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Wednesday, January 02, 2019

Why the World Trade Organisation offers no solutions

There is a very useful article in today's Times from Danny Finkelstein explaining why the World Trade Organisation (or WTO as everybody refers to it) offers no solution to the problems Brexiteers argue exist with the European Union.

Finkelstein starts by outlining a brief history of the WTO, and in particular, how the US under Trump remains hostile to the body. He says that in 1948, 53 countries signed the Havana Charter which envisaged the creation of an International Trade Organisation (ITO).

This body was to sit alongside the World Bank and the IMF, and would help to open up free trade. It would drive reforms of global tariffs, regulations, employment standards and economic development and adjudicate on domestic decisions in these areas.

However, the ITO was doomed. American politicians, suspicious of the powers it would have over them, rejected the plan, and the other signatories followed suit. Instead, for almost half a century, they used what was supposed to be a temporary arrangement: the General Agreement on Tariffs and Trade. It wasn’t until 1995 that the WTO was finally established.

He says that the WTO is weaker and less ambitious than the ITO was intended to be, but that doesn’t mean it has been any less controversial. It makes rules for global trade and its appellate body makes binding judgments in disputes. So of course it is controversial:

Its meetings have produced riots so violent that they paralysed decision making. Much of this was caused by protests against the perceived failure of the organisation to take labour and environmental standards seriously enough.

But the greater danger to its existence now comes from those who believe the WTO is overweening and failing to protect the domestic interests of its members. And in the vanguard is the Trump administration.

The US trade representative Robert Lighthizer has become one of Washington’s most powerful figures. His signature policy is to squeeze the WTO as part of a trade war with China. Lighthizer’s view, and the president’s, is that the WTO is biased against the US. He has long regarded its binding judgments as anti-democratic and some of the appellate body’s recent pro-China trade rulings have deepened his feeling that it has grown too big for its boots.

So the US is simply vetoing new appointments to the body, which is now down to three judges, the minimum needed to constitute a judging panel. It would not be quorate if there was a further dispute between China and the US, as judges would have to recuse themselves. And by the end of the year two of the current body finish their term. Unless the US removes its veto, the WTO will not be able to rule on its own rules. Beyond that the president has threatened that America might withdraw from the WTO. Something that proved the death sentence for its predecessor.

This is obviously of great concern to us, as we contemplate having to rely on WTO rules if we leave the EU without a deal this year. But there is a broader point. The WTO row shows that all the ingredients of our Brexit dispute will persist whatever happens.

Trading rules restrict the ability of countries to do what they want. That, after all, is their entire point. They stop nations engaging in a destructive competition to erect barriers against other nations.

Jeremy Corbyn provides the perfect example when he complains about the way the EU prevents countries from taking steps to promote domestic industry, so-called state aid. But the reason for keeping such rules in place is simple. State aid is like standing up in a crowd in order to get a better view. It makes sense for you in the few seconds before everyone stands up so they can carry on seeing. In the end, everyone is standing but no one has a better view.

So it makes sense to have an international agreement that prevents the sort of unilateral state aid that distorts competition. But that creates a problem: who makes these rules and who judges them? The judges have to be neutral, and the international bodies they represent are bound to seem remote from voters. So a democratic deficit develops.

In other words, not only does the WTO have the same weaknesses as the European free trade area, but it is being sabotaged by the US under Trump, to the extent that by the time we come to rely on it, the WTO could be completely emasculated. Finkelstein's conclusion is worth reflecting on:

At the extremes, there are three choices. First, to ignore democracy because it is just too hard to govern global trade democratically. Second, to ignore social policy, and have lots of free trade with labour standards decided at national level so the voters have control. Or third, to dispense with globalisation despite its economic advantages.

None of these is desirable or even practical. So you have to compromise. Lose a bit of democratic control, tolerate global trading that has some frictions, share control of social policy between national and international bodies.

It is easy to criticise any body set up to manage international trade, but the only way we can work is through compromise and, given the many disadvantages of the WTO, Trump's policy of dismantling it, and the many advantages of staying within the EU, where we conduct the majority of our trade, the only logical thing to do is to abandon Brexit altogether.
These articles exposing the myth of easy transition "to WTO terms" are all very well, but they appear only in top people's journals and in Remain-leaning blogs and Facebook groups. There need to be popular versions in the Daily Mail and the Mirror (clearly one cannot hope for the Sun to betray the Brexit cause).
The WTO isn't forced to accept us as members and since we are not members in our own right but only through the EU, this is a real issue. At least one country has threatened to veto a UK application.
Furthermore, the WTO operates through membership of common interest groups. If the UK government and the Brexiteers are serious about WTO, then they should have been seeking to make friends and influence people so that we have an interest group to join. Without that the UK, even if it is admitted to the WTO, would not be able to make deals because it would be on its own.
What staggers me is that neither the government, nor the leading Brexiteers understand any of this. It can be found out by a fairly modest amount of desk research. So to put no finer point upon it, the UK will be truly up the creek without a paddle if the preferred alternative is WTO rules as you have to be in the WTO and operating within its practices to have a cat in hells chance of getting any sort of trade deal at all.
So the result may be - as those with expertise on this subject have said many times - a standstill in UK trade for many years. That certainly wasn't promised by the Leave campaign!
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