Donald Trump won the White House after railing against free trade and has already pulled the US out of one massive trade deal. With less public notice, the new president just took what could be an even more far-reaching step — formally declaring that Washington would no longer be bound by rulings made by the World Trade Organization.
Citing concerns that many Americans do not “see clear benefits from international trade agreements,” the report lays out Trump’s intention to “aggressively defend American sovereignty over matters of trade policy.”
That's a characteristically blunt way for Trump to outline a major policy shift. What it means is that even if the WTO — which effectively serves as an international Supreme Court for trade — decides against the US in a dispute, “such a ruling does not automatically lead to a change in US law or practice.”
So let’s say the WTO rules that a tariff, or a border tax, that the US has imposed on a certain kind of Chinese car part that’s being imported to the US is in violation of WTO rules. Trump is using this document to say the US will feel no qualms about ignoring the WTO ruling if it doesn’t serve US interests. That would deal a serious blow to the organization’s legitimacy — and shows that Trump is serious about throwing out the playbook that has in one form or another governed global free trade since World War II.
“The consensus approach to trade in the US has been economic internationalism — this is a much more zero-sum approach to the world,” says Edward Alden, a senior fellow at the Council on Foreign Relations. “[The Trump administration is saying,] ‘If that hurts other countries, that’s okay — our focus is on the United States.’”
So if the US is going to ignore WTO rulings when they conflict with US interests, then how is it going to settle conflicts? Simple: head-to-head sparring with other countries using direct negotiations and real threats of punitive tariffs.
The Financial Times has reported that incoming Trump officials asked the US Trade Representative’s office to “draft a list of the legal mechanisms that Washington could use to level trade sanctions unilaterally against China and other countries.”
Trump’s willingness to buck the WTO appears to be yet another example of how his administration has an aversion to working in concert with the major international institutions that uphold the global political, security, and economic order, including military alliances such as NATO. His instinct is always that multilateral institutions and deals end up exploiting the US, and that going it alone is the best way for the US to protect its own national interests.
But the Trump administration’s skepticism of the WTO isn’t new, nor is it born entirely out of a reflexively nationalist or anarchic impulse. The WTO’s relevance has been a real question for years, and there’s even a case to be made that should Hillary Clinton have taken the White House, she might have considered doing things like carving out paths to take trade disputes with China outside the WTO.
In order to understand why, you have to consider how the US and China — the two major powers clashing at the WTO — are confronting a situation the WTO has never handled before.
The WTO usually helps prevent the world from sliding into trade wars
Since the WTO was established in 1995, one of its most crucial purposes (and some say its only purpose today) has been to serve as a neutral arbiter in trade disputes between its 164 member nations.
The WTO dispute resolution system allows members states to make their case against each other through an explicit legal process, which involves presenting evidence before a body of judges. The US has made good use of this process, bringing 114 formal disputes against other countries since 1995, which accounts for more than a fifth of cases around the world. If a country doesn’t comply with a ruling, the WTO will sometimes authorize the aggrieved country to retaliate against the violator by allowing them to, for example, impose reciprocal tariffs. But as international trade expert Chad Bown notes, it can only be done in a “in a formulaic and limited fashion.”
Trump is considering circumventing that very legal process. That would be a serious blow to the WTO’s legitimacy as an international arbiter. If the US decides that it’s free to ignore the body’s rulings and to negotiate trade disputes on its own, then what’s to stop other countries from doing so?
In a worst-case scenario, country after country could stop heeding the WTO’s rulings and start taking unilateral action to deal with trade disputes by threatening and imposing punitive tariffs on other countries; trade wars would prompt a new wave of protectionism across the globe, destabilizing the international economy in the process.
Trump’s anti-WTO stance isn’t as irrational as it may seem
But before we start panicking about that worst-case scenario, it’s important to take into account some context that makes Trump’s call for a new era of trade with less regard for the WTO a considerably less jarring shift than it may seem.
First of all, the US has already been weakening the WTO by ignoring some of its rulings and politicizing its trade dispute process. During the Obama years, the WTO ruled in favor of Brazil in 2014 in a case that argued American cotton subsidies gave US cotton farmers an unfair advantage over Brazilian competitors.
But instead of cutting subsidies, the US kept them on in defiance of WTO trade rules and bought off Brazilian cotton growers with payments amounting to $750 million. In other words, rather than respect the ruling, the Obama administration bribed their way out of the dispute.
In recent years the US has also ignored WTO rulings that it was discriminating against Mexican fishermen in tuna can labeling and a WTO ruling in favor of Antigua and Barbuda after the US prevented consumers from visiting gambling sites based in the Caribbean nation.
It’s also taken steps to make the WTO legal process more overtly politicized. Last year, Washington blocked the reappointment of a widely esteemed South Korean lawyer to the appellate body of the WTO’s dispute settlement system. The US claimed that he was an activist judge unfriendly to US interests, and then decided to veto him in its own gesture of activism. Obama’s untraditional move raised questions of whether the settlement system can maintain independence from the interests of specific nations.
This is all to say that while Washington has formally taken the WTO very seriously, in practice, even internationally-minded presidents like Obama had already on some occasions done what Trump has promised to do — ignore its rulings when it wishes to.
The US and China are locked in a battle exposing the limits of the WTO
Another important lens for understanding what’s happening is that the WTO is currently in uncharted territory. The clash between the world’s two biggest economies at the WTO — the US and China — is bringing to the fore massive questions that the international body has never before had to reckon with before.
Right before leaving office in January, Obama took a parting shot at Beijing by bringing a case at the WTO against China’s aluminum industry, arguing that the government was subsidizing it in violation of free trade rules.
Todd Tucker, a trade expert at the Roosevelt Institute, a left-leaning think tank, says that the case represents a “‘swing for the rafters’ test of the WTO's ability to find against subsidies that aren't actually prohibited under WTO rules.” It was the last of 16 cases that the US filed against China during Obama’s tenure — the latest addition to long-simmering tensions brewing between the two countries on their trade practices.
China is also testing the WTO’s willingness to confront major powers. Beijing has launched a legal challenge against the US and European Union for refusing to honor a pledge to officially confer “market economy status” to China in accordance with an agreement signed when China entered the WTO in 2001. That was supposed to happen in 2016.
The US and EU argue that since the Chinese government subsidizes so many of its goods and routinely engages in dumping — selling its goods cheaper in foreign markets than it does in domestic ones — it can’t possibly be considered a market economy.
This isn’t just an empty label — if China is officially considered a market economy, it will be much harder for the US and EU to impose anti-dumping measures against China, due to trade law rules. To put it more simply, if China gets free market status, the US and Europe lose a lot of their already limited power to hold China accountable for violating free trade practices.
But China says the US and EU are reneging on an agreement that was made in 2001, in which it was understood that China would automatically be given market economy status after 15 years. (The issue is that Beijing doesn't seem to have changed its behavior in accordance with the spirit of that agreement.)
This is all to say that the WTO is facing a number of big, thorny questions over the future status of China, a country that has extraordinary economic power — but also regulates its economy in a manner that flies in the face of free trade norms.
Alden thinks it’s possible the Trump administration may end up arguing that a lot of China’s practices are simply not covered by WTO rules. “The WTO is not a complete agreement. It doesn’t actually cover every contingency imaginable in global trade,” he says. If Trump can argue persuasively that some of China’s market interventions don’t fall under WTO rules, that could liberate the US to use unilateral measures like blocking Chinese imports if China doesn’t modify its behavior. “That is an intellectually defensible position,” Alden says.
Tucker notes that there’s widespread skepticism in Washington that the WTO actually has the power to compel China to change, and that it’s not only economic nationalists like Trump who are contemplating looking outside the WTO to deal with China.
“Even in a Hillary Clinton administration, you would’ve seen some of these ideas floated, although probably a bit more artfully,” Tucker says.
Even a longtime free trade proponent such as Clinton might’ve considered the WTO inadequate for dealing with China. Imagine what could be in store now that a critic of both free trade and China itself is at the helm.