Wednesday, October 4, 2006

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The quickest way to dynamite the WTO out of existence

The Center for Global Development's Lawrence MacDonald blogs about Joe Stiglitz's new idea to scupper the WTO make trade "fairer":

Nobel laureate Joseph Stiglitz urged at a CGD event that U.S. trade partners ask the WTO for authority to impose countervailing duties on exports of U.S. steel and other energy-intensive products that benefit unfairly from Washington’s refusal to join the Kyoto Protocol limiting carbon and other greenhouse gasses....

"One of the main purposes of the WTO is to create a level playing field; subsidies distort the playing field, which is why countries are allowed to offset subsidies through countervailing duties," Stiglitz explains in Making Globalization Work, the new book he was promoting at the CGD event. "This should be the case for hidden subsidies—not forcing firms to pay for the environmental damage they inflict—as well as for open subsidies."

The book contains a detailed explanation of the proposal--and an interesting discussion of the response his idea has received so far from senior officials:

I have discussed this idea with senior officials in many of the advanced industrial countries that are committed to doing something about global warming. And while, almost to a person, they agree with the analysis, almost to a person they also show a certain timidity: the proposal is viewed by some as the equivalent, in the trade arena, of declaring nuclear war. It is not. It would, of course, have large effects on the United States, but global warming will have even larger effects on the entire globe. It is just asking each country to pay for the full social costs of its production activities. Following standard practice, the pressure of trade sanctions could gradually be increased; and almost surely, as America recognizes the consequences, its policies would be altered--as they have been in other instances where the United States has been found in violation of WTO rules.
For a full transcript of Stiglitz's talk, click here. For an article-length treatment by Stiglitz, click here.

Stiglitz's proposal probably would improve the global warming situation -- but not the way he thinks. Assuming the WTO Appellate Body was willing to destroy itself, here is the chain of events that would improve the environment:

1) The WTO rules against the U.S.A.;

2) The U.S. refuses to comply, thereby weakening respect for the WTO's Dispute Settlement System;

3) As the Trade Diversion blog suggests, "once the litigation gates open, "hidden subsidy" will be a phrase that lawyers and protectionists love. Is the absence of labor standards in developing countries a "hidden subsidy" to exporters of labor-intensive manufactures?.... Costs are subjective; social costs doubly so." So, expect Canadian, American, Japanese, and European trade officials to file suit in the WTO over every "hidden subsidy" under the sun. Expect the target of a lot of these suits to be China?

4) The WTO, burdened by the collapse of the Doha talks and persistent noncompliance of dispute rulings, collapses.

5) The absence of multilateral trade rules encourages the emergence of economic blocs, as governments start applying "social tariffs" against countries that don't share their regulatory aims.

6) The ensuing, protracted slowdown in the global economy leads to significant reductions in CO2 emissions.

I'm thinking that there are better ways to solve the global warming problem.

This, by the way, is one of the basic problem I find with the parts of Making Globalization Work that I've read. There is a decent diagnosis of some of the ills caused by globalization -- but for a man who spent the past decade and a half in policymaking circles, he seems oddly oblivious to the massive political externalities many of his proposals would create.

UPDATE: My colleague Joel Trachtman explains why Stiglitz's plan is a legal non-starter.

ANOTHER UPDATE: Greg Mankiw critiques another of Stiglitz's policy prescriptions.

posted by Dan on 10.04.06 at 10:22 AM


So, expect Canadian, American, Japanese, and European trade officials to file suit in the WTO over every "hidden subsidy" under the sun. Expect the target of a lot of these suits to be China?

And India, as well as every other 'developing' nation exempt from Kyoto.

If not complying with Kyoto is a 'hidden subsidy' in the US, why wouldn't it be a 'hidden subsidy' in the countries not exempt from Kyoto?

Furthermore... why wouldn't the state health-care systems in, say, european countries be a 'hidden subsidy' that would give them an advantage over firms located in countries without similar state health-care systems?

How did someone this ignorant win a nobel?

posted by: rosignol on 10.04.06 at 10:22 AM [permalink]

Mr. Stiglitz may know economics, but he doesn't seem to know much about law. The Stiglitz argument may pass the laugh test, but there's about a 95% chance it will lose on the legal merits (and even allowing for the 5%, the Appellate Body is not stupid enough to go along with it).

posted by: WTO Lawyer on 10.04.06 at 10:22 AM [permalink]

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