The end of the Cold War brought about a different view of free trade in the United States. Through almost 50 years of negotiations, the United States spearheaded the establishment of the World Trade Organization as Washington sought to shape the global trading regime — and the trading order in the West — as a bulwark against communism. But times have changed, and amid a frontal assault by the United States this week, the WTO's 11th Ministerial Conference came to an undignified end Dec. 13 in Buenos Aires, Argentina.
Since the founding of the WTO and the signing of NAFTA, free trade has polarized the United States. Democrats have pushed for stronger standards in agreements, while Republicans have fought to link trade to national security. However, as the steadfast promotion of free trade became a toxic political liability, President Donald Trump managed to merge the Republican foreign policy approach with traditional Democratic ideals. And while his policy moves may be an overcorrection, the underlying U.S. political tensions are real.
The new global order on trade is also a far cry from the one defined by the Cold War. Virtually every country has adopted a number of free-market principles. The Russian economy is mostly state-run, but the country has cherry-picked Western market standards to create a hybrid economy. In China the private sector now employs more than four Chinese citizens for every one working in the public sector — the private sector also contributes over 60 percent of GDP growth. But as non-Western economies such as China's begin producing more valuable goods, they present an economic threat to the industries that Western economies still dominate, such as the manufacturing of high-end semiconductor chips.
Virtually every country has adopted some number of free market principles.
This has led to a merger of national security and economic policy in the United States and the West. Free trade policy is now defined by the growth of the hybrid economies of China and others, by the threats to strategic industries in Western countries and by China's alleged disregard for its commitment to market economy principles under WTO guidelines. Indeed, when U.S national security adviser H.R. McMaster gave a Dec. 12 preview of Trump's new national security strategy, he specifically cited China's economic strategy as a threat to the global system and connected trade and economic policy to national security.
The U.S. pressure on China has been growing under the surface for quite some time. U.S. Trade Representative Robert Lighthizer has long criticized the WTO for lacking the tools to force China to follow market economy principles on the financing of state-owned enterprises (SOE), the protection of intellectual property and the heavy state influence on domestic pricing. He has argued for the United States to go around the WTO to pressure China economically, if needed. That thinking can be seen in the U.S. investigation under Section 301 of China's intellectual property practices.
The harsh rhetoric about the lack of reform, combined with the U.S. tendency to lose cases brought against it, have rightfully worried many that the ultimate U.S. goal might be the end of the organization. Of course, actually pulling out of the WTO would bring on dozens of domestic legal challenges and could make U.S. exports to countries without a free-trade agreement subject to far higher tariffs. At the conference, Lighthizer pointed out that the WTO has been bogged down by litigation when it should be pursuing negotiations on trade and seeking concessions from countries such as China.
Reforming the WTO, however, is a tall order. One of the organization's defining features is that decisions must be unanimous, meaning every country essentially has veto power. If the United States wanted fundamental change, all the 163 other members would need to be on board. This is one of the reasons that the Doha Round of negotiations have struggled since they began 16 years ago.
Perhaps one of the more interesting outcomes of the Buenos Aires conference was a statement from the United States, the European Union and Japan that they would work trilaterally — through the WTO and other bodies — to eliminate "unfair market distorting and protectionist practices by third countries." They singled out overcapacity in certain sectors, forced technology transfers and state subsidies as a problem, all in a statement not too subtly aimed at Beijing. Such a joint effort could certainly cause China to capitulate on some aspects of their demands, but the United States almost certainly had to assure the Europeans that its moves were not geared to bringing down the WTO to get them on board. This broad alliance is not new and has been growing for a while: all three countries face the same systemic risk from China's economic growth. Indeed, Washington, Brussels and Tokyo notably collaborated when all three simultaneously brought cases against China's export restrictions on rare earth metals and other rare metals in 2015.
The biggest issue, a giant one for all those involved, is the ongoing WTO cases that China brought against the United States and the European Union over its continued treatment as a nonmarket economy, which gives the United States and the European Union greater freedom to enact anti-dumping and countervailing duties on China in sectors where there is a heavy state hand. Because those measures are the backbone of current trade remedies and sanctions against China, its classification as a market economy is something that the European Union and the United States are ardently against, and are coordinating their actions as a result. But if they lose their respective cases, both are going to be in a position where they will want to pressure China to make some sort of change.
Actually pulling out of the WTO would bring on dozens of domestic legal challenges and could make U.S. exports to countries without a free-trade agreement subject to far higher tariffs.
Ironically, China often complies with WTO rulings. Its strategy has long been one of compliance on the surface, because as it undergoes a delicate rebalancing at home, it doesn't want to add an external threat to its place in the WTO. Added pressure from the United States and the European Union could compel China to come to the table and to negotiate a new treatment.
One possible outcome finds some middle ground: China accepting less than full market economy status, while the European Union and the United States concede that the state's influence is weaker in some Chinese sectors — agreeing to treat them as market economy ones. China would most likely love this arrangement because many of its more important sectors are increasingly privately led.
One of the most interesting takeaways, however, may be the fact that as China moves into a new economic paradigm in which it is more market-oriented, a rules-based trade system becomes far more important if the United States, or anyone else, wants to justify trade action against China. That system would define the conditions that China must meet to qualify for market economy status. Nonetheless, the winds of free trade have shifted, and not just in the United States. What we are now seeing is global institutions being forced to catch up.
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