Trade Diversion

The 2010 WTO essay contest for young economists, with a prize of 5000 CHF (~$4640), is now open. Submissions are due June 15 and will be judged by Jagdish Bhagwati, Robert Staiger, Alberto Trejos, Patrick Low, and Hakim Ben Hammouda. Ralph Ossa was last year’s winner.

Krzysztof Pelc:

While models of “optimal compensation” grow in sophistication, the institutions concerned are evolving progressively further away from the recommendations of efficient breach advocates. Indeed, voluntary export restraints were forcefully banned during the Uruguay Round, and there is no sign of their being brought back into use; the WTO Agreement on Safeguards has drastically reduced the possibility of compensation, by explicitly ruling it out in the first three years of any safeguard measure; retaliation, far from becoming an automatic response to continued violations, is exercised in about one percent of all WTO disputes; monetary compensation has been offered only once in WTO history…

If efficient breach at the WTO would make all parties better off, then why do we see so little of it?…

The argument presented in this paper brings back the question of the purpose of the WTO as an institution. Focusing on domestic politics, I demonstrate how the possibility of efficient breach defies the purpose for which countries join the institution in the first place…

while individual instances of efficient breach would indeed make trading partners better off, its sheer possibility empowers domestic interest groups, by raising payoffs from lobbying for protection, and thus acts to slow down trade liberalization. It is little wonder that the countries that would seem to benefit most from the possibility of efficient breach have consistently opposed it. Over and above its normative implications, and the net transaction costs it may generate, efficient breach goes against the very purpose of international trade agreements.

Hat tip to IELP.

Susan Aaronson accuses China of poor governance to the degree that its behavior is a threat to the global trading system. I do not understand her argument, so I will quote her at length before I complain that she hasn’t explained her case:

But China’s competitive advantage is to some degree based on its inadequate governance; its failure to enforce its own laws in a transparent, even-handed manner. As part of its accession to the WTO, however, China was required to enforce the rule of law throughout all of its territories…
Inadequate Chinese governance is a trade problem because of the country’s dominance in global markets. Its failure to enforce the rule of law threatens the concept of mutual benefit that underpins the trade regime. China is broken, and a broken China could break the WTO…
it has yet to meet many of the obligations delineated in its protocol of accession. European and American business groups investing in China believe that the country is becoming more interventionist and protectionist (European Business in China 2009 and US China Business Council 2009)…
The rule of law was a key element of China’s accession agreement because trade policymakers understood that how China was governed could distort trade.
In recent years, China has become infamous for its failure to enforce its own laws, whether those laws related to intellectual property, product or food safety, human rights, or employment.
In both its 2006 and 2008 Trade Policy Review at the WTO, member states lauded Chinese trade diplomats for their export prowess but also complained that China was not transparent, accountable, or sufficiently even-handed (WTO 2006, 2008). Nor could they trust Chinese statistics or assertions on enforcement related to key trade issues such as product and food safety or intellectual property protection. Meanwhile, Chinese leaders argued that they are a developing country and thus deserve patience as they learn to govern effectively.
What can the WTO do?
WTO members have the ability to encourage China to address its inadequate governance. They could begin by using the trade policy process more effectively to discuss the rule of law and how it distorts trade. And they could threaten a trade dispute on some aspect of inadequate governance. Under GATT Article XXIII, any country in the WTO is entitled to a “right of redress” for changes in domestic policy that systematically erode market access commitments even if no explicit GATT rule has been violated.

I am familiar with complaints that weak intellectual property enforcement hurts sales of American and European IP products in China. But how does that undermine the world trading system? And while Mattel had to recall toys tainted with lead paint, is there a systematic problem with product safety for Chinese exports? No one is suggesting that Japan’s rule of law is inadequate after a few safety problems with one of its most notable exporters. I understand complaints about China’s rule of law, but how could China “break the WTO”?

The first WTO dispute of 2010 is, according to Simon Lester, a “classic de facto discrimination case.” The US complaint against the Philippines:

Distilled spirits produced from certain materials that are typically produced in the Philippines are taxed at a low rate. Other distilled spirits are taxed at significantly higher rates. The Philippines’ taxes on distilled spirits appear not to tax similarly imported distilled spirits compared to directly competitive or substitutable domestic distilled spirits. The taxes appear to be applied in a way that affords protection to the domestic products.

The Doha stall will likely last into 2011, so, as has been the case for a couple years, the WTO’s importance to the global trading system in 2010 will be its role in global trade governance and dispute resolution.

Joseph Sternberg has an optimistic column in the WSJ in which he hails American-Chinese trade conflicts taken to the WTO DSM: “Trade tensions between the two economic behemoths are definitely rising. But the advent of trade litigation is a healthy development.”

FT:

The World Trade Organisation gave Brazil the green light on Monday to impose $295m (€206m, £181m) of sanctions on US goods over Washington’s failure to scrap illegal subsidies to its cotton farmers.

However, the trade retaliation granted by a WTO arbitrator was barely a tenth of the $2.7bn Brazil had asked for. Brazil will also not be able to carry out its threat to break US drug patents or retaliate in services unless subsidies rise substantially from 2006 levels.

The WTO launches a database of members’ declared technical barriers to trade. See Richard Baldwin’s classic article on the subject:

The main thesis of this paper has five steps: technical barriers to trade (TBTs) are important; liberalization of TBTs will continue; this liberalization will involve hegemonic harmonization or mutual recognition of rules and test; such liberalization will almost surely entail preferential arrangements among rich nations, creating in essence a two-tier system of market access with developing nations in the second tier. The final step is to conclude that the WTO should be modified to address the potentially discriminatory aspects of regional TBT liberalization initiatives. The WTO, in short, should be gearing up to “fight” the battle of frictional barrier liberalization.

Fiona Harvey for the Financial Times:

Countries implementing cap-and-trade systems for greenhouse gases may be able to use border taxes to protect domestic industries, after the World Trade Organisation gave a cautious nod to such measures.

In a report to be published today, written jointly with the United Nations Environment Programme, the WTO said it was possible to implement border measures for environmental reasons under its rules.

“Rules permit, under certain conditions, the use of border tax adjustments on imported and exported products,” said the WTO. “The objective of a border tax adjustment is to level the playing field between taxed domestic industries and untaxed foreign competition by ensuring that internal taxes on products are trade neutral.”