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WTO in the Crosshairs

by greg rushford
 

greg rushford is an independent journalist specializing in international trade and investment issues, and is the editor of The Rushford Report.

Published October 3, 2017

 

While the world is focused on the nightmarish prospect of a nuclear war sparked by what seems to be a personal conflict between Kim Jong-un and Donald Trump, little attention has been paid to another brewing Korean conflict: the threat of economic war against America’s staunch ally in the peninsula’s south. The one similarity between a nuclear exchange with North Korea and a trade war with South Korea: once triggered, there could be no winners.

 
The high-pressure legal skirmishing between Washington and Seoul has had reverberations in every major capital, threatening to disrupt the delicate framework that governs multilateral trade among the 164 member-nations of the World Trade Organization..
 
Misunderstanding in the White House

South Korea is the United States’s 6th most important trading partner, sandwiched between Germany (5th) and the United Kingdom (7th). Last year, total trade between the two amounted to more than $112 billion. So, even apart from its awkward timing and geopolitical sensitivity, this trade spat is worth a second look. Indeed, as if to illustrate the unintuitive web of cause and effect in global trade relations, the high-pressure legal skirmishing between Washington and Seoul has had reverberations in every major capital, threatening to disrupt the delicate framework that governs multilateral trade among the 164 member-nations of the World Trade Organization.

The threat to break with South Korea seems to have followed from President Trump’s common — though in the view of mainstream economists, incorrect — view that bilateral trade relationships are zero-sum games in which “winning” means running a trade surplus. Claiming the U.S.-South Korea preferential trade deal that went into effect five years ago has been “horrible” for America, the president ordered U.S. trade officials to withdraw from the pact.

That policy about-face — the agreement had been celebrated by both Republicans and Democrats — generated bewilderment on both sides of the Pacific. In Washington, the U.S. Chamber of Commerce, the Business Roundtable, the National Association of Manufacturers and too many farm lobbies to list raised a ruckus about the prospects for a self-inflicted wound if the initiative got past the press release stage.

Faced with such vehement interest group opposition, the White House backed off. But it ordered its chief trade negotiator, Robert Lighthizer, to demand that Korea agree to “amend and modify” the pact with one-sided changes that would be humiliating for Seoul. While details are skimpy, Lighthizer is apparently pressing Korea to eliminate all remaining tariffs on farm commodities immediately rather than phasing them out gradually. Meanwhile, the United States would gain license to indefinitely delay its own scheduled removal of market barriers.

Gordian Knots

South Korea’s trade minister, Kim Hyun-chong — who had played a key role in negotiating the 2012 Seoul-Washington deal — was reportedly both incredulous and angry. And by unfortunate coincidence, the resulting loss of trust on the part of Minister Kim has spilled over to another fight the White House has picked, this one with the World Trade Organization.

In August, Kim resigned his position as a jurist on the WTO’s Dispute Settlement Body, which serves as the neutral arbiter in interpreting members’ legal obligations under the global rules-based trading system. The appellate body on which Kim had been serving is the DSB’s court of final appeals; its decisions are binding. 

 
The WTO is at risk of losing its value in preventing trade disputes from spilling into broader economic and diplomatic conflict. But while most professional trade negotiators would cringe at the prospect of losing a way to depoliticize difficult dispute resolutions, U.S. Trade Representative Lighthizer has seen it a hostage-taking opportunity.
 

Kim’s resignation created a second vacancy on the seven-member panel, with a third jurist’s term set to expire in December. The longer those positions remain unfilled, the harder it will be for the remaining judges to manage an already backlogged caseload. It is no exaggeration to say that the institution is at risk of losing its value in preventing trade disputes from spilling over into broader economic and diplomatic conflicts.

But while most professional trade negotiators would cringe at the prospect of losing a way to depoliticize difficult dispute resolutions, U.S. Trade Representative Lighthizer has seen it as a hostage-taking opportunity. Taking advantage of the fact that the WTO relies on consensus in making appointments, the U.S. trade chief has refused to agree to fill any of the vacancies until he gets what he wants.

Lighthizer has not explained precisely what that is. The only clues are vague public postings to the effect that there are “systemic” issues with the appellate body that the Trump administration wants addressed.

Look Who’s Minding the Store

But the muttering about legal procedure seems to boil down to one issue: Lighthizer has maintained for years that the 1995 choice to make the WTO’s dispute-panel decisions legally binding on members, especially the United States, was a mistake. Although U.S. presidents from Ronald Reagan to Bill Clinton had fought for that reform, Lighthizer — a veteran lawyer for the protectionist-minded U.S. steel industry and a dedicated America Firster decades before the rise of Donald Trump – has never accepted it.

In 2001, for instance, Lighthizer claimed at a seminar on Capitol Hill that WTO panels are often comprised of jurists who are “not qualified.” Lighthizer added that he suspected that some WTO jurists “may be crooked, although I have no evidence of that.” But even if they were “fair arbiters,” making WTO dispute-panel rulings binding would be “a threat to sovereignty,” he added. Perhaps because his reputation had preceded him, Lighthizer was rejected in 2003 when he sought an appointment to the appellate body.

Veteran trade observers suspect his goal is to force a return to the days when individual WTO members could block any adverse dispute-panel rulings. The Koreans, Europeans, Brazilians and several dozen other WTO members are furious, as are the Mexicans and Canadians (who have their own rule-of-law issues with Washington, associated with Trump’s renegotiation of Nafta). Presently, though, the other 163 WTO members are stymied in the face of intransigence from Washington.

Common (Non)sense

But I digress. For the president, the only evidence needed to judge the U.S.-South Korea trade pact to be unfair was the fact that Koreans sold Americans some $17 billion more in goods and services last year than they purchased. That logic doesn’t sit well with most economists, who dismiss the relevance of bilateral deficits in a global economy that is bound by an intricate web of cross-border supply chains — and who, in any event, view the imbalance in trade figures as largely driven by their flipside, the imbalance in international investment flows. More relevant here, it angers Americans who have directly benefited from the sharp cuts in trade barriers with Korea since the pact went into effect.  

It’s safe to assume that, unlike the White House, Citrus World, the giant orange-growers co-op in Florida, does not consider it “horrible” to no longer face a 54 percent tariff on orange juice exports to Korea. Nor does Hershey’s, which used to be hit with an 8 percent tariff on sales of Kisses. Ditto for Campbell’s Soup — South Koreans reportedly just love the company’s clam chowder — which no longer need worry about a 30 percent tariff.

Wait, I’m not done. Johnson & Johnson no longer faces a 5 percent tariff on medical equipment. California winemakers no longer must cope with a 15 percent tariff. And so forth. 

Remember, too, my earlier reference to global supply chains that obscure the winners and losers from wide-open trade. Virtually every U.S. manufacturer makes use of low- or no-tariff access to Korean components ranging from copper piping to sheet steel to semiconductors to SUV tires. And while protectionists complain that Boeing contributes to the U.S. trade deficit by buying parts from Doosan Machine Tools, the aerospace giant is the America’s single largest exporter at least in part because it can freely source components from dozens of other countries.

 
While there would assuredly be some American firms that would, on balance, prefer to operate in an environment in which goods from Korea were no longer competitive in the U.S. domestic market, few of any size would risk the reversal of global economic integration in the name of forcing a better deal from Korea.
 

No doubt some American firms would prefer to operate in an environment in which goods from Korea were no longer competitive in the U.S. domestic market. But few of any size would risk the reversal of global economic integration in the name of forcing a better deal from Korea. It thus shouldn’t be surprising that not one U.S. exporter or importer has publicly supported the idea of pulling out of the U.S.-South Korean trade pact. And not one U.S. ally favors the destruction of the WTO’s binding arbitration system, which gives national governments a way of managing interest group conflict over trade without risking a cycle of retaliation and counter-retaliation.

But in today’s Washington, it’s far from clear that cold logic — or even the organized efforts of trade-dependent American business — will influence trade policy. At least by the criterion of unpredictability, Kim Jong-un seems to have met his match. 

main topic: Trade
related topics: Asia