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Withdrawal from the World Trade Organization Would Be a Mistake

July 10, 2018 3 minute Read
By James Lake
Withdrawal from the World Trade Organization would likely initiate worldwide tit-for-tat tariff skirmishes.

There have been reports that the administration has a desire to withdraw from the World Trade Organization (WTO). While an extreme possibility, the administration's recent use of archaic trade policy measures show we should expect the unexpected. However, unlike the North America Free Trade Agreement (NAFTA), Congress retains ultimate discretion on WTO withdrawal under Section 125 of the Uruguay Round Agreements Act.

Nevertheless, withdrawal from the WTO would be a terrible mistake. WTO membership forbids importing countries from imposing tougher trade barriers on U.S. exports than other exporting countries (with the exception of the importing country's Free Trade Agreement partners). If the U.S. withdrew from the WTO and NAFTA then, rather than facing zero tariffs, U.S. auto part exports to Mexico could face much higher tariffs than key competitors, including China, and seriously damage U.S. global competitiveness. In turn, this would significantly hurt U.S. labor market conditions because exporting firms employ larger workforces and pay higher wages.

Presumably, WTO withdrawal would free the U.S. of its WTO commitments and usher-in higher tariffs. However, this would likely initiate worldwide tit-for-tat tariff skirmishes. Over 60 percent of 2016 U.S. exports went to the European Union (EU), Canada, Mexico, and China. Since the U.S. imposed steel and aluminum tariffs in March, each have imposed proportionate and retaliatory tariffs. Targeted goods not only include steel and aluminum, but also goods chosen to hit industries reliant on these particular foreign markets (e.g., pork) or concentrated in regions of key U.S. politicians (e.g., Kentucky bourbon, Wisconsin ginseng and Harley Davidson motorcycles, and San Francisco-based Levi jeans). These countries have also threatened larger, but proportionate, retaliatory tariffs upon further U.S. tariffs.

WTO membership has long granted the U.S. a bully pulpit for writing global trade rules and agreements. While some of these agreements are outdated, legitimate U.S. concerns over forced technology transfer in China represents an opportunity to modernize these agreements. Other advanced nations have similar strong concerns, including the EU, Australia, Canada, Japan and Korea. Forcing changes to Chinese technology transfer practices requires U.S. global leadership and coalition building, both within and outside the WTO. Unilateral WTO withdrawal would leave a global leadership vacuum inviting of Chinese-driven rule making.

Hopefully, the recent WTO withdrawal statements were bluster rather than a serious policy objective.

James Lake, Ph. D., is an Assistant Professor of Economics at Southern Methodist University, specializing in International Trade Policy.