reduce tariffs and nontariff barriers.
Although the GATT worked relatively well for the first few decades, by the mid-1970s it was apparent the system had a number of flaws, most notably the lack of a binding dispute settlement mechanism to hold countries accountable for violating the agreement. As things stood, GATT members could block the formation of arbitration panels and the adoption of such panels’ decisions, allowing violators to skirt punishment.
The United States took advantage of that flaw and began a policy of what the Columbia University trade economist Jagdish Bhagwati dubbed “aggressive unilateralism.” Throughout the 1980s and into the early 1990s, the United States would impose unilateral tariffs, ostensibly in order to claw open foreign markets. This approach had a limited record of success, but it angered a number of trading partners, including the Europeans.
As tensions deepened, GATT members began negotiating the Uruguay Round in 1986 at the behest of the United States. Talks were slow, but there was eventually a breakthrough with the so-called grand bargain. This deal converted the GATT into the World Trade Organization. The United States agreed to stop its aggressive unilateral approach, and the Europeans agreed to a binding dispute settlement. All alleged violations of rules would be settled within the WTO’s new system.
Although not perfect, the dispute settlement system—which includes the Appellate Body, the highest court of international trade—has worked well for nearly 25 years. Trade conflicts rarely spread like wildfire the way they did before the advent of the rules-based trading system. And despite the sitting U.S. president’s claims to the contrary, the United States wins about 85 percent of the cases it brings to the WTO. It also wins a greater percentage of the cases brought against it than do most other member nations. The system is a vital tool the United States has successfully used to target foreign protectionism and to ensure that WTO members abide by their commitments.
So while China’s mercantilist trade policies may pose problems for the long-term viability of the rules-based system, and the failure to significantly revise trade rules since the completion of the Uruguay Round in 1993 has led observers to question the value of the WTO as a forum for economic liberalization, the more immediate threat to the global system is the Trump administration’s war of attrition on the WTO’s Appellate Body. Citing a litany of disagreements with the Appellate Body—some legitimate, and some not—the Trump administration has continued to block nominees to the Geneva-based tribunal.
With just one member as of mid-December 2019, the forum is now unable to form the quorum necessary to hear disputes. Without a functioning Appellate Body, countries that lose their cases at the panel level of the dispute mechanism can effectively block the decision by filing an appeal, and the case will languish. In other words, the world could be heading back to the days of the broken GATT enforcement system.
To be clear, the WTO will remain intact as a system of rules that will largely be adhered to, as well as a forum to negotiate new rules. But the dispute settlement system, the “crown jewel ” of the WTO, has been damaged—perhaps irrevocably so.
The United States’ outsized influence in the late 1940s and again in the early 1990s was indispensable to the success of building the multilateral system. The United States created the status quo, and the imperative to fix it reflects the United States’ accumulated responsibility.
All in all, the United States is walking a lonely path into worse economic circumstances. If Washington decides to go it alone, it will tarnish its reputation on the global stage, hurt its ability to shape the productive rules-based system to its own specifications, abandon a system from which Americans benefit, and, above all, abdicate its responsibility to lead an institution that it took enormous effort and foresight to create.
Others will weigh in on the economic and legal ramifications of the Trump administration’s policy choices, but this development is an ugly stain on U.S. international economic leadership.
- “crown jewel”: https://crsreports.congress.gov/product/pdf/LSB/LSB10385