Protectionism Sabotages the WTO

Suffering from the financial storm, countries like the U.S. and those in the European Union are injecting huge amounts of bailout money into problematic industries such as finance and automobile manufacturing. Does this saving activity breach the regulations of the World Trade Organization? Does it shatter the WTO’s system? Public trust in the WTO, an international organization that economically unites 150 members, has been massively shaken by disputes and conflicts that have been caused by the financial crisis. The main reason for the plunge is the WTO’s lack of ability to halt rising protectionism among western countries.

The U.S. Treasury Department might start discussing another financing package of at least $40 billion to meet the financial needs of General Motors (G.M.) and Chrysler. Besides an injection of money, the U.S. government has also introduced a $1,500 tax credit for Americans who buy a domestic car. Japan also plans to subsidize every new digital television purchase with 20,000 Yen.

France, Germany and the U.K. also have similar bailout plans for their car industries. The German car maker Opel was spun off by its American mother company, G.M., and needs approximately 3.3 billion Euros in aid.

In addition, countries including India, Indonesia, Russia, Brazil and Argentina have raised their import duties on some products. The E.U. is considering imposing an import duty on bio diesel from America. Meanwhile, Washington is considering imposing duties on Italian drinking water and French cheese, because the E.U. restricts imports of American chicken and beef.

Does governmental aid to businesses violate the spirit of the WTO? Although that is exactly what the U.S and the E.U. are doing, most companies that are barely surviving have no other options to stay afloat.

For Korea, whose export represents more than 40 percent of GDP, the fairness of the WTO principles is crucial for their economic development. Korean trade researchers indicate that large amounts of governmental financing is against WTO regulations, according to which, a country may be sanctioned if it subsidizes a specific industry or a business and therefore causes damage to its competitors. In 2000, after receiving 6 trillion Korean Yuan of financial aid from the Korean central bank, the Korean semi-conductor Hynix has been charged countervailing duties by the U.S., Japan and the E.U. But now, in contrast, those countries are providing large-scale financial aid to their domestic industries. The WTO no longer fulfills its function of supervision and fighting against trade barriers. The system is staggering.

Protectionism is the Achilles’ heel of the WTO. The old protectionism used tools like tariffs and policy barriers. The new protectionism uses green energy and environmental considerations as its weapons. However, Obama’s economic stimulus plan involves governmental purchasing, to exclude legal challenges by other countries. Even Pascal Lamy, the director general of the WTO, has to admit the legitimacy of the measure to “Buy American”. The Americans themselves are also surprised by the leeway provided to practice protectionism without breaking any WTO regulations.

A Slap in the Face

In his speech, Lamy passionately emphasized that as long as every member can reduce tariffs by $150 billion, trade barriers can be eliminated and the world economy will greatly improve. Although his words won unanimous applause, several countries are still unwilling to cooperate. Moreover, following the financial crisis, the WTO seems unable to deal with protectionism led by western countries. Some WTO officials complained that even they need to rely on the media to know what is going on in WTO member countries. Apparently, the uncoordinated action of the U.S., the most important member of the organization, put Lamy in an awkward position.

When the economy is thriving, developed countries promote free trade to extend the world economy. When the economy is in a recession, they fend off others with protectionism. To a certain extent, those massive international organizations, including the WTO, the UN, the IMF and the World Bank, are facing similar embarrassment, since the U.S. and most developed European countries are their founders and rule setters. These organizations function efficiently when they can benefit from those developed countries. When the situation is the other way around, rarely can any organization maintain the same level of performance.

Nothing Lost for Russia as an Outsider

Some in the international media have indicated that China’s acceptance to the WTO has changed the organization’s power arrangement. Fast growing economies like India and China have impacted the developed countries-oriented WTO, which has to find a new balance among the complicated interests of its member countries. Under those circumstances, the developed countries focus on bilateral or regional free trade agreements that are more in their interest. Perhaps that also has something to do with the U.S. realizing that the WTO is not easy to manipulate anymore. In the future, bilateral and regional agreements will play a more important role in trade. In addition, regional free trade agreements will happen in the U.S., the E.U. and China.

Whether the WTO will survive or not, experts from Russia said that it is not a pity that Russia is an outsider. The Russian experts added that before Russia joins the WTO, it will be dissolved. The current WTO participants already show a preference for reinforcing bilateral and regional cooperation, which is lethal to the WTO. If an international organization wants to treat all of its members equally, some powerful regions or continents will prefer playing by their own rules to reach agreements. In the future, the rules set or practiced by these regional organizations might become common principles for all. This would be completely different from the WTO, and of a form not dominated by mainstream powers.

As global trade barriers grow in an irreversible manner, in the near future, trade conflicts in international economic and diplomatic relations will be normal. Various economies will survive the power reshuffle and set a new world order. However, before uniting those economies, what we need is to fairly open the markets and let the world achieve concordance.