Like an owl besieged by a murder of crows, the WTO came under attack by rowdy demonstrators representing organized labor, environmentalists, anti-globalization activists, and other protectionist groups.  Nearly 50,000 protesters descended on Seattle to express their dissatisfaction with globalization, free trade, and the WTO.  The drama was played out in downtown Seattle on TV news.  It featured labor strikes, chanting mobs, clashes with police, tear gas, vandalism, arrests, apologetic politicians, and bewildered international dignitaries.

The WTO had hoped to launch an agenda for a new round of international trade talks that would ultimately define the ground rules for world trade in the next century.  Instead, the WTO ministries left Seattle in a daze and without an agreement.  The ministries will now regroup and try again next year.  The protest adds a new dimension to the deliberations.  The sheer numbers of protesters, the breadth of discontent expressed, and the extent to which the event was covered by the media will give the WTO ministries even more to ponder.

The Issues: What are the protesters protesting?

The groups protesting in Seattle are not homogenous.  Rather, they are a hodgepodge of malcontents, each with agendas of their own.  Labor unions are against the WTO, because they perceive free trade as a threat to their job security.  Human rights activists believe that the WTO weakens safeguards against the exploitation of child labor.  Political rights groups argue that the WTO undermines democracy, because there are undemocratic countries among its membership.  Consumer rights advocates say the WTO is a commercial tool for big business to manipulate and monopolize global markets.  Environmentalists claim that the WTO promotes economic growth at the expense of air and water quality.  Animal rights activists blame world trade and commerce for encroachment on wildlife habitats and endangering species.  Anti-globalization exponents say that the WTO is too powerful, because it extorts nations into relinquishing their sovereignty.  Indeed, it would seem that the acronym WTO stands for the World's Troubles Originator.  In Seattle, the WTO became an easy scapegoat for most, if not all, of the world's ills.

Most of these attacks against the WTO are only partly true, many are misleading, and some are patently false.  Trade liberalization does cause some workers to lose jobs.  So does progress.  However, both free trade and technological change create new and, more often than not, better and less monotonous jobs.  It's also true that free trade promotes economic growth, and growth can be detrimental to the environment, especially where growth is occurring without regard to external costs and the overuse of "free" air and water.  But that could happen with or without the expansion of world trade.

It's very difficult to follow the logic of the consumer advocates and anti-globalization groups.  Consumers are the greatest beneficiaries of freer trade, because they gain access to new and better products at lower prices so that their real incomes and living standards rise as a direct result of international trade.  Free trade does not advance monopolistic corporate power.  It promotes international competitiveness.

The logic of those who say the WTO undermines national sovereignty is even more tortured.  The WTO is not a government.  It does not have the power to tax, and it has no police or armies to enforce its rules.  Its member nations have voluntarily entered into agreements to abide by the rules established by the members themselves.  Nothing prevents a country from resigning its membership in the WTO.  The only power the WTO has is to permit one country to break the rules of agreement, because it has been determined by a panel of arbitrators that another country has already violated the rules.  For example, the WTO will permit country A to raise tariffs against country B, if it has been determined that country B broke the rules in the first place.  That is the full extent of the WTO's power.

Most of the arguments leveled at the WTO violate the specificity rule in economics.  That is: To solve a problem it's best to intervene at the source of the problem rather than to attack an entity that is somewhat removed or an innocent participant.  For example, one way to prevent drunk driving accidents is to not let anyone drive a car.  Then there would be no drunk driving accidents.  Indeed, there would be no auto accidents at all.  However, a more direct and more efficient way to deal with the problem would be to take action against drunk drivers specifically.  Similarly, the way to deal with global environmental issues is to concentrate on the sources of the problem.  The WTO concedes that environmental issues are the purview of other international agreements aimed at the source such as the Montreal Protocol (protecting the ozone layer), the Basel Convention (dealing with hazardous waste), and the Convention on International Trade in Endangered Species (CITES).

The nexus between trade, human rights, and the environment regarding the WTO is found in the organization's Article 20, which states that policies affecting trade for protecting human, animal, or plant life are exempt from WTO disciplines under certain conditions.  However, much to the chagrin of environmentalists and others, the WTO arbitrators have consistently interpreted this provision narrowly.  Consider the case of sea turtles (an endangered species).  Shrimp are often caught with nets that simultaneously trap and kill sea turtles.  For that reason, the United States passed a law to prohibit shrimp imports from countries that fail to protect sea turtles from becoming entrapped in shrimp nets.  Several Asian countries, whose shrimp exports were adversely affected by the US import ban, filed a complaint with the WTO in 1997 claiming that the US policy violated the WTO's non-discrimination principle.  The WTO ruled in favor of the Asian countries, authorizing them to invoke retaliatory sanctions against US exports.  The arbitrators concluded that the United States could not use trade policy to force other countries to comply with US environmental standards.  This ruling (and similar ones) infuriated environmentalists.

The WTO's position here is that it is competent to deal only with trade issues.  It is not an environmental agency.  The specificity rule in economics suggests that the sea turtle problem should be dealt with through international environmental agreements which would prohibit all participating countries from using fishing methods that kill and endanger the sea turtles.  That is closer to the source of the problem than shrimp trade, and it would involve environmental experts in the negotiations.  The WTO is simply not structured to deal with global environmental issues, but it gets caught in the crossfire because trade is an often used weapon by individual countries to impose cultural, environmental, political, and economic standards on other countries in the world.

Why didn't the WTO reach an accord in Seattle in spite of the protests?

Some of those protesting in Seattle have claimed victory and taken credit for the failure of the WTO to reach an agreement:  "We've won!  We really disrupted it [the conference]," said one protester who belongs to a group that calls itself the Alliance for Sustainable Jobs and the Environment. It's true that the summit meetings were set back and delayed on the very first day because of the chaos in downtown Seattle.  However, the WTO ministries were unable to reach an accord in Seattle for reasons quite apart from the protests taking place in the streets.  There were major disagreements among the WTO's member countries going into the conference.

In 1995 the WTO became the successor to the General Agreement on Tariffs and Trade (GATT) which was formed at the end of WWII to promote free trade through the reduction of tariffs and other trade barriers that had been erected by countries in the 1930s.  Early in its history, the GATT was very successful in negotiating several rounds of tariff reductions.  For example, the chart below shows the extent to which tariffs were reduced in the United States as a direct consequence of these negotiations.

As you can readily see from the chart, major tariff reduction was achieved in 1947.  Much more modest tariff reductions were accomplished in the subsequent Kennedy, Tokyo, and Uruguay Rounds of negotiations.  Over time, more and more countries joined the organization.  As the GATT successfully reduced global tariffs, it began to venture into other areas of trade liberalization including non tariff barriers such as quotas and subsidies as well as issues pertaining to trade in services and intellectual property.  Each step of the way has proved to be more difficult similar to climbing a mountain.  It's much more rugged and steeper at the peak.  Significant negotiation problems began to emerge in the Uruguay Round.  That round took longer (1986-1993) than anyone anticipated because of the disparate positions held by the various and increasingly numerous countries in the GATT.  Initially, the GATT was herding a only a few countries that were compliant like cows.  Now, the WTO is attempting to herd 136 countries that are behaving more like impervious cats.  And the issues are exponentially more complex and qualitative than quantitative tariff  rate reduction.

Going into the Seattle summit there were major country differences on the contemporary trade liberalization issues.  The US, Europe, and Japan disagree on how to deal with agricultural subsidies that have the effect of distorting comparative advantage.  They also disagree on the extent to which e-commerce should be regulated by governments.  Less developed countries (LDCs) are opposed to plans by the United States and Europe to add new rules on labor, safety, and environmental standards.  They perceive these proposed standards as a subtle form of protectionism.  They are also resistant to enforcing intellectual property rights globally, especially when it involves life saving drugs and medicines.  Furthermore, the LDCs are disgruntled by the lackluster way in which the industrialized rich countries have granted preferential tariffs to poor countries.  In short, there was as much tension and discord in the conference meeting rooms among the participants in Seattle as there was in the city streets.  It just didn't manifest itself in the forms of marching, chanting, and vandalism. In this setting and against this background, it's not at all surprising that the WTO representatives in Seattle were unable to reach an agreement in the three days of negotiations.

Who started these fights, anyway?

Skirmishes over free trade issues and globalization did not originate with the battle in Seattle.  These disputes have been on-going for more than two centuries.  Adam Smith fired the most unforgettable intellectual salvo in 1776 with his publication, The Wealth of Nations.  Prior to this publication, it was generally accepted that governments had the authority, indeed, the moral obligation, to regulate trade for the common good.  Under mercantilist doctrine, governments would deliberately restrict imports so that exports would exceed them and gold would flow into the country.  This premise and trade strategy went virtually unchallenged until Smith wrote his book.  Smith disputed the proposition that this form of protectionism would increase the "wealth" of a nation in terms of living standards and well-being.  He argued that an "invisible hand" of  global markets would more effectively tap into the creativity, ingenuity, energy, and industriousness of people.  Smith advocated free trade and laissez faire markets.

It was David Ricardo who gave the most powerful intellectual weapon to free trade advocates.  In his book, Principles of Political Economy and Taxation (1817),  he articulated the principle of comparative advantage, demonstrating the economic gains from global specialization according to what a country or region is relatively more efficient at producing.  If each nation were to specialize in its comparative advantage and trade freely with others, then the world would get the most output from its limited resources.  Some have said that this proposition is the most irrefutable and socially relevant principle in all of economics.  It is the fundamental basis for trade. Like Smith,  Ricardo was convinced that market economies and free trade would naturally exploit comparative advantage, so that the general welfare of households would far exceed that which would be possible in a world of artificially imposed and often politically motivated government trade restrictions.

The debate over the role of government regarding trade policy has raged ever since the writings of Smith and Ricardo.  Entrenched beliefs yield only grudgingly and gradually to new ideas, and for most of the early history following the trade liberalization arguments of Smith and Ricardo, protectionism held the higher ground.  The United States, for example, was predominately protectionist throughout the 1800s.  Smith and Ricardo's views rang hallow in political circles in the early years of the Great Depression.  In 1930, the U.S Congress passed and President Hoover signed (over the objection of most economists) the Smoot-Hawley Tariff Act -- putting into effect the nation's highest tariff rates in this century [See Chart Above].  Countries all around the world raised tariffs during the Great Depression in an all out global trade war, and world commerce devolved to a trickle.

It wasn't until President Roosevelt signed the Reciprocal Trade Agreements Act in 1934 that free trade began to overtake mercantilist doctrine.  This act set the stage for a wave of trade liberalization that has continued right up to the WTO's meeting in Seattle.  It gave the president the authority to negotiate tariff reduction agreements with foreign governments.  More significantly, it contained the most -favored-nation (MFN) clause, which later became a model for the GATT.  MFN means that two (or more) nations agree to treat all nations equally, so that every participant is extended the lowest tariff rate on specific products granted to any other nation.  For example, if the United States reduces tariffs on French wine from, say 15% to 10% ad valorem, then all other participating nations are subject to no higher than a 10% tariff on their wine exports to the United States.  Following WWII, the GATT embraced the MFN principle, and each time one country reduced tariff rates on a specific good, all of the other countries participating in the agreement benefited.

The GATT/WTO is based on the premise that free and competitive global markets rather than governments should determine trade patterns.  Essentially, it embraces the writings of Smith and Ricardo.  To promote both free and fair trade, the GATT/WTO has three fundamental rules.  The first is the principle of non-discrimination to assure that all nation's are treated equally.  The second is transparency, meaning clarity and public disclosure regarding a member's trade policy.  The third is equal national treatment in the sense that no country will set standards and regulations for other countries that do not also apply to their own domestic producers.  These principles have served the global community well, and trade liberalization has advanced further over the past 50 years than at any other time in world history.  Most economics scholars are convinced that the prosperity of our times is due in large part to the rapid expansion of international trade as a result of modern trade liberalization.

Diminishing returns and timing may be working against the WTO

 In one sense, the WTO is a victim of its own success.  Economics is a world of trade-offs and increasing opportunity costs.  Most economic endeavors initially achieve marginal benefits that far outweigh the marginal costs.  Eventually, however, the benefits diminish on the margin and the costs rise.  At some point there is a convergence of the marginal benefits and costs.  Attempts to proceed further and beyond this point only result in costs exceeding the benefits.

Early in its history, the GATT's trade liberalization efforts achieved benefits that accrued to the global community far in excess of the costs.  Billions of consumers all around the world benefited immensely from the tariff reductions that were negotiated by the GATT immediately following WWII.  Subsequent rounds of negotiations yielded smaller benefits, but it could be reasonably argued that the benefits still outweighed the costs.  But as the GATT/WTO proceeds further in trade liberalization, it begins to encounter more resistance, both from within and outside its organization, because the costs to those who are adversely affected are being perceived and calculated by many to be too high relative to the smaller and smaller incremental benefits.

European and Japanese farmers have dug in and are refusing to be the last sacrificial lambs of freer trade.  Environmentalists and animal rights groups have simply reached the limits of their tolerance for any further damage to air and water quality, the encroachment on wild life habitats, and the endangerment of animal species ranging from tigers to turtles.  They assign virtually no value to more economic growth whether its origin is technology or trade.  Workers who are losing their jobs to overseas production facilities are becoming increasingly resistant to any more structural displacement.  Organized workers have the political clout to influence their government's trade policies, and elected officials are running out of capital to defend freer trade because the marginal gains from further trade liberalization are becoming so much smaller than they were in earlier years.

The pictorial below depicting the playing field of The World Game of Economics illustrates some of the problems currently confronting the WTO as it attempts to proceed further with trade liberalization.  When a country is at the top of the playing field, it has high inflation.  Disinflation and deflation occur when a country moves down the playing field.  When a country moves from left to right, its annual rate of growth in real GDP is increasing.  When it moves from right to left, real GDP begins to fall and the country experiences recession, stagflation, or depression.  Cyclical unemployment rises in a recession and falls during recovery.  Rapid growth (moving from left to right) causes pollution and environmental destruction.  More garbage cans begin to appear.  Structural unemployment increases as an economy moves down and diagonally.

Free trade policies (lower tariffs, reduced trade restrictions, and policies to permit and attract foreign investment) will move a country down, diagonally, and to the right of the playing field.  The benefits of trade liberalization are more rapid economic growth, lower prices, and less cyclical unemployment.  The costs of trade liberalization are rising structural unemployment and the environmental damage associated with economic growth.  If a country is in the upper left quadrant of the playing field, trade liberalization makes a lot of sense, because the benefits of faster growth, more jobs, and lower prices exceeds the costs of structural unemployment, higher pollution, and more garbage.  However, once a country falls below the center or proceeds too far to the right, the costs begin to exceed the benefits.  When countries are in the red trade war zone, their citizens will begin to support protectionist policies because too many people are unemployed and/or there is too much damage being done to the environment.

The WTO is negotiating a new round of trade talks while Europe and Japan are already in the trade war zone.  Many members of the European Community (EC) have double-digit and predominately structural unemployment.  Japan is in a recession.  Globally, inflation is already low so consumers are not particularly concerned about it.  The United States is in the middle of the playing field.  Any move down, diagonally, or to the right will simply bring even greater resistance from structurally displaced workers and environmentalists.  Less developed countries are all over the playing field, but most of them would benefit from freer trade.  However, the industrialized countries are not inclined to grant preferential tariffs to LDCs that would have the effect of putting their own domestic workers out of work.  These untimely circumstances make the WTO's negotiations extremely difficult, both from a practical and political perspective.

Will there be another global trade war?

It's not likely that there will be another world  trade war on the scale and scope of the one in the 1930s.  It's doubtful that those who advocate extreme isolationism and a general retreat from global integration will prevail.  However, countries will continue to use specific tariffs and trade restrictions to protect some industries, to impose standards on other countries, and to pursue political and foreign policy objectives.  The protests in Seattle indicate that there is (rightly or wrongly) widespread disagreement, discontent, and disillusion with the WTO and the negative effects of globalization.  Although many of the arguments are misplaced or founded on misinformation, some are legitimate and should be addressed in the proper forums.

The lesson of the 1930s is that international cooperation is better than beggar-thy-neighbor trade strategies that only end up making everyone worse off.  The role of the WTO will continue to be to help the nations of the world resolve their trade disputes.  It has a good track record so far.  Most of the grievances filed with the WTO have been resolved by the litigants before the case ever gets to the arbitrators.  And even in those cases where the arbitrators have determined a ruling against a country, the issues have often been settled by last minute compromise before trade sanctions are actually invoked.  On balance, the WTO and it predecessor GATT have been a positive force for the citizens of the world.

Recommended Link:  The World Trade Organization