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World Trade in Crisis

Robert Bob Koopman started his career by teaching international trade in the Economics Department at Georgetown University, in Washington DC. After that, he was working for Economic Research Service of USDA, USITC Office of Economics, and the United States International Trade Commission.

Robert Koopman, photo by Philipp Naderer

Now Mr. Koopman serves as the Chief Economist and Director of the Economic Research and Statistics Division at the World Trade Organization (WTO). In this post, Mr. Koopman provides the Secretariat and Member Countries with analysis and information that promotes a deeper understanding of trade and trade-policies’ role in economic growth and development.

On October 18th, Mr. Koopman is coming to Room for Discussion to talk about the World Trade Organization, the controversies in the international trade, and the trade war between the USA and China.

The World Trade Organization

The world is diverse; therefore, communication among countries is complex. The WTO is the only global international organization dealing with the rules of trade between nations. The WTO officially commenced on January 1st, 1995 under the Marrakesh Agreement, signed by 124 nations. Today, 164 countries are members.

The WTO is a forum for countries to thrash out their differences on trade issues. At the heart of the system — known as the multilateral trading system — lie the WTO agreements, negotiated and signed by a large majority of the world’s trading nations, and ratified in their parliaments. The main goal of the WTO is to improve the welfare of the people of the member countries.

Although, the fundamental value of WTO is to ensure that trade flows as smoothly, predictably and freely as possible, not everyone agrees that WTO has actually created a “fair playing field” for everyone. For example, in 2012 the American government complained to the WTO that the Chinese government was breaking the rules by restricting the export of rare-earth elements. According to the US, China’s dominance in their global supply creates a certain damage for American manufacturers by pushing up prices of their inputs. After the WTO’s judges sided with the US, the Chinese government dropped the measures. Now, the Trump Administration claims that the WTO’s incomplete rule book makes it incapable of dealing with action of China, therefore the USA must take over and do the job for them. 

Controversies in trade policy: The anti-globalization movement

Nowadays, the world is more controversial than ever. On one side, we have activist organizations supporting the “anti-globalization” movement and fighting for the global justice, on the other side, we see countries following the path of anti-globalization movement and engaging in the activist trade policy.

Not all organizations within what is called the anti-globalization movement are against globalization but they indeed often desire a counter-globalization movement. The biggest concern of the activist of counter-globalization movement is that the present type of globalization does not allow the poorer developing nations to exploit their comparative advantage in agriculture due to existing protectionist policies in the richer countries. The real anti-globalization movement, in particular the activist trade policy, usually means that the government policies actively support export industries through subsidies and import barriers.

Let’s examine some of the claims of both anti-globalization movement and counter-globalization movements and try to give a critical reply to them.

“International trade based on low wages hurts workers in the developing world”

The theorem of Stolper-Samuelson imminently discards this argument: free international trade benefits the factor of production that is abundant in the country, but the factor of production that is scarce in the country will lose. While developing nations have abundant low-skilled labor, developed nations have high amounts of high-skilled labor. Applying Stolper-Samuelson theorem to the developing countries: the free trade benefits the factor of production that is abundant in the country such that real wages of low-skilled workers increase or the distribution of income in the developing world tilts in favor of low-skilled labour. Wages of workers in developing nations improve due to trade but workers’ rights are not always well-taken care of. However, is the latter indeed due to globalization?

“International trade agreements (e.g. within the WTO) should allow for trade restrictions if products in developing nations are produced without respecting minimum labor standards (freedom to organize within unions, prevention of child labor, respecting safety standards, etc.)”

Combating, for instance, child labor via import bans shifts the use of child labor from the exporting sectors to the import-competing and services sectors where import bans in the developed world have no effect. Hence, such bans are not effective in reducing the incidence of child labor: actually the supply of child labour and especially of the so-called worst types of child labour increases. The first-best method to combat the problem of children labour is to directly work on the root problem: low family income, cost of education, etc.

“International trade agreements should allow for trade restrictions in order to guarantee environmental standards and to guarantee cultural identity”

Such environmental standards can be misused for protectionist purposes rather than to safeguard the environment. Protection of domestic “cultural markets” (e.g., film) against foreign dominance can be justified when referring to sufficiently large positive externalities. But the question remains: How big are the positive externalities and are they economically justified?

“The World Trade Organization infringes upon national sovereignty: the issue of legitimacy”

The WTO is not a staff-driven, technical and supranational body: it is member-driven. The members have voluntarily agreed upon taking on a code of conduct. 

“The developed nations’ attitude is asymmetric: they desire more liberalization in goods in which they have a comparative advantage, but they keep on restricting trade in agricultural products in which the developing world has a comparative advantage”

This is unmistakably true and it is currently the main reason why the Doha Round is still not finalized. The WTO launched the Doha Development Round during the fourth ministerial conference in Doha, Qatar in November 2001. This was to be an ambitious effort to make globalization more inclusive and help the world’s poor, particularly by slashing barriers and subsidies in farming. The conflict between free trade on industrial goods and services but retention of protectionism on farm subsidies to domestic agricultural sectors (requested by developed countries) and the substantiation of fair trade on agricultural products (requested by developing countries) remain the major obstacles. The future of the Doha Round remains uncertain…

The trade war between the USA and China

Unless peace breaks out, the American rate will increase to 25% on January 1stFrom September 24th, imports of products which in 2017 were worth $189 billion, including furniture, computers, and car parts, hit with duties of 10%. The Chinese in response put tariffs on $60 billion of American exports. Some have speculated that China could hit back at the USA in a far more significant way: selling a huge chunk of the more than $1 trillion of USA Treasury bonds it holds. 

The IMF said that disruptions to global trade are threatening growth. It cut its global growth forecasts for 2018 and 2019 by 0.2% to 3.7% and lowered projections for the increase in goods and services trade worldwide.

“America first” policy in Asia could result in “America last”The USA and China are in the proper trade war. While The USA raising the duties on Chinese import, China tries to minimize its losses by aggressively expanding into the Indo-Pacific rejoin. The experts say that the Indo-Pacific area is of great strategic importance as it’s the “future of the world’s economy”. The USA would lose the access to commerce in the world’s most populous region as China start dominating commerce and politics there. It is unclear if President Trump and his supporters understand that without the United States within the region an “America first” policy may result in an “America last” policy.

What is the future of the Doha Round? How will the trade war between the USA and China unfold? Is the whole world in danger from toxic slipovers of this trade war? Will free trade remain an ideology rather than reality? These and more questions will be posed to Robert Koopman during the Room for Discussion interview on Thursday 18th October. The interview will take place E-hall at Roeterseiland Campus (Universiteit van Amsterdam) at 13:00. Read our next article after the interview!


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