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Free Trade, not Forced Trade: How to Settle Seattle

Dylan Reid

now that the fallout from the turbulent World Trade Organization conference in Seattle at the end of 1999 has started to settle, it is time to sit back and analyze exactly what it was that created such discord, both within the WTO itself and between the WTO and the activists who opposed it from the outside. The intensity of the discord in Seattle and consequent failure of the negotiations seems to have taken the world's business, governmental and media elites by surprise. After all, over the 40 years during which the WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), was in place, no-one ever rioted in the streets. That's because GATT stuck to economics, and the trade-offs involved were straightforward - I'll reduce my tariffs if you reduce yours. Furthermore, the process was gradual - economies had plenty of time to adjust to the removal of tariff barriers. The WTO, on the other hand, interferes not just in a nation's economic management, but with many aspects of a nation's society. Its enforcement mechanism is useless against large economies, but brutal on small ones. And it has been imposed suddenly, without any clear analysis of the enormous consequences (and, in fact, prematurely - part of the Seattle round was about reducing tariffs on textile imports from developing nations that should have been removed long ago under GATT, before the WTO process was even begun). This hubris, this combination of ambition with a lack of understanding of its consequences, has resulted in an agreement that is fundamentally wrong-headed, and can only serve to disrupt international relations and economies until it is fixed.

The fundamental flaw in the WTO can be found by examining its origins in the GATT process. In the 1980's, as the GATT process approached its conclusion and worldwide tarriffs became less and less significant, other forms of barriers to trade became more noticeable. These took many shapes: national laws that decreed preferential treatment towards local companies at the expense of foreign enterprises; strict or eccentric quality regulations that effectively barred imports; direct or indirect subsidies to particular industries (the most controversial being agriculture). Trade negotiators believed, reasonably, that international trade could not be considered truly free unless there was some way of reducing these non-tariff barriers as well, and the WTO process was begun to bring these reductions into effect. The problem was that, unlike tariffs, there was no easy way to manage trade-offs between nations. Tariffs were similar everywhere, so it was easy to trade off reductions; but because every country's regulatory system is distinct, it is far more difficult to establish obviously transparent trade-offs in non-tariff barriers.

To begin setting rules to reduce non-tariff barriers, trade negotiators started with the principle of national treatment. This principle states that a government has to treat the goods and services of other nations in the same way as it treats those of its own nation. In other words, you can't discriminate against foreign companies. This policy is perfectly sensible. It would have eliminated the most egregious forms of non-tariff protectionism - any policy that protected or coddled local companies - while still allowing nations to shape their society in any way they chose. Such an agreement would certainly have required some serious changes in the policies of most nations, including Canada. But the principle is logical and easy to understand, and the benefits clearly outweigh the costs. Furthermore, it is easy to see where exceptions to the policy would be logical - those few areas of activity which are meaningless if they are not specific to the nation itself - that is, culture and defense. Such a trade-off should have been easy to negotiate - the US would want an exception for defence, many others would want an exception for culture, and that would be that.

The problem with the WTO is that it went far beyond the principle of national treatment. The reason was that, even with national treatment, there was still a great deal of scope for what seemed to be non-tariff barriers. For instance, if one nation enacted very specific regulations on some product - regulations that its own companies already followed, but that foreign companies would not find it economical to implement - it could effectively keep out foreign goods. Even if, technically, foreign goods that met these regulations were allowed, in reality no foreign manufacturer was going to bother. The Japanese in particular were masters of this tactic. In an effort to get around this problem, the WTO came up with an astonishing, absurd measure, one that is utterly disproportionate to the problem it was trying to solve. The WTO decreed that one nation could sue another nation for enacting regulations that interfered with the first nation's exports - even if these regulations were applied even-handedly to domestic and foreign companies. The effect is to extend the WTO's reach far beyond economic matters, into any regulatory issue - effectively, into every aspect of society. The WTO can now interfere with every nation's ability to define the way in which it wants to live. Citizens are prevented from shaping their society in the manner they choose. Nations are, effectively, forced to accept goods they do not want - it is not free trade, but forced trade. It is this specific section of the WTO agreement that has triggered most of the resistance to the WTO, that threatens to permanently tarnish the image of the free trade principle, and to disable all further progress towards freeing up international commerce.

There are innumerable cases already, both notorious and obscure, that illustrate the effects of these provisions. For instance, at the Seattle protests, there was a contingent dressed as sea turtles. The reason? Sea turtles are being wiped out by the nets used by shrimp fishermen. There are shrimp nets available that don't kill sea turtles, but obviously they would require additional investment on the part of the fishing companies. In order to encourage this investment, the US passed a law banning the sale of shrimp in the US that had not been caught by turtle-friendly nets. A classic case of environmental progress. Shrimp would still be caught, but turtles would no longer be killed in the process. But the law was struck down by the WTO, because it interfered with the profits of companies exporting shrimp to the US - despite the fact that the law did not discriminate between foreign and domestic suppliers. Another example: the French do not want to eat beef that has been fed synthetic growth hormones, a common practice in North America. The WTO has ruled against the French, because there is no definitive scientific evidence that the beef hormone is harmful. We will leave aside the fact that such negative side-effects often take a long time to be discovered (for instance, in England during the 1980s, scientists swore that there was no way mad cow disease could be passed on to humans - and therefore there was no reason to ban British beef. They only changed their tune when more and more people started to die of the disease in the 1990s). The fact is, whether or not it has harmful consequences, if the people of France do not want hormone-boosted beef in their country, and are willing as a consequence to pay more for their meat, they have a right as a sovereign nation to implement their wish. The only obligation they have is to enact clear regulations that apply equally to foreign and domestic producers. If foreign beef producers wish to export to France, they can grow beef without hormones. It's as simple as that.

The perniciousness of the WTO's regulations is aggravated by the blatant unfairness of its enforcement system. If a nation successfully sues another nation, but the other nation refuses to change their policies, the WTO will allow the plaintiff nation to apply punitive tariffs on the defending nation's goods. This is very effective if you are a big nation that is a major market for imported goods - that is, if you are the United States of America. It's pretty much useless if you are a small nation. So the effect is to give a great deal of power to large nations and their corporations when they want to break open smaller markets, while leaving smaller nations helpless if they want to open large markets. Let's illustrate with a hypothetical example. Imagine that a small nation - say, Belize - exports woven carpets to the US. The US enacts regulations that cut off these exports. Even if Belize has the time and money to sue the US at the WTO, what will they do if they win? Tariffs on US imports would have no effect on US companies, since Belize is a negligible market. But since many US exports are vital to continuing development, these tariffs would in fact interfere with Belize's growth. So the WTO is useless to Belize. Now, let's say that it was Belize that enacted regulations which interfere with the exports of a US multinational. The US could sue Belize in the wink of an eye. When it won, it could enact brutal tariffs on goods from Belize that would murder Belize's economy, without really bothering anyone in the US. So the WTO is a convenient and effective instrument for the US to serve the interests of its multinational companies, but is ineffective in serving the interests of small nations.

The key to the widespread opposition to the WTO among activists in the first world, and governments in the developing world, is this provision allowing suits against nations that develop new regulations, even when those regulations apply equally to foreign and domestic companies. This section of the WTO acts as a corrosive force towards existing national regulations, and as a firewall against any attempt by sovereign nations to enact further regulations to protect or shape their society. The enforcement mechanism provides a powerful weapon to multinationals in opening new markets, while providing no influence or protection to small economies. It is no wonder that big business and its boosters in government and the media are in favour. In some ways, though, this business support is ironic, because these provisions run directly counter to the free-market ideology they profess to believe in. The effect of these WTO regulations is to impose a uniform regulatory system throughout the entire world, destroying the diversity of approaches that is the essence of the free market's vigour. Furthermore, rather than evolving through the competition between different nations, these regulations are imposed arbitrarily by faceless bureaucrats and lawyers in international agencies, who are supposedly the free market's worst nightmare. Yet in this case, their power is being vigorously supported by free-marketers (note: to be fair, I'm told that Terence Corcoran has made similar arguments to the ones I am making here, though I haven't seen them since I rarely read the Post. About twice a year, I find myself in agreement with Corcoran, which is always a disconcerting experience).

As long as the WTO retains the power to interfere with a nation's domestic affairs, the opposition to the WTO will continue and strengthen. The path it is currently pursuing is a dead end. If international free trade is to make any further progress, it will have to step back in order to step forward again. The WTO must divest itself of the power to rule on the validity of national laws. It must allow nations to regulate themselves as they choose, and restrict its role to enforcing the principle of national treatment, ensuring that foreign goods and services are treated according to the same rules as domestic goods and services. The WTO must give up its attempt to impose forced trade. Only then can the principle of free trade regain the legitimacy it has lost over the last two decades.

© 2000 Dylan Reid

this article first appeared on Dylan Reid's Canadian Commentary website, and is reprinted with permission.

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