WHEN ROBERTO AZEVÊDO, the director-general of the World Trade Organisation (WTO), departs on August 31st, he will leave an institution in a wretched state. The WTO’s 164 members could not agree even on an interim successor (Mr Azevêdo is going a year early, and will take a job at Pepsi, a drinks manufacturer). Only one global trade negotiation has been completed in 25 years. America—a fierce critic of the WTO under Donald Trump—has blocked the appointment of judges to the organisation’s appeals body, hobbling its dispute-settlement system. And now Mr Trump’s trade representative, Robert Lighthizer, has fired another salvo. In a recent article in the Wall Street Journal, he claims that the WTO’s core principle is being undermined.
His complaint centres on the ideal of the “most favoured nation” (MFN), or non-discrimination, principle: the WTO’s members should apply the same tariffs to all their trading partners. For example, America should apply the same tariff to imports from China as it does to goods made in Europe. A cut in tariffs agreed with one country should, by the same principle, be extended to all others.
But the WTO also allows a big exception to MFN. Two or more members may strike preferential-trade agreements (PTAs) that eliminate tariffs on almost all trade—but only among themselves. These deals have drawn Mr Lighthizer’s ire. He singles out the European Union in particular, for resurrecting the pre-war “system of colonial preferences" through its 72 deals with smaller countries, and for pushing “thinly veiled protectionist measures” such as rules on what can be called “feta” or “champagne”.
Mr Lighthizer has a point. Partly because it has been so difficult to agree multilateral tariff cuts at the WTO, the number of PTAs has risen from 50 in the early 1990s to around 300 in 2019. As a result, even though most trade still happens on an MFN basis, in 2016 around 28% of global trade enjoyed zero tariffs because of a preferential deal. On average, trade under such deals incurs a tariff 7.4 percentage points lower than exchanges with countries that are left out.
Preferential deals increase trade, but they can divert it too. Although they boost trade among the countries involved, others’ exports can be squeezed out. A recent PTA between Canada and the EU, for example, lowered Europe’s tariffs on Canadian lobsters—but not, of course, on American ones. Canada’s share of the EU lobster market grew, whereas America’s shrank. So on August 21st Mr Lighthizer concluded a deal with the EU that removed the Canadians’ advantage. The EU lowered its lobster tariff for everyone. In return, America cut its MFN tariffs on goods, including cigarette lighters and crystal glassware, of which Europe exported $160m-worth to America last year. (The deal could prove politically useful in lobster-exporting Maine, where the Republicans are at risk of losing a Senate seat in November.)
Advocates of PTAs argue that ultimately they reinforce the multilateral system. They persuade other countries to negotiate tariff cuts (Mr Lighthizer’s mini-deal this month is arguably a case in point). And they also open up new areas of co-operation. The Comprehensive and Progressive Trans-Pacific Partnership—a deal designed by America but subsequently spurned by Mr Trump and adopted by the remaining partners—includes tariff preferences as well as rules on things like subsidies that are intended to encourage reform in China, which was not a member.
The deals’ critics snap back that PTAs in fact do little to advance multilateral free trade. For instance, India already enjoys low-tariff access into the American and European markets under MFN, and it is naive to think that it will offer to open its own markets any time soon. The proliferation of PTAs also makes trade more complex: fiddly “rules of origin” are needed to decide whether goods that are the product of international supply chains qualify for tariff-free treatment. Critics have long likened the overlapping mess of deals to a spaghetti bowl.
Despite Mr Lightizer’s broadside, America has been an enthusiastic proponent of the sorts of deals he now questions. A study by Jurgen Richtering and Thomas Verbeet of the WTO found that in 2016 America had a bigger share of its trade enjoying preferences through reciprocal trade agreements than Canada, Japan, or indeed the EU. Mr Lighthizer concedes that deals that encourage regional integration, like the EU’s single market or America’s deal with Mexico and Canada, are fine. But this distinction might seem intended to favour big countries like America that can then hold their smaller neighbours hostage, while excluding Europe’s preferential deals with its members’ ex-colonies.
Mr Lighthizer has relentlessly pursued deals with Britain, Japan and Kenya. In 2017 he stated his preference for bilateral agreements over the multilateral sort, arguing that with an $18trn economy America could do better negotiating individually. The Trump administration has also been eager to wield discriminatory tariffs to force partners into making concessions. In just over three years in office Mr Lighthizer has applied such levies to around 70% of America's imports from China, as well as European steel. He may complain about the Europeans imposing their standards on the rest of the world. But others would complain just as loudly about Americans doing the same, for example through the intellectual property protections he negotiated with Mexico and Canada.
It would be salutary for WTO members, as they choose Mr Azevêdo’s successor, to reflect on whether they are supporting the multilateral system as they should. After a long run of failure, the arrival of a new director-general of the WTO should provide an opportunity for a candid discussion about the organisation’s future. Mr Lighthizer is right to bemoan the stalling of the multilateral system. But the irony of his attack is that there will probably need to be a new American administration, committed to supporting rather than undermining it, before the WTO can be reinvigorated.
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