Peter Morici: WTO no longer serves U.S. foreign-policy interests

The World Trade Organization no longer serves U.S. foreign policy interests.

The U.S. and its allies established the General Agreement on Tariffs and Trade to limit tariffs and quantitative restrictions and to promote trade in goods.

Rechristened the WTO in 1995, agreements were added to cover trade in services and discipline domestic policies affecting commerce in areas such as foreign-investment performance requirements, intellectual-property protection, product standards, government procurement, and industrial policies.

Deterring war

An underlying objective was to promote economic integration to deter war and strengthen national security.

Along with the European Union and other WTO-sanctioned regional agreements, it helped expand trade based on comparative advantages and accelerated economic growth.

China and Russia were admitted into the WTO in 2001 and 2012 on the assumption that expanded trade with the West and complying with WTO rules would enable Western-style market economies and democratic governance to emerge.

That hasn’t happened.

China has subverted WTO norms by forcing foreign investors to transfer intellectual property, massively subsidizing domestic industries, such as semiconductors, imposed great harm on Western economies and effectively gamed the dispute settlement process.

After the Obama administration, the U.S. has refused to approve new judges for the WTO Appellate Body and during Donald Trump’s presidency, appellate review of dispute settlement panel decisions ceased.

National security exemption

The WTO recognizes the right of nations to take actions inconsistent with its rules for the purposes of preserving national security.

GATT Article XXI states nothing in the agreement prevents a member from taking actions “relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment” or “taken in time of war or other emergency in international relations.”

When Russia seized the Crimea, it blocked Ukraine’s trade with Kazakhstan and Kyrgyzstan.

In 2018, the Trump administration imposed 25% tariffs on steel and 10% tariffs on steel and aluminum from several nations citing the necessity to maintain an industrial base.

Both actions were contested in dispute settlement panels, where Russia and the U.S. maintained that policies referencing Article XXI are non-justiciable in the WTO.

In 2019, a panel asserted that national-security actions were subject to WTO review, but Russia may block Ukrainian trade because conditions between the two nations rose to the level of “war or other emergency in international relations.”

In December, another panel ruled U.S. metal tariffs “are not justified” because they were not “taken in time of war.”

Steel and aluminum are essential for making armaments, but people of goodwill and with knowledge of economics and trade law can disagree about whether imposing tariffs on Canada and other close allies was prudent.

Worse than useless

However, if the WTO can sanction a wanton act of aggression by Russia and prohibit the U.S. from maintaining access to vital materials when not engaged in a hot war, the WTO does not deter war and becomes worse than useless.

The war in Ukraine has taught us modern conflicts can quickly run through prodigious stockpiles of very expensive, technologically sophisticated weapons and the wherewithal to replace depleted ammunition must be in place before hostilities begin.

China is building a military with global clout, well capable of challenging the security interests of U.S. allies in the Pacific. And seeks to sell its model of autocracy and state-directed capitalism to the developing world as a better alternative to democratic capitalism.

China is building an axis of autocracies by forging trade and investment ties with Russia, Saudi Arabia and Iran. Together with Russia’s invasion of Ukraine, this is inspiring a significant military buildup among NATO, the U.S., Australia and Japan.

Semiconductors are the new steel and those militaries, as well as Chinese capabilities, require substantial, secure supplies. China has spent $150 billion building a domestic industry with only limited success.

To mute this, the U.S. is organizing a Western embargo on sales of semiconductors to Chinese military suppliers and the machinery necessary to build the most sophisticated semiconductors.

Now China is taking the U.S. to the WTO to stop export restrictions. Given how dispute-settlement panels have ruled regarding Russia blocking Ukrainian trade and the U.S. metal tariffs, it’s easy to see a dispute-settlement panel finding Japan, the Netherlands and the U.S. in violation of Article XI, which severely limits export restraints.

Russia is threatening to lodge a WTO complaint against Lithuanian plans to block transshipment and EU trade sanctions. Based on the reasoning from the steel case, it could win.

If the WTO can’t be reformed to weigh aggressive actions by autocratic states, it might better be replaced by a system of Western regional trade agreements like the U.S.-Mexico-Canada agreement and the Trans-Pacific Partnership.

Peter Morici is an economist and emeritus business professor at the University of Maryland.