Two Cheers For GATT

Policy Backgrounders | Trade

No. 135
Friday, November 25, 1994
by James Bovard

The WTO and U.S. Sovereignty

The GATT will create a new World Trade Organization as a forum for settling complaints of unfair trade practices among nations. WTO panels will be similar to the GATT panels that existed under prior international agreements. The main differences will be a faster timetable for dispute resolution, the absence of power to veto decisions against one's policies and the likelihood of penalties against violators of GATT rules. All three changes were explicit goals of the U.S. during GATT negotiations.

"The GATT will result in the elimination or reduction of tariffs in established and developing markets."

Much anti-GATT rhetoric has sounded as if the opponents considered the WTO part of a secret "Protocols of the Elders of GATT." Senator Fritz Hollings (D-SC) - the U.S. Senate's most prominent protectionist, a warrior whose own raiment is made in South Korea - proclaimed last August that the WTO would subject U.S. law to an "international tribunal" and place the nation "in the hands of the Philistines."22 A Connecticut spokesman for United We Stand, Ross Perot's organization, warns that "The World Trade Organization will have complete power over us."23 Reality is otherwise.

"The World Trade Organization will only have the power to authorize a victim of an unfair trading practice to retaliate."

Powers of the WTO. The rulings of the WTO panels will not automatically bind nations found guilty. The WTO will have no power to force a nation to change its laws; it will have only the right to authorize the victim of an unfair trading practice to retaliate against the exports of the guilty nation. In recent years, the United States and the European Community have received GATT permission to retaliate against each other's trade practices numerous times and yet have retained their sovereignty. As former U.S. trade negotiator Julius Katz observed, "There is nothing in the WTO that is self-executing in terms of U.S. law - none of our trade agreements can by themselves change U.S. law."24

The World Trade Organization is necessary, in part, because national governments routinely violate their international obligations to abstain from protectionist practices. In the United States, companies routinely spend three to five years in litigation - and hundreds of thousands of dollars in legal fees - to challenge absurd dumping decisions by the U.S. Department of Commerce. These are decisions that penalize firms for supposedly selling imported products at "less than fair value." For example, in 1990 the Commerce Department accused Korean and Hong Kong sweater producers of dumping because they sold sweaters more cheaply in the United States than in other countries:25

  • One company sold sweaters in the U.S. for only 1.2 percent less than in Mexico.
  • Another sold sweaters for 3.2 percent less than in Australia.
  • A third sold them for only 0.7 percent less than in Britain.

There are other ways of committing dumping "crimes." Under U.S. law, any foreign company earning less than 8 percent profit on a product is considered guilty of selling at a loss. Moreover, because of the Commerce Department's protectionist actions:26

  • At least 40 million fewer sweaters from Hong Kong, Taiwan and Korea were sold in the United States in 1990.
  • As a result, more than two-thirds of all Taiwanese acrylic sweater companies closed and thousands of Taiwanese lost their jobs.

Although U.S. judges often find the Commerce Department guilty of violating federal law, the agency routinely refuses to be bound by court rulings. The U.S. also chooses to disregard GATT rulings that have found that its dumping rulings violated its international obligations.

GATT Is Only a Contract. The WTO will have neither an army of soldiers nor a battalion of inspectors. As Heritage Foundation economist Joe Cobb wrote earlier this year, "What is most remarkable about the GATT, during its almost 50 years of existence, is the purely voluntary nature of it. A government's membership in GATT is like membership in a chess club: if you join, you agree to play by the rules, but nobody can arrest you if you break a rule. The penalty is that others will then refuse to play with you. The essential nature of a ‘trade sanction' is that it represents the partial withdrawal of the equal rights that member governments in GATT extend to each other's citizens."27 As one high-ranking U.S. trade official observed, GATT "is a contract among countries and a dispute settlement simply says that when one side has violated the contract that the other side has the right to also violate the contract. No one wants to get to that point because it is not in their interest to violate the contract."28 Members of the GATT receive favored treatment from other GATT members, thus providing a strong voluntary incentive for governments to abide by GATT decisions.

"If a trade practice is found to be GATT-illegal, the U.S. has four options - including doing nothing."

U.S. Options Under GATT. If a U.S. law or trade practice is found to be GATT-illegal, the United States will have four options. First, the United States could change its law or practice to conform with the GATT ruling. Secondly, it could negotiate a settlement of the case so that neither side does anything. (This has happened regarding previous U.S. complaints to GATT about Canadian dairy import barriers.) Third, it could offer the injured nation compensation in some other product area. Finally, the United States could do nothing and let the other country take reciprocal action.

The type of compensation that would be required is key to understanding why GATT would not impact national sovereignty. If the United States "wronged" Taiwan, for example, it would not be asked to surrender Guam, the Midway Islands or a few of the smaller Hawaiian Islands to Taiwan. Instead, the panel would estimate the trade-distorting impact of the GATT-illegal trade practice and authorize the injured nation either to retaliate comparably against United States exports or to seek comparable compensation from the United States. If the United States refused to change its GATT-illegal trade practice, at worst it would face retaliatory tariffs or other trade barriers from the injured nation.

The U.S. government and the offended government could negotiate over a compensation package. The United States could satisfy a foreign government's complaint not by lifting the specific trade barrier or changing the law at issue but by lifting other trade barriers to provide equivalent compensation. Wrongful U.S. trade barriers on one product could lead to the negotiation of lower U.S. trade barriers on other products. This would be a "win-win" situation for American consumers: the U.S. could either lower the trade barrier the WTO found to be unjustified or could find some other trade barrier to lower.

Despite the litany of U.S. trade barriers recited earlier in this study, the United States is one of the less protectionist nations. While it may lose a few cases before WTO panels, U.S. exporters are likely to win more cases than our government loses. Thus the United States will reap a net gain from the firm international imposition of rules of trade.

"If the World Trade Organization became abusive, the U.S. could withdraw."

The Option to Withdraw. Furthermore, the U.S. government will have no obligation to maintain its membership in the WTO. If the WTO, contrary to reasonable expectations, became abusive, the United States could exit the organization. By withdrawing support, the United States could turn the WTO into an irrelevant Third World debating group. If the WTO fell captive to Third World bureaucrats, the United States would not likely be the only economic superpower abused: the European Community and Japan would probably also take heavy flak. Still, Third World officials have no vested interest in derailing the world trading system. They may fantasize about imposing their wills on larger, richer nations - but they are not likely to act. 

Other Safeguards. Many GATT opponents warn that the United States could be outvoted and overwhelmed in GATT decisions. This is an illusory threat. It is true that each member will have one vote to change the rules of GATT. But several key WTO rules will prevent future changes from threatening American sovereignty or American interests. Two-thirds of the members of GATT must approve fundamental rule changes. And, most importantly, new GATT rules will not bind nations whose governments voted against those rules. Thus the United States will have a right to ignore rule changes made after the WTO is created.

Trivial Risks. It is certainly possible that a WTO panel could wrongfully decide that some specific U.S. government policy violated the GATT. However, in past GATT panel rulings, the average retaliation authorized has been less than $100 million. Most economists who have analyzed the GATT agreement estimate that it will increase U.S. exports of goods and services $40 billion to $100 billion. So while U.S. exporters may occasionally suffer, the United States as a whole will greatly benefit. And, since WTO penalties will most likely be imposed on United States exports, exporters - including America's most competitive corporations - will have a strong incentive to encourage adherence to the GATT commitments.

To understand the WTO's perceived threat to U.S. sovereignty, let's consider the types of trade agreements the U.S. has been found to have violated in the past. In July 1994, the U.S. was found to have violated the MultiFibre Arrangement (MFA), a compact of major textile importing and exporting nations, by imposing import quotas on El Salvador's shirts - even though there was no evidence Salvadoran imports were disrupting the U.S. market. Reportedly, U.S. officials threatened Salvadorans with retaliation if they complained to Geneva. Although an international MFA panel ruled unanimously against the United States, the U.S. refused to abide by the decision and maintained our quotas for several months.29 The offending quota was lifted only after the Salvadoran government formally agreed to accept another, higher quota restriction on its shirts.

"U.S. export control regulations have severely hurt many of America's leading technology companies."

WTO vs. the U.S. Government. If we look at the likely adverse impact on U.S. exports from potentially negative WTO rulings and compare them to the adverse impacts on U.S. exports from existing U.S. government policies, the trivial impact of WTO adverse rulings becomes stark. The U.S. government has done more to reduce U.S. exports than has any other government and probably more than any international organization could do in the next half-century. U.S. export control regulations - routinely imposed despite the lack of benefits to national security - have severely hurt many of America's leading technology companies. As author George Gilder notes, "By constantly imposing special export controls for nonsensical national security concerns and changing policy from month to month in response to utterly spurious emergencies, the U.S. government has become the chief obstacle to U.S. competitiveness in electronics."30

  • The National Academy of Sciences estimated in 1987 that Commerce Department export controls on U.S. technology and products that pose no national security threat reduced American exports by $9 billion.31
  • A 1994 study by the Center for the Study of American Business estimated that export controls reduced American exports by roughly $30 billion in 1991, and that many of the restricted products would have no possible military use.32

There are other ways in which unwise U.S. government policies hurt U.S. exports:

  • A study by Purdue professors Thomas W. Hertel, former U.S. Department of Agriculture chief economist Robert L. Thompson and Marinos E. Tsigas concluded that the misallocation of resources caused by the federal government's farm program depressed the productivity of other sectors of the U.S. economy, reducing American manufacturing exports by $7.5 billion and service exports by $3.4 billion.33
  • A North Carolina State University study concluded that U.S. tobacco exports would double if the government abolished its tobacco quota and price support system.34
  • The USDA currently imposes severe limitations and/or quotas on the export of almonds, raisins, peanuts and peanut butter.35
  • U.S. telecommunications exports have been decimated because a federal judge prohibited major American telephone companies from product design and development.37
  • Overall, a study by Andrew Feltenstein of Kansas State University estimated that unilaterally abolishing farm programs would have reduced the U.S. trade deficit by $42 billion in 1986.36

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