Over the past few weeks, much has been made about the transatlantic trade pact President Obama proposed in his State of the Union address, as well as the announcement that Japan will join the Trans-Pacific Partnership, which the U.S. hopes to wrap up this year. Largely overlooked, however, was another development in the area of trade: the leadership contest for the post of the World Trade Organization’s director general. The winning candidate, Brazil’s Roberto Carvalho de Azevêdo, managed to secure the closed-door consensus that passes for a selection procedure with milquetoast statements designed to offend no one.
The lack of excitement about Azevêdo’s appointment reflects the extent to which the WTO has been marginalized in favor of trade regionalism. That’s a real problem for the U.S.: Regional approaches can’t handle a lot of the country’s most significant trade issues. The World Trade Organization, meanwhile, remains vital to national and global economic prospects.
The two most important long-term trends in U.S. trade are the integration of American factories and retailers into global production networks and the declining U.S. share of global trade volume. Both factors suggest America needs a strong WTO much more than it needs a series of bilateral and regional deals.
The rise of global production networks means that products no longer originate in a single place. Instead, manufacturing now involves multiple countries. And networked production is becoming the norm worldwide. According to the U.S. International Trade Commission, the proportion of U.S. manufacturers’ inputs that were imported increased fourfold from 1980 to 2006. And the proportion of the value of U.S. exported goods accounted for by imported parts doubled from 1977 to 2002. Global trade in “intermediate goods” each year is larger than that in finished manufactured products sold to consumers and industries combined.
Take the Boeing 787, finally assembled in Everett, Wash. Parts of the plane, including the flight-deck controls, escape slides, and rear fuselage, are made in the U.S. Other bits—the landing gear and passenger doors—are made in Europe. The wing tips and toilets are made in countries in Asia. The components of those parts, in turn, come from a range of other countries. Production of this world-traveling aircraft is pretty much a global endeavor.
Jason Dedrick of Syracuse University and his colleagues pointed out that a few years ago, each iPod sold at $299 retail. It appears as a $144 trade deficit with China in the trade statisitcs, but China’s input is actually only worth about $5 of labor. Much of the remaining $139 of imported value is accounted for by parts imported by China from all over the world—including the U.S. Apple’s gross margins amount to about $80 on each iPod; U.S. retailers and distributors account for about $75. For Apple (AAPL) and Boeing (BA) to make money requires friction-free trade not just between the U.S. and China, but around the world.
That involves a global agenda far beyond the traditional fixation on trade tariffs. Analysis by the OECD suggests that reducing transaction costs of trade by just 1 percent would increase global income by more than $40 billion. And World Bank researchers note that countries with more efficient logistics systems are far more integrated into international production networks. The WTO has begun to tackle a host of nontariff barriers to trade that prevent goods and services from being provided to consumers more efficiently and with greater choice. These include trade in services—such as logistics, banking, and telecommunications—as well as policies relating to the movement of the people who deliver those services.
The U.S. needs global trade to work better at a time when America’s economic dominance is declining. The U.S. controlled nearly 16 percent of world trade as recently as 2000. Economist Arvind Subramanian predicts that will drop to around 7 percent by 2030 (China will control around 15 percent—as much as the U.S. and Europe combined). The best way to lock in a trading regime that will be fair to the U.S. is to use the power of the WTO. The organization has shown itself capable of standing up to today’s biggest trade bully: Washington. Economic minnows Antigua and Costa Rica have both successfully challenged U.S. trade practices using the WTO. At the same time, WTO decisions have also helped the U.S.—not least, a WTO ruling forced China to drop export taxes on a number of raw materials, including bauxite and zinc, in 2012.
If the U.S. wants to benefit from a stronger, fairer, truly global trading regime, it needs to reach out beyond Europe and the Far East to producers from Africa to Asia and Latin America. Because of global production networks, it needs agreements that promote friction-free movement of goods all around the world. And only one trade institution has that reach. The WTO now has 158 members who account for more than 95 percent of world trade. Add in 32 applicant countries, and that brings the total to 99.95 percent. For all of the frustrations of the past 10 years, the Obama Administration should be putting its muscle behind reviving the moribund Doha WTO round—or launching a new one. Regional and bilateral agreements are simply a distraction.