ECONOMICS: by Colin TeeseNews Weekly
From bad to worse: the future of world trade
, June 17, 2000
A major trade dispute between the US and the European Union threatens the future of the World Trade Organisation, according to Colin Teese, former Deputy Secretary of the Department of Trade and Australia’s negotiator at GATT.
In the past year I have watched with increasing fascination the machinations of the WTO (World Trade Organisation). More interesting still, is the indifference of the leading economies to the agency’s present plight. It is they, after all, who have most to lose from a malfunctioning WTO.
The WTO emerged about five years ago, from what is now known as the Uruguay Round of trade negotiations, as the successor to the GATT (General Agreement on Tariffs and Trade). GATT was previously responsible for administering the rules governing the conduct of international trade.
The GATT was not perfect, and after almost 50 years of operations, some rule changes were obviously desirable — notably relating to the trade in agricultural products, which, for reasons associated with both big power and Cold War politics, were never seriously addressed.
Because of these considerations, the United States, de facto leader of the GATT, paid only lip service to the idea of devising fair trading rules for agriculture, much to the disappointment of Australia, one of the founding GATT members.
The Uruguay Round was to prove no exception — despite all assurances to the contrary, and much misleading propaganda from Australia’s then government.
Indeed, by the time of Uruguay, agriculture had been off the real US agenda at least since the GATT Ministerial Meeting of 1982, when the then European Community finally made it clear that serious negotiations on agricultural trade reform would always be a breaking point for Europe. This realisation caused the then Australian Trade Minister, Mr Anthony, to walk out of the meeting.
While protesting to the contrary, the United States probably welcomed Europe’s revelation, because America’s primary interests lay outside agriculture.
America was more interested in achieving worldwide industrial tariff reductions in emerging markets. By giving US and European Union multinationals the ability to put their production plants where they wished and to export where they wished, the US and EU would be able to maintain dominance in world manufacturing. To some extent Uruguay helped cement tariff reductions in place, though the idea of free trade was sold to unsuspecting nations as a universally beneficial virtue.
Also important for the US and Europe was to get some rules in place to stop the manufacture and sale of low-cost copies of well-known international products, especially by the developing country economies. This was called protecting intellectual property rights.
This had nothing to do with free trade — quite the opposite. In any case intellectual property rights already had a mother hen in the form of a specialist UN agency just up the road from the GATT offices in Geneva. But the US believed that if intellectual property rights were incorporated into GATT, then the US could better control the agenda.
The US and Europe were also interested in the growing trade in services, very important to the dominant economies. Trade in services had not been subject to any international rules. Nor were there rules covering government purchases of both goods and services. Both were to become the burning issues of the Uruguay Round. And though they were only partly resolved there — mainly because developing countries, who were being asked to give up most, were not satisfied with the other side of the bargain — important advances were made.
Agriculture put last
All of this explains why agriculture was left to last. A small parcel of access gains, more imagined than real, was cobbled together as a sop to agricultural exporters like Australia.
But for the US, having its real trade access concerns brought to centre stage in the Uruguay talks, was a major advance, even though most concerns were not resolved there.
As things now stand, these gains to the US may well have been frittered away by legalistic meddlers — in particular Canada — being allowed to tamper with the dispute settlement arrangements of the old GATT.
GATT rules were intended to prevent the practices of one member country, contrary to the rules, harming the trade interests of another. Following a formal complaint, a panel could be convened to consider the matter. In theory, its decision had no binding effect, if a panel found GATT rules had been contravened and the offending practice was not discontinued, the injured party was entitled to balance the harm by applying barriers to the trade of the offending member country.
In practice, the GATT convention actually discouraged countries resorting to the Agreement’s dispute settlement procedures. Instead, disputant parties were urged to resolve their differences by private negotiation, for a very good reason. Every resort to the formal dispute settlement procedures tended to attract others to their use, thereby entrenching undue and unwanted legalism into the operation of the GATT.
But the meddlers insisted that, in the new WTO, dispute settlement procedures were enshrined as a discipline against rule breaches and decisions were made binding.
Australia welcomed this change believing that it would create a level playing field in world trade. Australia believed that large and small trading nations would be equally bound by WTO rulings.
How wrong Australia was.
In its highly legalistic setting, dispute settlement has become a major activity of the WTO and one of its most embarrassing public faces. In almost all of the WTO disputes panel rulings — including in disputes between themselves — the large WTO players have shown that they will not allow any international agency to interfere with their domestic arrangements, regardless of any WTO disputes panel rulings.
As the disputes have been minor so far, the larger players have preferred to suffer the consequences of the complainant imposing trade retaliation measures.
In other words, between big players, a dispute settlement procedure intended to advance the interests of free trade, is actually working to increase the overall level of trade barriers.
Between large and small trading nations, nothing has changed. It is the smaller party — regardless of the rights and wrongs of the dispute — who suffers and free trade is the casualty.
Consider Australia successfully having the WTO rule that the United States restrictions on lamb imports were illegal. The US has ignored the finding. Australia can retaliate, but that won’t help restore lamb exports, and any retaliation by Australia against the US would be like a flea bite on an elephant.
On the other hand, the Americans can seriously damage Australia’s exports to the US if we do not abide by the WTO ruling that subsidies paid to Howe Leather are illegal under WTO rules.
Now a major dispute has brought the WTO’s future into question. A WTO panel has ruled in favour of a European Union complaint that the practice of US tax remissions to certain of its exporters, involving US$7 billion of trade with Europe, is against WTO rules. Either the US changes this practice, or the way is open for the EU to apply restrictions against a similar volume of US trade.
The volumes of trade are so large it is hard to imagine this scenario being played out to its logical conclusion. And yet how else can it end?
The US Congress is unlikely to cancel its tax support measures for exporters. Nor will the EU back off from retaliatory measures. And any other solution undermines the credibility of the WTO, already shaky after major public protests at the Seattle Ministerial Meeting a few months ago.
WTO Director General, Mr Mike Moore, whose appointment itself is under a cloud in Asia, will need all of his skills to save the agency. Suppose he does manage to sweep the whole thing under the carpet, what kind of a message does it convey if its two largest players are permitted to turn their backs on the rules. The Asians nations are already suspicious of Mr Moore and of the dominant power of the WTO.
One might hope that Australia’s Department of Foreign Affairs and Trade was addressing WTO issues from a purely Australian perspective, but don’t bet your life on it. Alas, the Department appears more interested in applauding the virtues of abstractions like “free trade” and “globalisation” than in pursuing Australia’s interests.
Perhaps it is time we looked at the idea of a specialist Trade Ministry with a powerful and independently-minded Minister at its head.