A new Executive Order on Trade Agreement Violations and Abuses is coming soon (I haven't seen the official document yet). An explanation by Commerce Secretary Wilbur Ross at a press briefing is here. I have some thoughts on what Ross said. Here's how he started off:
SECRETARY ROSS: Thank you. It’s me again. (Laughter.) I notice the audience is dwindling. I hope that's due to Friday rather than to the speaker. But in any event, this is the executive order addressing specifically violations and abuses under existing trade agreements. So that's what differentiates it from some of the earlier ones that we had. This is focusing more narrowly on the agreements themselves.
Now, not all of the free-trade agreements that we have result in deficits. But some of the larger ones also result in some of the larger deficits. In all trade relations with companies, other than free-trade companies, are governed by the WTO, the World Trade Organization. So that's really the grandparent of all trade arrangements that we have.
And as far as I can tell there has never been a systematic evaluation of what has been the impact of the WTO agreements on the country as an integrated whole. So it’s trying to find violations and abuses. It calls for a report within 180 days. But this particular report, it calls for not just outlining the problem or problems, but also proposing the solutions -- alternative solutions to them.
So that's the guts of it. Now, why? What is it really all about? I think everyone here is generally aware that we do have a big trade deficit. It’s some $700 billion -- not counting our trade surplus in services, just counting the trade deficit in goods; and it’s $500 billion, counting the trade deficit in -- after netting out the benefits of the exported services. So that's the general parameters.
This order involves the Department of Commerce and the U.S. Trade Rep jointly to conduct that review.
And so maybe it would be useful to you to hear where are some of the big deficits so that you can put it into perspective. China alone is the number-one deficit. It’s $347 billion. This is on the goods part alone. So the base is $700 billion. And China is 47.2 percent of that.
Japan is next at $68.9 billion, which is 9.4 percent.
Germany, $64.9 billion -- 8.8 percent. I might point out that Germany doesn't negotiate separately trade agreements. It negotiates them as part of the European Commission.
Mexico, which is obviously part of NAFTA, $63.2 billion, or 8.6 percent.
Ireland, $35.9 billion, 4.9 percent -- also part of European Commission.
Vietnam, $32 billion, 4.3 percent.
Italy, again, part of the EU, $28.5 billion, 3.9 percent.
South Korea, $27.7 billion. We do have a free-trade agreement with South Korea. And that's 3.8 percent of the problem.
Malaysia, $24.8 billion, 3.4 percent.
India, $24.3 billion, 3.3 percent.
So that's the top 10 of the agreements. But for the most part, as you can tell from that, the largest portion is with the countries that are really just covered by WTO rules, as opposed to countries that are covered by individual free-trade agreements.
What are some of the problems under WTO? Its 160-some-odd countries are participants in the WTO, and the vast majority of those are countries that export to us, and in most cases, export more than they buy from us.
Clearly, the Trump administration is very concerned with trade deficits for goods. Most economists think their emphasis on bilateral deficits, trade in goods (to the exclusion of services), and on trade deficits in general is misguided. But nevertheless, this is important to them. I'm not sure how a trade policy that focuses so heavily on trade deficits in this way can function, but we'll find out soon enough.
He then says:
The U.S. only has 20 free-trade agreement partners, and that’s a very small number. Those of you who have been at some of the earlier briefings know Mexico, for example, has more than twice as many free-trade agreements by number as we do, and has them with the most important areas, such as the European Commission, which we do not have.
So it’s anomalous that the U.S. with its huge trade deficit has relatively fewer free-trade agreements than do much smaller countries like Mexico. And I think that points out one of the issues with our current relationship with the World Trade, namely Mexico and others have had very big external tariffs on many, many goods. U.S. is the least protectionist country. Many goods come in totally free, and others have little, tiny tariffs, like 2.5 percent. Countries like Mexico frequently have 15, 20 percent, even more than 20 percent tariffs.
The implication of that is, when they negotiate a free-trade agreement with another country, they can give something important to that country by way of tariff relief. If we, for example, only have a 2.5 percent tariff on autos, and no tariff on steel, what is it that the other country gains by making a free-trade agreement with us?
So in a weird way, the fact that we have been so free-trade oriented historically actually impedes our ability to make new free-trade agreements. And that’s something that I don’t think is very well understood, so I think it would actually do your readers a very good service to point out to them that the fact that we have made so many unilateral concessions impedes having more free-trade agreements with other countries. It’s an oddity of the way that we’ve behaved in the past.
Is the U.S. really the least protectionist country? I would have though it was one of the least protectionist countries, but not the least protectionist. Also, I'm not sure it is less protectionist than other developed countries by all that much. Anyway, it would be interesting for someone to study this and come up with a good ranking of countries in this regard.
It's an interesting idea that our lower tariffs might hurt us in getting other countries to lower their tariffs as part of a trade negotiation. That doesn't seem to have been the case with NAFTA. I wonder, though, whether another factor here is all the demands the U.S. makes on other countries in areas unrelated to protectionism. If we did not push so hard on labor, the environment, intellectual property and investment protection, could we have convinced other countries to lower their tariffs more?
Here's Ross again:
The other thing about it, the President has talked a lot about reciprocal concept; namely if we have a country that has big trade barriers against us, we should logically have similar trade barriers against them. And if there’s a country that has relatively few barriers against us, we should have relatively few against them.
The only problem is, the World Trade Organization has what’s called a "most favored nation clause," meaning that of all the countries with whom we do not have a free-trade agreement, we must charge the same tariff on the same item to those -- each of those countries as we charge to the others. So that’s a significant impediment toward getting to anything like a reciprocal agreement.
This statement is puzzling, given GATT Article XXIV and GATS Article V, which allow countries to negotiate bilateral or regional trade agreements. Ross alludes to this when he says "all the countries with whom we do not have a free-trade agreement." What actions does he think MFN prohibits? If he means that we can't charge tariffs that match other countries' tariffs (e.g., the U.S. could charge 5% on Mexican imports, 10% on Brazilian imports, or whatever amount matches those countries' levels) outside the context of an FTA, I suppose that's true. But the WTO tariff levels themselves are negotiated: We agreed to all of these tariff levels. That's what led to the different tariff levels for different countries, not the MFN clause. And if we want the tariffs to match up (that is, U.S. tariffs should be at the same level as those of each trading partner), aren't FTAs the answer? NAFTA does a pretty good job of getting almost all U.S., Canadian and Mexican tariffs to zero. In other words, we all charge each other the same tariffs (with a couple exceptions). That's both trade liberalizing and reciprocal, which should make people from both camps happy.
More from Ross:
The second thing is the WTO doesn’t really deal very much with non-tariff trade barriers, and it doesn’t deal very effectively with intellectual property rights, and doesn’t deal very much effectively with the whole digital economy. So there are some real gaps within it.
In my view, the WTO deals with non-tariff trade barriers better than any other agreement. Think of all the GATT Article III, TBT, and SPS cases, for example. Have any other trade agreements been anywhere near as effective in addressing such barriers? Now, there is talk about going further in some agreements (the TTIP comes to mind), with some mutual recognition and other cooperation. But that's hard, and my impression was that it was the U.S. who was resisting this in the TTIP.
The WTO also does a lot with intellectual property rights, although not as much as some FTAs. As for the digital economy, the WTO does not do much; the TPP would have gone the furthest here. (What happened to the TPP again? Oh, right).
Now it's on to the WTO dispute process:
But there are those problems that I mentioned, then there’s also the structural problem of the dispute resolution mechanism. Takes a very long time, and given the composition of the WTO panels, often we’re defeated when people come and appeal it. Because if the people on the panel are mostly people who are doing the same thing as what you’re complaining about, it’s a little bit hard to get them to vote for you.
He should check the WTO dispute statistics, which show that the U.S. mostly wins when it brings complaints, and loses when complaints are brought against it (just like every other country). So I don't think there is really an issue with the U.S. getting panelists or Appellate Body Members to vote for it.
But regardless, they will be proposing some changes here. Note that he first says "panels," but then he mentions "appeal." Which one is he most concerned about here? I'm not sure. He specifically refers to "composition" of the panels. Of course, DSU Article 8.3 limits the participation of Americans as panelists in disputes involving the U.S., as it says that "[c]itizens of Members whose governments are parties to the dispute or third parties as defined in paragraph 2 of Article 10 shall not serve on a panel concerned with that dispute, unless the parties to the dispute agree otherwise." (As an aside, while the indicative list of panelists does not have much correlation to people who actually serve as panelists, a former intern of mine named Christina Woo put together this cool table of Americans on the indicative list since the GATT era. The Obama administration never appointed anyone, and the list has kind of been frozen in time. Will the Trump administration take a look at this?)
As for the Appellate Body, the U.S. has already made appointments to the Appellate Body a big deal. Will this issue get bigger somehow? I think I'd rather see the Trump administration propose some substantive changes, for example to the standard or review, then to mess around with the Appellate Body itself.
And then there's the WTO more broadly:
So those are just a few illustrations of the kinds of issues that we’re liable to come up with and try to figure out some solutions. Also, WTO is a very, very bureaucratic organization. Their main meetings occur four times a year. Well, when you think about how dynamic trade is and how rapidly it changes, the idea of a leisurely four-times-a-year meeting schedule, it’s really not very consistent with dealing with problems.
When you check the full schedule of all the meetings undertaken at the WTO each year, it is anything but leisurely. In fact, it's kind of exhausting!
And finally this:
And then the last thing -- if you look at the last annual report that the WTO published, it’s filled with complaints that there are more trade actions, more actions alleging violations than there used to be. And they lament that as protectionist. It apparently doesn’t occur to them that perhaps the cause of it is more violations by more countries. But that’s the reality. That’s why the trade actions are being brought, is that there’s more and more dumping all over the place, but there’s an institutional bias on their part toward the exporters rather than toward people who are being beleaguered by inappropriate imports.
There's been a debate about this in the past. I'm not sure the WTO is saying all of these measures are protectionist. As I read it, they are just saying, here are all the trade restrictions. Be aware of them, because some might be protectionist (although I think they could be clearer about this).
As for "inappropriate imports," there really needs to be a conversation about this at the WTO. What exactly is the "dumping" that some people consider harmful? What is the best way to address subsidies? We have rules, but they are vague, and people do not agree about what they should say or how they should be interpreted.
Then there was also some Q & A with Ross, which you can check out at the link.
So there you have it. I'm confident the WTO will survive this, but it will be an interesting next couple of years.