Trade and Investment

Would a US exit from the WTO unravel global trade?

A worker walks in a shipping container area at the Port of Shanghai April 10, 2012. China returned to an export-led trade surplus of $5.35 billion in March, heralding the prospect that a rebound in the global economy is lifting overseas orders just in time to compensate for a slowdown in domestic demand.

What would happen if the US left the WTO? Image: REUTERS/Aly Song

Pedro Nicolaci da Costa
Editorial Fellow, Peterson Institute for International Economics
Cathleen Cimino-Isaacs
Research Associate, Peterson Institute for International Economics
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United States

This article was first published by the Peterson Institute for International Economics.

In this latest attack on US trade policy, Republican presidential candidate Donald J. Trump has threatened to exit the 163-country World Trade Organization (WTO), which the United States played a leading role in creating and fostering.

“We’re going to renegotiate or we’re going to pull out,” he told NBC’s Meet the Press(link is external). “These trade deals are a disaster. The World Trade Organization is a disaster.”

 Changing patterns of world trade
Image: FT

So what is the WTO?

The WTO is a global trade body(link is external) aimed primarily at setting rules for international commerce, settling disputes between its 163 members, and providing a global forum for negotiating lower trade barriers. Its goal, according to the organization, is “to help producers of goods and services, exporters, and importers conduct their business.” The WTO was created in 1995 but was preceded by the post-war General Agreement on Tariffs and Trade, or GATT. “Essentially, the WTO is a place where member governments try to sort out the trade problems they face with each other,” the organization says.

The WTO now covers over 98 percent of world trade, and new members continue to seek accession to the organization. Why? To gain nondiscriminatory access to new markets, to complement politically controversial but important domestic economic reforms, and overall, to benefit from the security of a rules-based trading system.

In remarks at the Peterson Institute for International Economics (PIIE) in September 2015, WTO Director-General Roberto Azevêdo reminded the audience that the United States “has played a very important role throughout the history of the multilateral trading system…. I don’t have to tell you that this leadership is going to be critical for the future steps that we have ahead of us.”

What would happen if the US government withdrew?

Withdrawal would upend 60 years of trade diplomacy and could prove disastrous, according to trade experts at the Peterson Institute for International Economics.

First, US exporters would lose critical market access around the world.

“One of the major risks of leaving the WTO would be the loss of ‘most-favored nation’ (MFN) rights in 163 countries; other exporters could replace some of US exports in those markets,” said Jeffrey J. Schott, senior fellow at the Peterson Institute for International Economics, adding that this would mean job losses in America’s most competitive and profitable companies.

Most crucially, the United States would face the very real risk of losing MFN trading status with all countries. The United States currently has free trade agreements (FTAs) with only 20 countries, which means US firms enjoy preferential access to these countries’ markets at mostly zero or low import tariff rates, with very few exceptions. However, US FTAs combined cover only 40 percent of total US two-way goods trade (and the majority is accounted for by Canada and Mexico); the rest of US trade—60 percent—is with non-FTA partners. In order to access these markets, the United States relies on nondiscriminatory MFN tariffs, which countries agree to under the auspices of the WTO. In other words, if the United States pulled out of the WTO, every country in the world would no longer have to apply its MFN tariffs to US exports and could raise such tariffs to whatever levels they choose.

As PIIE’s Chad Bown explains, “The implication is that US exporters would now have an even bigger cost disadvantage hurdle in trying to compete in world markets against Chinese exporters, Mexican exporters, Korean exporters, or whomever.” Put another way, a pullout from the WTO and other US trade agreements would reduce US companies’ access to 96 percent of the world’s customers.

Second, the United States would give up its right to defend the rules-based system that it helped create, losing access to an important forum for resolving trade disputes. The WTO is not just about market access; it plays a key role in the monitoring and enforcement of its rules. The WTO has been criticized for sluggish progress in recent trade negotiations, namely the Doha Round, but its dispute settlement function has been widely acknowledged as its crowning achievement. In 2015, the WTO reached the mark of 500 disputes(link is external)received since its inception—282 of these have proceeded to litigation. The United States is one of the leading users of the system—it has been a complainant in more than a hundred cases, the most of any WTO member—of course, on the flip side, the United States has also been challenged by WTO members in just as many cases. Many of the cases pursued by the United States have involved the trade practices of major trading partners like China, for example relating to preferential taxes and other measures that favor Chinese firms, export restrictions(link is external), and lack of enforcement of intellectual property rights, among other issues.

Of course, outside of the WTO, the United States could retaliate against its trading partners by unilaterally imposing tariffs and continuing its use of antidumping duties to protect and support US producers. But overall, the most competitive US firms would suffer from the loss of MFN rights, which could translate to higher tariffs against US shipments to foreign markets, higher costs of US production at home due todecreased access to foreign inputs(link is external), fewer sales, and thus fewer US jobs.

Would this affect other trade arrangements?

The United States’ 20 FTAs are mostly with small economies. But of the large economies on that list, Trump has already signaled he is going to scrap deals like the North American Free Trade Agreement and the US trade deal with Korea. As mentioned, these deals mean the United States has better access to these specific markets and holds its trading partners to higher standards as well in areas like labor, environment, investment, and intellectual property rights, compared to WTO trade deals alone.

What would happen to WTO leadership?

The WTO would survive even if the United States were to leave. But the move would have important geopolitical implications, says PIIE’s Gary Hufbauer: “US withdrawal from the WTO would hand leadership of the world trading system to China.”

This is already a major concern given that both presidential candidates have voiced opposition to the Trans-Pacific Partnership (TPP) trade agreement between the United States and 11 other countries, signed earlier this year but not yet ratified by the US Congress. China is actively pursuing a parallel regional trade initiative with Japan and Korea, the Regional Comprehensive Economic Partnership, as well as ambitious economic initiatives like the Asian Infrastructure Investment Bank and the Belt and Road Initiative.

The WTO has faced its own serious setbacks in recent years. Hufbauer and Schott (2015) have laid out how the WTO can go from “drift” to “deals.” Importantly, the institution regained some positive momentum with the conclusion of the Trade Facilitation Agreement in 2013 and progress in sectoral agreements among subsets of WTO countries, for example information technology, environmental goods, and services. US companies and workers in these industries stand to benefit from reduced tariffs in IT products(link is external) that the United States designs and manufactures, such as high-tech medical devices, semiconductors, and software, and reduced tariffs in environmental goods(link is external) like renewable technologies.

Unlike bilateral FTAs where Trump thinks he can renegotiate better trade deals, the United States could not renegotiate the terms and conditions of the WTO with 162 other countries. Abandoning the WTO at this critical juncture could well undermine the incremental progress made in the past several years—and indeed over the past several decades of global trade governance.

Copyright for this work is held by the Peterson Institute for International Economics.

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