A few weeks ago, Senator Josh Hawley wrote a New York Times op‐ed calling for “abolishing” the World Trade Organization (WTO). I responded to Hawley’s piece here, pointing out the various ways that he had misunderstood the WTO. Hawley’s op‐ed was apparently intended to lay the foundation for the joint resolution he introduced to withdraw the United States from the WTO. As I noted here, a Senate vote on this resolution is likely in late July.

Over in the House, two Congressmen, Peter DeFazio and Frank Pallone, introduced their own WTO withdrawal resolution. DeFazio had an op‐ed in The Hill recently, in which he also tried to make the case for the United States leaving the WTO. Due to a rule change passed last week, it now looks extremely unlikely that this resolution will come to the House floor for debate and a vote. Nevertheless, for the sake of completeness, I’m going to respond to his piece as well. I’m not sure I have it in me to address each and every one of his points, but I’ll try to deal with a lot of them. Here goes.

DeFazio says: "Since its establishment in 1995, but even more so since China joined in 2001, the WTO’s ban on Buy American and other domestic procurement preferences, its protections for foreign investors, and its lack of rules against currency misalignments and other forms of unfair trade practices have promoted the outsourcing of American production capacity and decimated well‐paying manufacturing jobs."

In truth, the WTO doesn’t “ban” Buy American and other procurement preferences, but rather countries can negotiate to open their procurement markets to each other. Many countries have joined the WTO’s Government Procurement Agreement, and have made market‐opening commitments.

Through this process, the United States has opened some (but far from all) of its procurement to foreign bidders, in exchange for U.S. bidders being allowed access to foreign procurement markets. But we are not completely open (although I wish we were, aside from legitimate national security issues), and Buy American procurement preferences still exist. There is, in fact, a federal Buy American Act, which was recently tightened by the Trump administration, as well as state and local procurement preferences.

As for “protections for foreign investors,” this refers to a controversial aspect of many bilateral and regional trade agreements, under which foreign investors can sue governments directly in an international tribunal (I am skeptical of this myself). But the WTO doesn’t have anything like this, so DeFazio can relax. DeFazio should, however, join the debate over foreign investor protections that is going on in the context of bilateral and regional trade agreements.

There are valid concerns, but a withdrawal from the WTO won’t address them. It will simply cede U.S. leadership of the trading system, leaving us more isolated than we already are.

With regard to “currency misalignment,” the WTO does actually have a vague provision on this (GATT Article XV:4: “Contracting parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement, nor, by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund.”) But DeFazio is free to propose something more detailed and encourage the U.S. government to put it forward for discussion at the WTO.

In addition, it is worth noting that the Department of Commerce (DOC) is currently pushing ahead with its own efforts to use countervailing duties to address what it considers to be currency manipulation that leads to a subsidy causing injury to a domestic industry. The WTO does not have specific rules on this, but if the DOC’s actions are challenged there, the general WTO obligations on subsidies/countervailing duties will be applied.

DeFazio then offers the following: "These are the facts: a quarter of U.S. manufacturing jobs – roughly 5 million – lost. Sixty thousand U.S. factories shuttered. A U.S. goods and services trade deficit explosion of 265 percent, from $170 billion in 1994 to $617 billion in 2019."

There is plenty to dispute with these jobs and factories numbers, but let’s put that aside for now. The figures he presents are not as relevant to the WTO debate as he seems to think. Yes, manufacturing employment has gone down, as the United States has been moving away from relying on manufacturing to employ vast numbers of people, just like hundreds of years ago we moved away from large‐scale employment in agriculture.

This is partly due to increased productivity (including through automation): As we get more efficient in production, we need fewer people to work in factories. And some of it is due to general shifts in the economy over the years. But it’s surely true that some amount of U.S. manufacturing jobs were lost due to competition with foreign producers. It’s also true, however, than many jobs were gained due to increased exports. And it’s most important to point out all the gains to U.S. consumers from this increased trade and competition. You could, in theory, shield your economy from foreign competition and manufacture everything yourself. But centuries of experience with governments using this strategy shows pretty clearly that it does not make you better off.

In The Spotlight

As for the trade deficit, Cato colleagues of mine have debunked this point many times in the past.

Back to DeFazio: "The WTO has promoted corporate protectionism while banning commonsense consumer safeguards. In fact, WTO terms required the U.S. to extend for three years monopoly protections for pharmaceutical firms that they use to charge sky‐high prices. …"

I assume that he is referring here to the extension of patent terms from 17 years to 20 years as part of the Uruguay Round negotiations which created the WTO. But stronger intellectual property rules was something the U.S. government supported. If he wants to make the case for going back to 17 years, I have no objection, but it’s not like “the WTO” did this. The U.S. government was on board with it the whole time and that’s why it’s part of WTO rules.

DeFazio then tries to argue about the fairness of WTO dispute settlement as follows: "The WTO rules and dispute settlement system are so lopsided that the U.S. has lost a staggering 90% of the cases attacking U.S. policies."

This is some wonderful cherry‐picking of data. He’s not too far wrong, it’s just that he forgot to mention that the United States has won even more of the cases it brought to “attack” foreign government policies. The explanation here is that governments tend to be pretty circumspect about bringing WTO complaints, and the result is that most of the ones that are brought are successful.

Putting aside all of these errors, omissions, and deceptions, what does DeFazio want to see happen now? "A withdrawal vote would put our trading partners on notice that after decades of trade deals and systems that have led to weakened supply chains, structural trade imbalances, and massive income inequality, there is bipartisan appetite for transformative change."

"As the largest economy in the world, the U.S. has a powerful hand to play, and we should use it to advocate for new rules, including strong and enforceable labor and environmental safeguards, and a more level playing field. In doing so, we can — and we must — address the understandably immense frustration among Americans whose lives have been ruined by trade policies that put corporate profits over working people."

"At a moment where authoritarian nationalism is on the rise, it is also essential that the U.S. bring the world’s democracies together to make the case for a fair and resilient form of global cooperation, encouraging multilateral responses to the pandemic crisis, shared security, marginalization, and climate change."

I can get on board with “bringing the world’s democracies together” and “advocating for new rules” (perhaps not the same ones DeFazio wants, of course). I have suggested some improvements to the WTO myself. But if he thinks U.S. withdrawal from the WTO would lead to any of his desired changes, he has badly misread the situation. Our trading partners, including those that are democracies, want to keep the WTO intact. They would support reform, and they would love to hear reform proposals from the United States. But they don’t want the United States to leave.

In fact, the Trump administration, despite its own skepticism of the WTO, has made some reform proposals. The administration has raised questions about the transparency of some governments’ reporting on their trade practices, as well as the special status that allows some poorer countries to take on fewer responsibilities. These are valid concerns, but a withdrawal from the WTO won’t address them. It will simply cede U.S. leadership of the trading system, leaving us more isolated than we already are.

This article appeared in Cato at Liberty.

Simon Lester
About The Author Simon Lester
Simon Lester is a trade policy analyst with Cato’s Herbert A Stiefel Center for Trade Policy Studies. His research focuses on WTO disputes, regional trade agreements, disguised protectionism and the history of international trade law.

Cato Institute

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