Point of Clarification
The New York Times published an article last weekend, “China Uses Rules on Global Trade to Its Advantage,” that could easily be misconstrued. The article rightly points out how China has aggressively used the rules of the World Trade Organization and the International Monetary Fund to achieve its export objectives. I don’t have a quarrel with what China has done; other countries could take some lessons.
What I find problematic is the author’s description of a WTO that “wields strict, enforceable penalties for countries that impede trade” and an IMF that “has no power over countries … that do not borrow money from it.“ Let’s dispose of the IMF first. At its core, the IMF is a bank, often the lender of last resort for countries whose economies are in the dumper. Like any other bank, I wouldn’t expect the IMF to have any influence over somebody who doesn’t borrow from it. Duh.
The point about the WTO is trickier. Many people, especially American politicians, fear that the WTO can tell a country to do something it doesn’t want to do – and that the organization on the banks of Lac Leman has the power to back up what it says. Nothing could be further from the truth. The WTO, in and of itself, has no power beyond those of moral suasion. And we know how far moral suasion goes with national governments.
The “strict, enforceable penalties” that the Times refers to have quite a different source. Realizing that total freedom to retaliate on trade matters has led to more than one war in human history, the member states of the WTO have willing subordinated their powers to retaliate to an organized dispute settlement process. The process is managed by the WTO secretariat in the sense that the secretariat provides support staff, statistics, keeps records, prints and distributes documents – that sort of the thing. The director-general of the WTO can’t wake up one morning and say “let’s be hard-nosed” against China or the United States or any other country.
This is where the action is.
The dispute settlement process begins when a WTO member, or several members, decide they have had enough of another member’s restrictions on some specific product. They notify the WTO of their complaint, which lets everybody know what is going on and starts a clock on resolving the issue. First, the two (or more) sides must talk bilaterally to try to work things out. If that doesn’t happen according to an established schedule, the WTO is asked to assemble a panel of experts to review the facts of the case. These experts work in their individual capacities, are recognized specialists and are from neutral parties. The parties to the dispute may object to an expert, but that is rarely done because the secretariat is pretty careful about who they nominate. The panel gets down to work, exhaustively reviews the facts, talks to all the parties. The parties are also continually encouraged to resolve things between them. Again, the panel of experts has a strict timetable for finishing its work.
Assuming the dispute still stands, the panel sends its report to the parties and to the WTO’s General Council, composed of all the members. The report makes recommendations for resolving things, which generally requires a change in one of the parties’ rules or regulations. Assuming that country doesn’t agree to change its ways, it has one month in which to appeal the panel’s findings. The WTO has a standing appellate body of seven well-respected trade experts to review panel findings, experts chosen by the WTO membership for four-year terms. If they deny an appeal and a country’s practices aren’t changed, then the aggrieved parties may request permission to retaliate (often by increasing customs duties on products of interest to the recalcitrant party). More negotiations ensue but, again, there is a timetable, which generally means that we reach the retaliation stage after about 18 months. At that point, if the country deemed to be at fault still will not change its ways, the other parties may be authorized to retaliate by the General Council.
Notice that the WTO has no power of any sort throughout this process. The dispute settlement mechanism is launched by member states, carried out through a process designed to protect the interests of all parties, usually resulting in a compromise agreed between those parties. It is a rare case that goes all the way to authorizing retaliation. And the retaliation is carried out by member states – not by the WTO. Any teeth come from the members acting in their own self-interest. And it seems to work.
