Josh Hawley’s New Smoot-Hawley
Since the end of World War II, the United States has exerted outsized influence to shape the rules of global commerce. Recognizing the economic and strategic benefits of a rules-based trading system, every president from Harry Truman to Barack Obama supported U.S. leadership and engagement with the World Trade Organization (WTO) and its predecessor institution. Though imperfect, this system has paid enormous dividends for the United States.
The current global trading system has its origins in the reaction to the infamous Smoot-Hawley tariff—named after its congressional sponsors. President Herbert Hoover was ambivalent about the final legislation, but with his party strongly backing it as a measure to fight the Depression, he signed it in June 1930. The disastrous impact of these tariffs on global trade and domestic economies ushered in an era of international trade agreements designed to limit protectionism.
Now a new Hawley has entered the scene to bring protectionism back. With nationalism on the rise amidst the outbreak of a global pandemic, Senator Josh Hawley (R-Missouri) is advocating that the United States walk away from the WTO. That would hurt American families and businesses, undermine our strategic interests, and be counted as an economic and diplomatic victory for China.
On May 7, two days after publishing a New York Times op-ed calling for the abolishment of the WTO, Senator Hawley introduced a joint resolution in Congress to terminate U.S. membership in the organization.
Fortunately, Congress can’t unilaterally abolish the WTO: It is an international organization created by a treaty that has been ratified by its state members and observers. But Congress can end the United States’ participation in the WTO. The implementing law that codifies U.S. participation in the WTO permits Congress to consider a joint resolution to terminate U.S. membership in the global trading body every five years, which is to be informed by the findings in a report from the U.S. Trade Representative (USTR). If introduced, such a joint resolution is unamendable, does not require committee approval, and cannot be filibustered. In other words, Hawley’s resolution is not a messaging bill. It is a serious procedural mechanism that will––if it reaches the Senate floor within 90 legislative days after the submission of USTR’s February 28 report—force a Senate referendum on the merits of the United States remaining in the WTO.
It is worth noting that USTR Robert Lighthizer, in testimony before a Senate Finance Committee hearing last year, wrote that “the WTO is a valuable institution, and offers many opportunities for the United States to advance our interests on trade. As I have said before, if we did not have the WTO, we would need to invent it.” Lighthizer is hardly a cheerleader for globalization—he has been the point man for President Trump’s trade war with China—but he is correct about the WTO. If the United States were to withdraw from the organization, the economic and diplomatic fallout would be devastating.
The WTO has undoubtedly increased quality of life for Americans: In 2017, it was estimated that global trade liberalization, in part facilitated by the WTO, increased the size of the U.S. economy by $2.1 trillion between 1950 and 2016 (in 2016 dollars), the equivalent of about $7,000 per person. And if the WTO and other trade agreements were to be eliminated entirely, the result could be a drastic $2.8 trillion loss in global GDP.
The WTO includes 164 member states and its rules cover a staggering 95 percent of global trade. WTO members afford equal tariff treatment to all other members, which ensures that American exports can compete on a level playing field. But they also agree to the same set of legally binding measures, such as commitments on intellectual property rights. Unilateral withdrawal from the WTO would forfeit these benefits and put U.S. interests at a serious disadvantage.
First, withdrawal from the WTO could result in higher U.S. tariffs, which would burden families and businesses that rely on foreign products. As numerous studies have confirmed, American consumers are paying for President Trump’s tariffs. Moreover, new tariffs likely would trigger foreign retaliation against American exports, the costs of which America’s farmers and ranchers well know. Under WTO rules, the United States is required to apply the same tariff rates to all WTO members (excepting those who are U.S. free trade agreement partners and eligible for preferential tariff treatment). Those uniformly applied tariffs are known as “most-favored nation” (MFN) tariffs. As trade economists Chad Bown and Doug Irwin have observed, the average applied U.S. MFN tariff in 2017 was 3.3 percent, but the average applied non-MFN U.S. tariff (those applied to non-WTO members) was 32.3 percent. Absent WTO commitments, the president would be free to raise tariffs to rates not seen since the disastrous Smoot-Hawley tariffs in the 1930s, hurting taxpayers and damaging American competitiveness in the global economy.
Second, membership in the WTO entitles the U.S. government to bring complaints for resolution through consultation or adjudication if it believes other members are not living up to the commitments they’ve made. Although some modification to the dispute-settlement rules may be in order, the United States has benefited disproportionately from WTO arbitration: According to the White House, the United States has won more than 85 percent of the cases it has initiated since 1995 (compared with China’s success rate of 67 percent). Notably, U.S. agricultural interests have been well served under the WTO dispute-settlement system, prevailing on major claims in a recent case involving Chinese subsidies for grain production.
Finally, Ambassador Lighthizer has also correctly noted that “the WTO provides the United States with a platform to export its views on trade policy.” If the United States were to abdicate its seat at the table, it would play directly into China’s hands. A spokesman for Senate Finance Committee Chairman Charles Grassley (R-Iowa) put it succinctly: “Withdrawing from the WTO would only leave a vacuum for China to fill and diminish America’s position of strength.” Moreover, if the United States were to depart from the 164 member-strong WTO, it would join the ranks of only 13 countries that are neither WTO members nor seekers of WTO membership, including North Korea and a handful of tiny countries like Turkmenistan, Eritrea, and Kiribati.
Past congressional attempts to abrogate U.S. membership in the WTO failed by wide margins, but Senator Hawley’s resolution should still be treated as live fire. The Hawley resolution, if adopted, won’t address the Senator’s legitimate grievances about Chinese trade malpractice or the dire economic straits currently faced by millions of Americans as a result of COVID-19. Instead, it will voluntarily shut the United States out of the world’s largest trade agreement and will be remembered as one of the greatest economic missteps in modern history.
Correction: In an earlier version of this article, the $2.1 trillion figure cited above was wrongly described as the estimated annual benefit to the U.S. economy of the WTO, when it in fact is an estimate of the cumulative benefit to the U.S. economy across six decades of trade liberalization in general.