What would be the consequences of pulling out of the WTO?

Donald Trump recently made headlines for threatening to pull out of the World Trade Organization, or WTO.

The proposal by the Republican presidential candidate would be a major break with the past. The 163-country pact has structured trading relations for over two decades, and a predecessor agreement goes back to roots in the 1940s.

What would the impact be of such an unprecedented move? While the future is unknowable, there are a few things to consider.

First, when people refer to “the WTO,” they can mean a few different things.

  • The WTO is an actual It has a building in Geneva, Switzerland, and a full-time Secretariat staff that helps keep the lights on.
  • The WTO is also an intergovernmental body. The Secretariat helps provide a forum for governments to negotiate and talk to one another about policies affecting trade in goods and services. The U.S. delegation is led by the Deputy U.S. Trade Representative Michael Punke, who serves under USTR head Mike Froman. Like Froman, Punke has ambassador status; unlike Froman, he wrote The Revenant – remade as a movie starring Leo DiCaprio. But trade negotiations have stalled since the late 1990s, so the importance of the inter-governmental part of the WTO has been downgraded to mostly routine bureaucratic meetings.
  • Finally, the WTO is a set of treaties and a court that adjudicates disputes under them. The WTO consists of 17 treaties, each of which lay out commitments and obligations for the organization’s members. Under the Dispute Settlement Body, governments and the Secretariat supervise adjudicators hired by the case to decide on challenges by WTO members against one another. If disputing governments do not like the outcomes of these lower panels, they can appeal the decision up to an Appellate Body staffed of tenured adjudicators. If a respondent country loses a case, they are supposed to (in theory) change the policy so that it complies with WTO rules. In practice, countries often drag their heels or outright refuse to change the offending policy. There is then a further set of procedures for fixing an amount of permissible trade retaliation. There have been over 500 intergovernmental challenges launched since the WTO opened its doors in 1995.

The pact’s multi-faceted nature makes it tricky to know what exactly a WTO critic is criticizing.

Second, the WTO should not be confused with a specific content of national policy. It is a legal-diplomatic construct that is distinguishable from national economic policy choices.

The debate around the UK’s vote to leave the European Union illustrates the distinction I am trying to make. Now that UK leaders are going forward with Brexit (unnecessarily, IMHO), they must decide if and how to restructure their relationship with the EU. The models that are often mentioned are Norway and Switzerland, who are not voting members of the EU but have nonetheless committed to follow EU rules on trade and immigration. So, not a member of the EU, but having national laws that are nonetheless consistent. A bitter pill for many Brexit supporters no doubt.

Put bluntly, the WTO doesn’t diminish national sovereignty, at least not in the first instance. It simply creates a series of potential legal and financial consequences for stepping out of line. This means that a country can leave the WTO and still have national policies consistent with WTO rules. It means also that a country can be in the WTO with national policies that are not consistent with the rules, and still face no consequences (either because other countries don’t notice or aren’t willing or able to mount a legal challenge).*

To follow this through to the present context, Trump would not need to leave the WTO to jack up tariffs on Chinese goods.** He would, however, almost assuredly face a challenge at the dispute settlement body if he tried to do so, as it is a blatant violation of most-favored nation rules. (For this reason, the policy would also probably be ineffective and likely lead to more imports from third countries.) He could also leave the WTO, but not jack up tariffs.

So, what are observers worried about when they question Trump’s WTO threats? On the one hand, they’re worried about jeopardizing some of the gains from trade under the WTO – which economists estimate at a few percentage points of global income. But such models are really capturing the autonomous national policy changes that each WTO member enacted. It is at least conceivable that they could have happened without the WTO, although many political economists consider the system indispensable for helping countries trust one another to make the baby steps needed to liberalize.

And, thus, we get to the real issue. Pulling out of the WTO should not be feared for any necessary economic fallout. The U.S. and world could get by just fine. Rather, what observers should be worried about is the potential diplomatic signal it sends. This could lead to a chain reaction of tit-for-tat retaliation by nervous politicians who seek to shield their population from the externalities of Trump’s effort to protect U.S. workers.

So, the WTO is not so much a global government as it is a framework for structuring retaliation. Trump’s comments envision a return to a world where retaliation is not so structured. Where that takes us is any one’s guess.

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FOOTNOTES

* A trickier problem is that there may be no consensus about what a WTO obligation actually means in practice. In such cases, panelists and appellate body members get to moonlight as rule writers – taking over for gaps left by actual government negotiators.

 

** Depending on how exactly he took the action, he could take an action under executive branch powers. Alternatively, he might need Congress to modify U.S. tariff rules or the Uruguay Round Agreements Act that greenlit U.S. membership in the WTO. This was a bill supported by the Bill Clinton administration – passed by a lame duck Congress full of Democrats that just lost their seats, most of whom had not read the legislation. (Interestingly, the Obama administration is suggesting doing something similar with the Trans-Pacific Partnership after the November elections.)

 

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