President Trump threatened on Thursday to leave the World Trade Organization. As far-fetched as that might seem, his language on this threat was not ambiguous: “If they don’t shape up, I would withdraw from the WTO.”
Trump’s criticisms of the WTO were partly justified, based on Chinese abuses of intellectual property law that have been essentially given a pass. But he also views the WTO as a bad deal because it restricts his own power to control American trade policy. Here, he is very wrong. For the United States and other member countries, WTO limits are often the only thing standing between them and their own worst impulses.
The WTO is designed to keep trade free and flowing to the benefit of all. It does so by imposing unhappy consequences for the ones who, for example, unilaterally impose tariffs that impede free trade and thus harm everyone in the global economy.
Tariffs don’t hurt only the countries they target, but also the countries that impose them. As a tax on imports, they harm domestic consumers and producers, as Trump’s steel and aluminum tariffs are already doing. As the price of imported goods rises because of this tax, domestic prices also rise, absent the natural forces of price competition.
The net result is that money that once went to a range of industries, lifting the economy as a whole, now flows inefficiently into a single industry artificially supported by the government (think of steel). This market distortion always destroys far more jobs from other sectors and, in the long run, makes the economy less efficient. For every steel job supported by a tariff, hundreds of automotive and other manufacturing jobs that use steel might be lost.
This big picture is easily lost for politicians who consolidate and build their power base by propping up politically important industries. This is why Trump was so keen on steel tariffs. WTO rules are in place, in part, to prevent such short-sighted economic shuffling.
Trump, in his determination to wage a trade war, has found what he thinks is a way around both WTO rules and Congress. He has used national security arguments as a justification for his tariffs. The resulting trade war has done perfectly predictable damage to the economy. Otherwise, why would Trump be promoting a $6 billion agricultural bailout, funded by taxpayers? That may not be a lot of money in the grand scheme of things, but it’s an awful lot of money to spend on a self-inflicted problem that was entirely optional; the national security angle is an obvious pretense.
Moreover, the WTO has not treated America unfairly. The U.S. wins more cases before the WTO than it loses, and it benefits greatly from the free trade that the organization facilitates more broadly. Washington has been quick to resort to the WTO, most recently to challenge other countries for responding to American tariffs with retaliatory tariffs.
Leaving the WTO would unleash the worst instincts of domestic politicians to subsidize and protect politically important industries. Trump’s instincts on this are bad. It would also give China immense power to make and litigate the rules under which world trade operates. Those rules would not be in Washington’s interest.
Abandonment of the WTO would be Trump’s worst deal yet, an easily avoidable own goal, coming just as a possible victory on renegotiating NAFTA is in sight.
