In his latest Trade Talks podcast, my friend Chad Bown has covered a topic that he and I have discussed several times: What is the economic purpose of the GATT/WTO? I assume he knew his podcast would generate a reaction from me, and I don't want to disappoint him, so here goes.
Free Trade and Anti-Protectionism as the Purpose of the GATT/WTO
The podcast conversation between Chad and economist Bob Staiger starts off by making an argument that the WTO is not about "free trade":
Chad Bown: I want to begin by talking about free trade. Let's start with the WTO itself. Does the World Trade Organization indicate anywhere that its objective is to get countries to impose zero tariffs and get them all the way to free trade?
Bob Staiger: The short answer to that question is no. If you look at the WTO website, you'll find a tab that says “What we stand for,” and you might expect a statement there. But in fact, that statement never mentions the goal of free trade. It does mention the goal of freer trade but never says free trade is the goal, even aspirationally.
A bit more authoritative source would be to go to the actual legal text of the WTO or the GATT and look at the preamble. The preamble is the legal statement by the member governments of what exactly their objectives are. And in the preamble, there is no mention of free trade as a goal. There is a mention of reducing tariffs, and substantially reducing tariffs, but no mention of free trade.
They seem to be saying that if the goal is anything other than absolute free trade, then free trade is not the goal. But I think this suggestion asks too much of trade policymakers. We all recognize political limitations, and if the policy is moving us in the direction of free trade, I think it's fair to say that the goal is free trade. More nuance would be nice, of course, as it always is, but I think saying the WTO is pursuing "free trade" is fine, even though it's clearly not getting all the way there any time soon. How many policymakers actually want all tariffs at zero? Hard to say! But the point is that moving in the direction of free trade should be sufficient to say that the purpose of the GATT/WTO is free trade, even if only partial free trade is really on the agenda.
But I can see how saying "free trade" can be a problem, as it suggests a degree of trade liberalization that is greater than what actually exists or will exist any time soon. That has been an issue in the trade debate recently, as some people seem to think that all these "free trade" agreements out there mean that we have free trade, even though we clearly do not. A better way to describe the WTO's goal, and to avoid this confusion, might be to think of the opposite of free trade, which is protectionism. Free trade vs. protectionism has been the key issue throughout the history of trade policy, and remains so today. With this in mind, it seems to me that a good way to characterize the core economic goal of the WTO is "mutually agreed constraints on protectionism." These constraints are based on the idea that protectionism is bad domestic economic policy, and also that it can lead to international economic conflict and retaliation that generates additional economic inefficiency, while recognizing the political reality that it's hard for governments to eliminate protectionism entirely due to the demands of interest groups.
Of course, while that's the core goal, some other goals have popped up along the way, such as intellectual property protection. Sometimes these other goals are not consistent with the core goal, and fit uneasily into the trading system. That's a situation that I and some others have been complaining about for a while, but it looks like it's here to stay.
Let's talk now about the "official" WTO statements about its purpose. Official statements are not always definitive, but they can certainly help inform the discussion. Staiger makes reference to the preamble of the GATT/WTO legal texts, so I'll start with that. The WTO Agreement preamble states:
Being desirous of contributing to these objectives by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations
Let's also look at the Singapore Ministerial Declaration, which was written soon after the WTO was established:
Role of WTO
6. In pursuit of the goal of sustainable growth and development for the common good, we envisage a world where trade flows freely. To this end we renew our commitment to:
- a fair, equitable and more open rule-based system;
- progressive liberalization and elimination of tariff and non-tariff barriers to trade in goods;
- progressive liberalization of trade in services;
- rejection of all forms of protectionism;
- elimination of discriminatory treatment in international trade relations;
- integration of developing and least-developed countries and economies in transition into the multilateral system; and
- the maximum possible level of transparency.
Thus, according to these legal texts, an important way the WTO pursues trade liberalization is by condemning and constraining protectionism. Specifically, the WTO Agreement calls for the "elimination of discriminatory treatment in international trade relations" ("discriminatory treatment" is a way of saying protectionism, although it is a bit broader); and the Ministerial Declaration calls for the "rejection of all forms of protectionism." That's about as clear a statement as you can make on these issues in a formal legal text.
Noticeably, the whole podcast episode does not use the term "protectionism." (Although it does say "shift some of the costs of its protection onto foreign countries" at one point). In my view, though, protectionism as a concept is crucial for thinking about the purpose of the GATT/WTO, and about trade policy in general. (My 1989 Samuelson and Nordhaus Economics textbook defines protectionism as: "Any policy adopted by a nation to protect domestic industries against competition from imports (most commonly, by a tariff or quota imposed on such imports.") For domestic policymakers, the issue they are focused on is whether to pursue protectionist policies. That's the domestic political/policy debate going on, and in thinking about the economic purpose of the GATT/WTO, we should address that issue head on. Many politicians believe that protectionism is good economic policy because it supports domestic industries and generates stronger economic growth and more jobs in the process. Most economists disagree about the overall impact of such policies on the domestic economy, but the politicians aren't listening to them, so we end up with a wide range of protectionist policies.
As a final point here, let me shift away from the WTO, which was the focus of the podcast discussion. The argument there was that the absence of zero tariffs at the WTO proves something about the purpose of the WTO. But a few trade agreements, such as NAFTA, bring almost all ordinary tariffs to zero. So how do proponents of the "not free trade" view of the trading system see the purpose of NAFTA? Was this about free trade? (Obviously, NAFTA has "free trade" in the title, but not all trade agreements with "free trade" in the title get so close to zero tariffs, so I'm not sure that should be determinative.) If their answer is yes, then I'd want to hear more about why some trade agreements are about free trade while others are not.
The Market Access Alternative
In contrast to the virtual absence of the term protectionism in the podcast, their discussion uses the term "market access" a lot, e.g.:
So at the end of the day, I would argue that according to the GATT/WTO, it's not about free trade, but it's about how much market access a country is comfortable providing to its trading partners once it is stripped of its international cost-shifting incentives.
As I've discussed before on this blog, the term market access is vague and, in my view, has led to some of the problems with trade agreement provisions intruding too much into domestic regulatory autonomy. Tariffs do affect market access, but so can non-protectionist regulatory measures. When these measures have been raised in WTO committees and have been subject to challenge in WTO dispute settlement, it has led to a good deal of controversy for the trading system.
To be clear, I think "market access" is a good way to describe the business objectives that generate many of the negotiating demands that we see in trade negotiations. Businesses want access to foreign markets, or increased access to those markets, and that is a big driver of the negotiations. However, while it's true that many of the businesses who lobby behind the scenes during trade negotiations are looking for access to foreign markets, that doesn't mean market access is a principle that can be applied to explain the policy purpose of the trade regime. Rather, it simply describes every type of demand that businesses/governments make of their trading partners during these negotiations.
For these reasons, market access should probably be avoided as a term to describe the policy purpose or economic principles of the WTO (although I agree that it's relevant for explaining the dynamics of the negotiations). Thus, if you want to apply this term to the trading system, instead of just saying that the WTO is about market access, it might be better to say that the WTO is about increasing access to markets through negotiating reductions to tariffs and other forms of protectionism, through enhanced intellectual property protection, or through ensuring that even non-protectionist food safety regulations are based on science. (It's worth noting that these types of measures are very different in terms of their impact on domestic regulation, and involve widely divergent conceptions of the scope of the trade regime.)
Which Tariffs are Targeted in Trade Negotiations?
I'm hopeful that everything above was somewhat clear, if perhaps a bit long-winded, but here's where things get a little confusing. When it comes to tariffs, it seems as though Staiger wants the issue to be something very specific that has an uncertain (to me, anyway!) relationship with protectionism:
Chad Bown: If the economic basis for the WTO is not free trade, then what is it?
Bob Staiger: I think the basis for the WTO in terms of economics is something far more general than the case for free trade. And that is the case for countries to internalize the externalities that they impose on each other when they choose their trade policies. And by externalities, what I mean is the effects that are imposed on other countries when a country unilaterally makes tariff choices.
When a country takes account of the international externalities that it's imposing on its trading partners through its tariff choices, that's going to naturally lead the country to adopt lower tariffs, but there's no necessary reason why those tariffs should be driven all the way to zero.
Fleshing this out further, he wants tariff negotiations at the WTO to be about situations involving market power, as he is looking for "evidence that when countries are unconstrained by a trade agreement, they have market power and they use it when choosing their tariffs." In this regard, he says that: "We found that there is quite a strong positive correlation between the market power that the countries who were joining the WTO had, in terms of the sectors that they were offering tariff cuts on, and the size of those tariff cuts."
A long discussion then ensues, which I think is about the idea of "terms of trade manipulation," although they don't use this phrase. Their argument, as I understand it, is that governments can use terms of trade manipulation to benefit their economies, but this hurts other countries and can lead to trade retaliation and conflict, and thus it is best for all if they negotiate an agreement to limit terms of trade manipulation.
Importantly, they seem to be concerned about only certain tariffs (or tariff levels):
we want evidence that when countries are unconstrained by a trade agreement, they have market power and they use it when choosing their tariffs. This better be true because if that's not true, then there's no inefficiency created by the pecuniary externalities of tariff choices, and there's nothing for a trade agreement to do.
Based on all of this (and some conversations with Chad), it seems like they are saying (but they should correct me if I've misunderstood), that only certain tariffs, or certain portions of a tariff, impose an externality on other countries that leads to inefficiency, and these tariffs (or portions thereof) do this by driving down the product's price on world markets through a country's market power. If there is no market power, there is no externality imposed on other countries from the tariff.
It seems to me, however, that putting aside situations where there is no domestic competition and the only purpose is to raise revenue, tariffs will have some degree of negative economic impact on trading partners regardless of whether there is market power. By taxing imports but not taxing competing domestic products, tariffs give domestic producers an economic advantage over foreign producers. To give a concrete example of this in a situation without market power, if Costa Rica were to impose a 5% tariff on imports of semiconductors, that would give Costa Rican producers an advantage over their foreign competitors in the Costa Rican market, even though Costa Rica's semiconductor market is small enough that it does not have market power.
This economic advantage could play out in various ways in practice: The domestic producers could have a price advantage if the foreign producers raise their prices to cover the tariff; or the domestic producers could raise their prices after the foreign producers raise theirs, which would make the domestic producers more profitable because their products are not subject to the tariff; or if the foreign producers don't raise prices and simply accept lower revenue due to the added cost of the tariff, the domestic producers would also be more profitable.
The tariff commitments made at the WTO seek to rein in this protectionist impact of tariffs, regardless of whether the country imposing them has market power, as foreign companies trying to sell in the imposing country's market will be interested in removing the disadvantage they face as a result of the tariffs.
For the sake of clarity, I should also note that in situations where there is no domestic producer and thus no advantage for domestic products over imports, the exporting country might still be upset with a high tariff, because it reduces demand for its products. But that's a different issue from the protectionism point that I am focusing on here.
Two final points on all this. First, while it's true that the WTO hasn't gotten us to zero tariffs, that's not because policymakers believe that certain tariffs don't come within the scope of WTO constraints on the basis that no market power exists. Rather, more likely, it's because domestic interest groups have resisted the further reduction of these tariffs.
And second, it may actually be that the disagreement here is just about the degree of impact on foreign producers, and the market power folks would say they are only worried about the larger impact that can arise when market power exists. But I'm not sure about this.
