World Trade Organization is worse than useless

OPINION:

The World Trade Organization is failing in its mission.

Established after World War II as the General Agreement on Tariffs and Trade along with the International Monetary Fund and World Bank, the United States and its allies created these institutions to promote trade among Western market economies, the convertibility of currencies and investment in developing nations.

An underlying objective was to promote economic integration as a deterrence to war and to strengthen national security. Along with the European Union and other WTO-sanctioned regional agreements, it helped expand trade based on comparative advantages and common prosperity.

China and Russia were admitted into the WTO in 2001 and 2012, respectively, based on the flawed assumption that membership and rules for tariffs, export and import quotas and domestic policies affecting trade — such as product standards, intellectual property protection and industrial policies — would foster their transition to Western-style market economies and democratic governance.

That simply hasn’t happened.

China has subverted the rules by forcing foreign investors to transfer intellectual property, massively subsidizing domestic industries, such as semiconductors, imposing great harm on Western economies and effectively gaming the dispute settlement process.

Consequently, since the Obama administration, the United States has refused to approve new judges for the WTO Appellate Body. In the Trump years, appellate review of dispute settlement panel decisions ceased.

The WTO recognizes the right of nations to take actions inconsistent with its rules for the purposes of preserving public morals and safety, and national security.

GATT Article XXI states that nothing in the agreement prevents a member from taking actions “relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment” or “taken in time of war or other emergency in international relations.”

When Russia seized Crimea in 2014, it blocked trade between Ukraine and Kazakhstan and Kyrgyzstan.

In 2018, the Trump administration imposed 25% tariffs on steel and 10% tariffs on several nations, citing the necessity to maintain an industrial base.

Both actions were contested at the WTO, where Russia and the United States maintained that policies referencing Article XXI are nonjusticiable in the WTO.

In 2019, a panel asserted that national security actions were subject to WTO review. Still, Russia may block Ukrainian trade because conditions between the two nations rose to the level of “war or other emergency in international relations.”

In December, another panel ruled that U.S. metal tariffs “are not justified” because they were not “taken in time of war.”

It’s tough to supply an army without metals. Still, people of goodwill and with knowledge of economics and trade law can disagree about whether imposing tariffs on Canada and other close allies was prudent.

More importantly, if the WTO can sanction a wanton act of aggression by an autocratic state and prohibit the United States from maintaining an industrial base to supply its military when not engaged in a hot war, the WTO becomes worse than useless. It becomes destructive.

The war in Ukraine has taught us modern conflicts can quickly run through prodigious stockpiles of expensive, technologically sophisticated weapons. The industrial wherewithal to replace depleted ammunition requires production facilities and supporting industries to be operational before hostilities begin.

A WTO that does not permit national policies to maintain an adequate industrial base in peacetime does not deter war. Carried to its logical extremes, it can encourage aggression.

China makes no secret of its intention to build a military with global clout, challenge the security interests of U.S. allies in the Pacific and gain control of Taiwan. And sell its admixture of autocracy and state-directed capitalism to the developing world as an alternative to democratic capitalism.

China is building an axis of autocracies by forging trade and investment ties with Russia, Saudi Arabia and Iran. Together with Russia’s invasion of Ukraine, this is inspiring a significant military buildup among NATO, the United States, Australia and Japan.

Semiconductors are the new steel, and those militaries, as well as Chinese capabilities, require substantial, secure supplies. China is spending $150 billion building a domestic industry with only limited success.

To mute this, the United States is organizing a western embargo on sales of semiconductors to Chinese military suppliers and the machinery necessary to build the most sophisticated semiconductors.

Now China is taking the United States to the WTO to stop those efforts. Given how dispute settlement panels have ruled regarding Russia blocking Ukrainian trade and the U.S. metal tariffs, it’s easy to see a dispute settlement panel finding Japan, the Netherlands and the United States in violation of Article XI, which severely limits export restraints.

If the WTO is beyond reform, the only solution may be plywood and nails. Board up the windows in Geneva and send the bureaucrats home.

• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.