Trade Restrictions—A Tangled Web Even if all could agree that as a whole the world would be…

Trade Restrictions—A Tangled Web

Even if all could agree that as a whole the world would be better off if all national trade restrictions were ended, it does not follow that all countries or that all persons would be better off, certainly not in the short run. International trade has never been free of national barriers in modern times. WTO negotiations start with existing historical protections and member countries agree not to increase barriers and commit to participating in multilateral trade negotiations with the goal of lessening restrictions over time. New countries are admitted to the WTO only after sometimes prolonged negotiations with existing members over modifications of their existing trade-related barriers deemed necessary before they can be admitted. Every country has companies and industries that benefit directly from existing barriers, businesses whose profits rely on, and sometimes depend on, protection. Each of these businesses in turn have employees, suppliers, and communities that indirectly benefit from those protections. Thus, any change in a nation’s trade policies will have a negative effect on some segment of its economy, even if it can be demonstrated that a change would produce a positive effect on the total economy. Take a specific example: The United States has had an ongoing dispute with China over its protection of and trade in intellectual property. Recently a WTO dispute resolution panel ruled that China must permit foreign companies to sell music online in China. The panel said China’s prohibition on downloaded music violates a promise China made on joining the WTO to open access to foreign mass-produced art. China responded that it never promised to open markets in the electronic distribution of sound recordings in a nonphysical form and that the restriction was necessary to protect China’s “public morals.”68 Interestingly, only once has the public morals defense previously been used before the WTO—by the United States when it argued in support of its ban on Internet gambling over the objections of Antigua. The United States lost. To succeed, a proponent has to be able to show that the restriction is “necessary” to defend public morals. Now consider more broadly the trade relationship between the United States and China. What other forces influence the resolution of a particular dispute? Consider, for example, that China exports to the United States $4.46 of goods for every $1 of goods that the United States exports to China, which would suggest that China is more dependent on trade with the United States than the reverse.69 Conversely, in significant part because of China’s large positive trade balance with the United States, China invests its abundance of U.S. dollars in U.S. Treasury bonds. China’s demand for treasuries keeps the interest rates the United States pays on those bonds significantly lower than they would otherwise be, thus reducing the cost of borrowing by the United States. The United States also has an ongoing trading dispute with Brazil. Brazil forced the United States into the WTO dispute resolution process arguing that the $3 billion per year the United States has been paying to cotton growers (mostly large agribusinesses in the South) constitutes an unfair subsidy. United States companies account for about 40 percent of cotton exports globally. The WTO ruled in favor of Brazil and ultimately authorized the imposition of countervailing duties. In order to avoid the imposition of those duties, the United States negotiated a settlement that permits the United States to keep paying the $3 billion in subsidies, at least until Congress passes a new farm bill, so long as the United States also pays Brazil $147.3 million per year in the interim.70

Questions

1. How would you challenge China’s assertion that prohibiting music downloads is necessary to protect public morals in China? What facts might you look for to support your argument?

2. Is it ethical for the United States to dispute China’s protectionist policies while itself spending years defending subsidies for a well-developed U.S. industry? Explain.

 

 

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