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Transcript of Live Internet Chat on the WTO with Robert Litan

Robert Litan

Perspectives on the World Trade Organization Conference
Live Internet Chat with Robert E. Litan
Monday, December 6, 1999

Brookings Institution

 

Robert E. Litan, who delivered a paper at the highly controversial WTO conference in Seattle, will answer questions about the event and the issues discussed there, including China’s membership; trade competition from countries with less stringent environmental and labor regulations; NAFTA; America’s trade conflicts with other nations; and other global commerce issues.

 

 
Q #1   I am continually struck by the assertion that the WTO is not the proper organization to enforce labor and environmental laws. But, if WTO rulings can effectively nullify or severely undermine a country’s labor or environmental regulations, what other organization could enjoy any real enforcement power? Can we realistically expect a small WTO member country to enact tough environmental, labor, or product safety laws in the face of pressure from large members like the U.S. and the E.U.?

Andrew in Michigan

A Everyone wants all countries to have first world labor/environmental standards. The real question is how to do that.

As an economic and political matter, it is unrealistic to expect that third world countries can have the same standards that we rich countries have. We wouldn’t impose on 19th century America the standards that exist going into the 21st century. Same principle means we shouldn’t be imposing our standards on countries not in our same economic position.

Nonetheless, there are two well accepted ways of getting their standards up. One is to trade with them, make them richer—and they will demand higher standards on their workforce and environment (that is what happened with U.S. and Europe and Japan as they got richer). Second, consumers here who don’t like foreign standards—and outfits like the ILO will begin publishing other countries’ level of standards so that consumers have more information—can always refuse to buy.

Final point: much of the labor force in third world countries is “informal”—and outside the purview of local governments. So local governments themselves can’t enforce standards even if they want to. If we in the rich world then don’t buy their products, we’ll force even more people in the LDCs into the informal and lower wage sectors.

Bottom line: trade and consumer pressure are the best ways to lift standards abroad.

 

Q #2   The effect of the strong dollar is to render prices of imported goods very low. This, in effect, is the same as subsidizing foreign imports to the disadvantage of U.S. producers. Thus, our trade deficits continue to increase at an exponential rate.

Question: Where do you see this effect eventually ending? Will there not be a “day of reckoning”, and if so, how will it be manifested?

Jerry in Arkansas

A You’re right that our strong dollar has kept import prices low, but this has kept inflation low, which in turn has allowed the Federal Reserve to allow a lot more job growth than otherwise. Hence our 4.1% unemployment rate, the lowest in 30 years.

Strong job growth in turn has fueled the demand for imports.

At the end of the day, however, our growing trade deficit reflects a yawning gap between national savings and national investment. Strong investment is outstripping savings, and we are importing foreign capital to make up the difference. The counterpart—economic and accounting—to capital imports is a strong trade deficit.

Your are right that as we run larger trade deficits, our dollar will eventually weaken, which will make imports relatively more expensive. But the turnaround in the deficit may not come for several years, especially if the U.S. economy stays strong.

 

Q #3   What’s your opinions of the agreement between the U.S. and China on its entry into WTO? Do you think the EU will soon sign a similar agreement with China? What is the key element?

Thank you very much.
Sincerely, Caichao China Reform Forum

A China’s admission into the WTO is very much in both our nations’ interest. It is in the U.S. interest because China is opening its borders to increased trade and investment and this will benefit U.S. exporters. China will gain, meanwhile, politically by belonging to the world’s major economic organization. It will secure permanent normal trading status with the U.S. And it will benefit from the continued influx of U.S. and other foreign goods and capital and know-how.

I think the EU will have to reach a similar agreement with China; otherwise it will be at a competitive disadvantage relative to the U.S.

 

Q #4   Will china agree to fix the underage workshops if it is admitted?

David

A I frankly do not know what China committed to do on child labor issues. But on the topic more generally, it is important to understand that in many developing countries if parents can’t have their kids work, they can’t eat. It is that simple. In some countries, kids not allowed to work end up in prostitution and other forms of activity of which none of us approve.

The best way for countries to graduate from using child labor is to trade more with them, so they get richer and have the resources to pay higher wages so that kids don’t have to work. Refusing to trade with them will permanently keep them down economically.

 

Q #5   Why is it that this group of foreign people that remain unidentified to the public think they have the right to tell any country what safety and price laws they should have? “Only the congress has the right to impose tariffs, taxes, or fines...” Where does the constitution fit into WTO, since it is against sovereignty? sincerely,

Claud

A The WTO doesn’t override anyone’s sovereignty, Instead, it is an institution we in the U.S. pushed hard to create so that we would have a more effective mechanism of getting other countries to drop their barriers to U.S. exports. It has basically worked; most cases we in the U.S. have been involved in at the WTO have been decided in our favor.

It is important to understand that when a country “loses” at the WTO, it doesn’t have to change its policies. Instead, if it doesn’t change its policies—that is, if it doesn’t quit discriminating against foreign products—then it has to be willing to accept higher trade protection targeted against it by the winning party or parties. That is all that happens. The WTO has no other enforcement mechanism than that and it nonetheless have served U.S. interests well.

 

Q #6   I am still trying to read or have someone explain why we need a WTO and how this pact can benefit anyone anywhere except for the transnational corporations.

Why is a global agreement superior to individual agreements between pair of nations? With the latter arrangement we can have our environmental protection laws, our fair labor standards, our pure food regulations. And why do we trade with nations which permit child labor, sweatshops, and prison labor?

Jerry in Arkansas

A The WTO was created as a successor to the GATT in order to eliminate the need of having multiple separate trade deals with individual countries. Doing it separately balkanizes the world trading system, something which happened during the Depression and which the U.S. wanted to correct.

The WTO doesn’t set national food safety laws. In fact, it explicitly allows countries to regulate in their own interest as they judge it necessary to protect their citizens from harm. The WTO can find, however, that in the process of doing such regulation, countries may discriminate against foreign goods. In that case, the countries need not change their policies—although they are encouraged to do so—but instead must then will be willing to have some trade protection targeted against them by the winning country (the “price for losing”).

As for countries with lower standards than us, the best way to improve their standards is to trade with them—that way they get richer and demand higher levels of labor and environmental standards. That is the history of the U.S., Europe and Japan—and it should be history of the developing world.

Not trading with countries with lower wages or lower standards than us—most of the world—consigns them to lower growth, and meanwhile limits the markets into which we can sell our own goods.

 

Q #7   The debate is degraded, when WTO supporters put words in the mouths of the protesters. And the opportunity for productive discussion is reduced when only the most extreme positions are entertained. Globalization is a fact of economic life, which most reasonable people concede. But, we cannot permit others to foul the planet, on their side of the border, while requiring our own economic system to maintain higher environmental standards. Everyone can agree on this point as well but, if we reduce our U.S. baseline criteria for sustainability to make international trade fair, and impose lower standards on others, then we ruin the planet and the U.S. domestic economy, too. Rather, we need to bring the developing counties, and the older struggling economies into the new millenium, with equitable and higher environmental practices across the board, particularly in energy developments.

Ross

A I think we all agree that we need to raise standards of living around the world, which will lead to higher standards (that is the history of the U.S., Europe and the West). The best way to do that is trade with these other countries, so they get richer and their people demand these standards.

Refusing to trade with them, or raising barriers to their products, will consign these countries to lower income growth, and thus will defeat the very objectives we all share.

One way to think about this: would the U.S. of the 21st century refuse to trade with the U.S. of the 19th century (when we were much poorer and didn’t have the standards we now have)? I don’t think so. Yet many countries are in an economic position equivalent to 19th century America. They won’t graduate to 20th century America or 21st century, unless they can interact with the rest of the world (including us).

 

Q #8   There are frequent ’food wars’ lately between the EC counties and the United States, especially over the safety of GM [genetically modified] foods.

The U.S. sees safely standards and labeling requirements as creating barriers to free trade while nations of the EC view such requirements as protecting the safety of food for consumers. How can the WTO balance such conflicting views?

Erin

A My inclination is that eventually we’ll have to accept some form of labelling. Many U.S. firms view labelling requirements as expensive and they are legitimately worried that a “made with GMOs” or a “made in America” label could be pejorative, and consumers abroad won’t buy. But the alternative is to accept a long-run stalemate between U.S. and European scientists, which will continue the impasse and meanwhile keep some U.S.-made food out of Europe altogether.

 

Q #9   How much of the opposition in Seattle would you say was to procedures and practices of the WTO (reformist) and how much was anti-globalization (for abolition of the WTO)?
A My personal view is that there were many different interests there with different agendas, but I suspect the dominant view was anti-WTO or anti-globalization period. Reform of the WTO—making it more open (a position with which I agree)—probably would not have satisfied many in the streets.

 

Q #10   Mr. Litan,

In light of the disappointing results of—and of the fierce (and mainly loud) opposition to—the WTO agreements in Seattle last week, what are the odds of including in the near future proposals for the liberalization of investment and competition rules under the WTO?

Stefano in Washington, D.C.

A Going into Seattle the U.S. was opposing the European position to add competition policy and investment issues to the agenda. Coming out of Seattle, there is no chance that either issue will be put on the agenda any time soon. The main challenge is having the nations agree to any agenda at all. That may not happen until after the Presidential election here.

 

Q #11   Capitalism’s much celebrated invisible hand would seem to require a world market which was uniformly regulated, without the myriad regional derivations now in place which, according to its proponents, hinder competition. If that is the case, why not uniform regulations which protect workers, consumers, and the environment as well as lenders, manufacturers, and those providing services? Why must the needs of corporations trump the needs of labor, communities, and ecosystems? Why should the level playing field of competition for which free market adherents so vehemently lobby be a landscape devoid of basic labor and environmental rights? Why should corporations operating in the third world be able, to borrow an old Midwestern saying, drink the milk without buying the cow?

Andrew in Michigan

A Capitalism doesn’t require a level playing field everywhere. Is there one in the U.S.—does California have the same wages, standards, and so forth as West Virginia? Of course not. A fundamental proposition in basic economics is that nations—and individuals—trade because they are different and not the same! If every nation had same wages, same standards, same factor costs, etc., there would be very little or no trade.

 

Q #12   As an economic and political matter, it is unrealistic to expect that third world countries can have the same standards that we rich countries have. We wouldn’t impose on 19th century America the standards that exist going into the 21st century.

This may make some sense for truly indigenous companies, but is it really neccessary to allow rich multi-nationals to operate under 19th century conditions? Why can’t we at least hold multinationals to contemporary standards?

Further, would we really want to claim that child-labor and wholesale environmental destruction were neccessary parts of the American industrialization process? Is it possible that if we had enacted child-labor laws and environmental regulations earlier we would be better off now?

Miles in D.C.

A U.S. multinationals operating abroad do in fact pay higher wages than local wages. U.S. consumer pressure has induced Nike, for example, to improve working conditions in plants of its sub-contractors. But forcing MNCs to pay the same wages abroad as they do here will keep them from going abroad and spreading their skills to other countries. Also, the prices of their products will be higher, which you and I and the rest of America would have to pay for.

As for our own economic development, it is a fact of economic life that countries do what they can afford. A U.S. where workers had 1/10 the average income of today’s workers would not have voted for the protections we have today.

In any event, why should the U.S. and other rich governments be in the position of telling LDC governments what standards they have—except when their pollution spills over into our borders (as is the case for global carbon emissions)? That is what most of the rest of the world tells us. They might add: would the U.S. accept European labor protections—or else be confronted with sanctions? I doubt many Americans would say yes (especially when European labor protections have also contributed to the much higher rates of unemployment there than in the U.S.).

Again, the bottom line is that trade makes other countries richer (makes us richer too—see my op-ed in the Post today (http://www.brookings.edu/views/op-ed/litan/19991205.htm) on this website).

 

That’s all the time we have. Thank you for your questions, and thanks to Robert E. Litan for his answers. This page will remain available on the website.