S2 Ep19: The end of the WTO?

Episode Summary

Executive Summary: The episode examines whether escalating US-China trade tensions and growing use of special protection are undermining the WTO’s legitimacy and dispute-settlement function. Chad Bown argues the bigger threat is not tariffs alone, but the erosion of rules-based trade through exceptions, national-security tariffs, and attacks on the WTO appellate body, which could leave the world with no reliable forum to prevent trade frictions from becoming broader conflicts.

Main Topics: WTO’s core functions (Priority: 5/5): Bown explains that the WTO’s main roles are negotiating tariff reductions and rules, ensuring transparency through notifications, and resolving disputes through a judicial process rather than retaliation. Special protection and China-focused trade remedies (Priority: 5/5): The discussion highlights how many countries have used anti-dumping, countervailing, and anti-subsidy measures aimed at China, which are allowed exceptions but still erode openness over time. Trump administration’s national security tariffs (Priority: 5/5): The US shift from conventional trade remedies to national-security justifications for steel, aluminum, and potentially autos is described as highly unusual and destabilizing for the system. China’s indirect subsidies and industrial policy (Priority: 4/5): Bown describes China’s implicit subsidy system in sectors like aluminum, including energy and input support, export restrictions, and VAT non-rebates that advantage domestic downstream firms without clearly violating WTO rules. Strain on WTO dispute settlement and appellate body (Priority: 5/5): The US blocking of appellate body appointments threatens to cripple WTO adjudication, raising fears that even small trade disputes will no longer be contained. US dissatisfaction predating Trump (Priority: 4/5): The transcript notes that criticism of WTO judicial overreach and frustration over China’s non-market practices existed under prior US administrations, even if Trump’s tactics are new. Limits of economic modeling (Priority: 3/5): Bown argues economists often understate the value of institutions like the WTO because standard trade models focus on measurable tariffs and welfare losses rather than institutional stability and dispute prevention.

Key Arguments: The WTO is valuable not just for lowering tariffs, but for creating a predictable system where countries can negotiate, signal policy changes, and settle disputes peacefully. Looking only at tariff levels misses the broader rise of special protection measures that undermine market access while staying within or near WTO rules. The US move to use national-security exceptions for steel, aluminum, and possibly autos is unusual and threatens the legitimacy of the trading system. China’s industrial policies, especially in aluminum, rely on indirect subsidies and restrictions that may be hard to challenge under existing WTO rules. Non-violation complaints could theoretically challenge policies that violate the spirit, if not the letter, of WTO commitments, but they are hard to win and rarely used. The US has contributed to WTO weakness not only by criticizing China, but by blocking appellate body appointments, which may disable dispute settlement. The Trump administration appears to want change in the system, but has not articulated a replacement for the WTO. Economists have underappreciated the institutional value of the rules-based trading system and should model its benefits more explicitly. If WTO dispute settlement collapses, small trade disputes may escalate into chronic trade wars between many countries, not just the US and China.

Data Points: US tariff on imports from China: around 3% - Bown cites current low headline tariff levels as evidence that tariffs alone do not capture trade protection. China tariff on imports from the United States: around 8% to 9% - Used to illustrate that bilateral tariffs remain relatively low compared with historical levels. Trade in dispute under 2018 US-China conflict: more than $360 billion - Bown says tariffs at the time cover over $360 billion of bilateral trade. Existing US tariffs on China: $250 billion - Mentioned in discussing the scale of unilateral US tariff action against China. WTO appellate body minimum judges needed: 3 judges - Bown explains that at least three judges are required to adjudicate cases. Current appellate body members whose terms were expiring soon: 2 of the remaining 3 judges by December 2019 - This deadline could leave the WTO unable to issue rulings. Timeframe of rising special protection: last 15 to 20 years - Bown notes that China-targeted special protection has grown over this period. Timeframe of trade policy evolution: last 20 or so years - Used when describing how the WTO system evolved and why its disappearance would be consequential.

Pivotal Quotes: "The way I think about the WTO is it essentially does three big things." — Chad Bown: Introduces the WTO’s negotiating, transparency, and dispute-settlement roles. "This system creates a place where you can bring grievances forward and have a judicial process to have the arguments heard out and settled judiciously." — Chad Bown: Explains why dispute settlement is central to the WTO’s value. "If that existing system disappears and we don't know what any future system might look like to replace it, any little skirmish between countries could actually end up bubbling up." — Chad Bown: Warns about the risk of escalation if WTO dispute resolution collapses.

Implications: The episode suggests the WTO’s biggest threat is institutional decay, not just tariff escalation. If dispute settlement weakens, trade frictions may become more frequent, harder to contain, and more politically dangerous for global commerce.