Jill O'Donnell: Welcome to Trade Matters, a podcast by the Yeutter Institute at the University of Nebraska - Lincoln. I'm Jill O'Donnell. Our guest today is Clete Willems, Partner at the Washington law firm of Akin Gump Strauss Hauer & Feld. He previously served as Deputy Assistant to the President for International Economics and Deputy Director of the National Economic Council in the Trump administration.

Clete, Thanks so much for joining us today on the Trade Matters Podcast.

Clete Willems: Thank you for having me. It's a pleasure to be here.

Jill O'Donnell: So you have recently published a paper for the Atlantic Council, a research organization in Washington, called Revitalizing the World Trade Organization. There's been a lot of talk lately about how the WTO has not kept up with many of the changes that have occurred in society and technology and trade since it was founded in 1995, and you consider all three of the WTO primary functions, negotiations, implementation monitoring, and dispute settlement in your paper. So I'd like to start with a big picture question for you, your report states that, "The world has changed, and so must the WTO", so briefly walk us through a few of the changes that you think pose the greatest challenges to the WTO's functioning and relevance right now.

Clete Willems: Sure. Happy to do that. And the way I would think about this is there's things that have changed in the world since 1995. And then I think we've also learned a bit about the WTO itself and how it's operated and how it can be improved. So first, when you look at the world and how the WTO hasn't kept pace with that, I mean, the obvious thing is that the change in technology since that time, this was before the internet age and we have to adapt to that. And the fact that things are now done digitally, that used to be done in other ways, you also have the very obvious rise of China and you have the fact that in 1995 we didn't quite contemplate what the world would be like and how the WTO would deal with a major non-market economy that is generally operating in a system that was built by market economies for market economies.

And so we need to confront that, and then you have innovations in trade negotiations themselves. In our free trade agreements, we've had much more advanced standards on intellectual property and services. And you've also seen issues like labor and environment become increasingly important in particular, to maintaining a political consensus for more trade. And so all of those things have happened in the outside world. And then as I've mentioned, there's also things with the WTO itself. And as you noted there are three pillars of the WTO, there's the implementation and monitoring pillar, there's the negotiations, and then there's the dispute settlement pillar. And if you look at all three of those, they really aren't fulfilling their original mandate. And let me just mention that briefly. And I want to say, look, I think the WTO overall has been a success, but an honest assessment shows you that on implementation and monitoring, countries aren't meeting their most basic transparency commitments to notify the WTO about their subsidies and issues like that. When you look at negotiations, we've really only had one major multilateral negotiation in 25 years. And that's why the WTO is so far behind a lot of what's happening in the external world. And then on dispute settlement, you have a situation where it takes far too long for countries to get a result. You look at Airbus and Boeing where we've been going on for over 16 years, and then the WTO itself in the actions of reaching a result, oftentimes goes beyond its mandate. The dispute settlement system was really set up just to narrowly resolve disputes between members not to create new sets of rules. And unfortunately it's done that in many cases. And so that's some of what I tried to address with this paper. And let me just make one more comment. What I think is unique and what I tried to do here is, as you noted, cover all three pillars and you've had a lot of conversations, the US has been very forward-leaning, I'm putting forward proposals on the negotiation front. There's been a lot of conversation in Geneva, the Europeans, toxic about dispute settlement. And I tried to bring that all together here and try to have a high level of ambition across the board.

Jill O'Donnell: Yes, you've certainly packed a lot into the 10 or so pages with full of recommendations on all of these fronts. And I wanted to start by digging a little bit more deeply into a couple of areas that don't get as much kind of mainstream media attention is to dispute settlement function does because of the collapse of the appellate body almost a year ago here now. So let's start with the negotiation function. In your report, and you just alluded to this a couple of minutes ago, you suggest that free trade agreement negotiations are kind of running ahead of WTO agreements in many of the areas that you just talked about as you outlined how the world and technology, the rise of China and many of these changes have come into play. So that FTAs are now covering newer issues for trade and more advanced and have more dance provisions on things like technology and IP, etc. Do you think FTAs are going to continue to be a better or more realistic way forward in terms of trade agreement negotiations, or do you think the WTO really can kind of re fully recover its role as the prime forum for providing certainty and predictability and international trade through that large multilateral negotiating function? What will it take to do that?

Clete Willems: Yeah, at this point, it's really not clear which way it's going to go. And I think you have to look at this historically first and recognize that part of the foundation of the original WTO rules was NAFTA, and that we had been able to make progress in NAFTA with Canada and Mexico, and then that was seen as a model for the international system. And so I certainly think you're going to continue to see that happening today. And I don't have to remind your listeners we very publicly updated NAFTA with the USMCA and added in a whole range of new provisions on some of these modern issues, whether it be labor, environment, digital issues, and some of the China challenges. And so it would be great if we could find a way to import some of that into the WTO system, just like we've done before. And I think it's going to be a mix, honestly, going forward. Some people have criticized the FDA approach and, and noted I think they call it the spaghetti bowl where you get all these sort of conflicting rules between different sets of members. And it clearly is better from an efficiency standpoint to have it all under one multilateral system, but it's very difficult to get it into that system. And so what you end up having happen is you have higher ambition in FDA's and then over time eventually gets imported into the multilateral system. I think you're going to see that here. Now, what I propose in the paper, and I'm sort of trying to get halfway between that to be responsive to the need, to be forward-leaning, but all sorts of try to multilaterals it as much as I can is the notion of having plural laterals under the WTO system on a non MFN basis. And the idea there is that US, EU, other forward-leaning members would negotiate stuff, maybe on China's practices, maybe on the environment and labor, but they would do it under the auspices of the WTO, but not every WTO member would be required to immediately consent and join that agreement, but they could try to do so over time, it could be aspirational. And the reason that I suggest that it's non MFN, it doesn't follow the normal, most favored nation principle because of the problem of free riders. There is a real problem if the US, EU Japan all decided to lower their tariffs or decide to have certain disciplines and then China and India and others who aren't ready to make those commitments themselves get to be beneficiaries of that. And so that's the idea is sort of how can we still do it within the WTO to continue to suggest that multilateral was better than plurilateral or than bilateral where you can get it, but also prevent this problem of free riding, which is going to reduce the incentive for the US and the EU to actually be ambitious in that context.

Jill O'Donnell: Let me follow up then on another related piece of your report, where you talk about self declaration of developing country status, I wonder how you think this is undermined tariff and rules negotiations. I think you're getting at that a little bit here. So walk us through your proposal on this front, you suggest introducing objective criteria into the WTO system that would govern when a WTO members should be entitled to special and differential treatment. So it's kind of a more tailored way of applying provisions that recognize the developing levels, different development levels in different countries, but it's not kind of a blunt determination like it is now where countries can say that they are developing and then not have to make the same level of commitments as developed countries. So walk us through your proposal there, how does that relate to the negotiating function here that we were talking and do you also see any obstacles to that reform? I mean, some countries have too much to protect and would not want to kind of give an inch on this at all.

Clete Willems: Well, you hit the nail on the head here. I mean, it is absolutely a problem today and it absolutely undermines the negotiations. And the problem is that any country can basically say we're a developing country, therefore we don't have to take on the same level of commitment as quote unquote developed countries. And so China and India right now are saying, we don't have to cut our tariffs as much as the United States or in the fishery subsidies negotiation that they don't have to get rid of subsidies as quickly as the United States or the EU or Japan. And I mean, look, we got to be honest. The world we're living in today where the US and China are the two largest economies, their principal competitors. It's just not realistic. It's not politically feasible for China to say it doesn't have to take on the same commitments as the United States. And if China wants to be seen as an equal player in the international system, it's time for it to step up. And my idea is basically that you can't just simply declare it anymore, but that you can get it where it's warranted. And then if you can establish on a factual basis that certain parts of your economy are not competitive, or are in need of additional protection, then you're able to receive it, but you simply just can't assert it without any factual basis for doing so, look that is going to be controversial. It's going to be hard for a lot of countries to accept and to try to smooth it over, of course I would not apply that kind of logic to countries that are considered least developed countries around the world. If you truly are a poor country who doesn't have the ability to do all these things right away, well, what we're going to give you a free pass for awhile, but it's really aimed at countries like China and India who are clearly should be seen on a level playing field with the United States and the EU and others. But let me just conclude it. I want to make a larger point that I think is important and often lost in this conversation. And it's that those countries that assert that they should be treated specially, they are basically saying that protectionism and not liberalizing, their economies is good for their development outcomes. And I really think that's just a misnomer. I think it flies in the face of what the WTO is all about. I mean, the whole premise of the WTO is that liberalized trade is good for the global economy. That it's good for development. And for them to say that actually no, more tariffs is good for us, I think that's a bigger problem. And I think you have to look at the example of the Asian tigers of Singapore and Korea and those who have stepped up and are no longer in need of special treatment because they've liberalized their economies. And I think that's the model that I would like to see other countries follow.

Jill O'Donnell: So let me interject here and just bring in a totally different, but yet related point here, I wanted to get your thoughts on the director general race at the WTO. It's down to two candidates here, one from South Korea, one from Nigeria, both women. So, that'll be unprecedented to have a woman at the helm. And so the reason I bring this up at this point is because do you think that having a director general in place, whether it's from a country like Nigeria that is still developing and would be in that category or South Korea, which is a fabulous example of development and often pointed to as a country that has figured out how to develop from a very low base over just a matter of decades. So, we've got a candidate in place from each of these countries. Do you think that number one, having either one of these women, whichever one it will be, would kind of help with this to kind of counteract this argument against straightened development that you just laid out? And how do you see this race unfolding because it's gotten, as we've talked about before, pretty interesting right now.

Clete Willems: Right. Well, let me confess at the outset that I am somewhat biased, just because I personally know Trade Minister Yoo from South Korea very well. We worked together when I was in the White House on reforming the chorus agreement. And I will say, I mean, I think one of the big virtues that she brings to the table, and one of the reasons the US likes her is she showed real leadership in getting her country to be one of the only ones who has said, we are no longer going to avail ourselves of special and differential treatment at the WTO. Korea had been asking for developing country status for years, and it was under her leadership that they changed that and showed that there's a different path. And I do think that that's one of the reasons that she's particularly appealing to the United States. She's also really an expert in this stuff. Now with respect to Ngozi I want to say I don't know her personally, so I have a little bit more difficult problems speaking to that. I can say though, she does bring some things to the table that are attractive. Clearly getting African buy-in into the system is going to be important. Clearly she comes from a background where she has a lot of political clout. And also if you look at this, having an outsider, maybe, with a system that hasn't really been functioning all that well, that the insiders haven't been able to fix, I mean, that has some virtue too. So, I mean, I actually think in some ways they're both pretty good choices. Again, I have a personal bias because of Trade Minister Yoo is my friend, but I think that they're, they're both interesting choices. Now, how does this play out? It's hard to say. I think it's, if I'm being honest about this, I'm sure that a lot of folks in Geneva are probably holding their breath, hoping that this election gives them a new administration to negotiate with them this, on this issue. And I do think that the Biden administration might be willing, more willing to let Ngozi go through. If President Trump wins again, then I do think you're going to have a real negotiation on this, and the US is going to want either some sort of concession in order to accept Ngozi, or you could even have a scenario where a new sort of white horse candidate comes in and is seen as a way to break the log jam. I think that the danger here, and a lot of the trade experts that I talked to they're very worried that this could end up going to a vote. Now the WTO has avoided voting in the past, it's tried to operate by consensus. And there's a concern if you start voting on all this stuff you sort of get a UN type organization, which I think is probably doing even worse than the WTO at the current moment, and sort of fulfilling some of its mandates. And so I think that would be the worst case scenario. So hopefully they work it out one way or another.

Jill O'Donnell: We'll have to see, hopefully we'll know here soon. So I want to come back to the topic of China, which we've touched on a little bit already, but that is a major issue when it comes to how the WTO could be reformed to deal with our modern era. Now, in your report, you wrote that the economies of the United States and the European Union are, "Equally challenged by China's policies. If they cannot reach consensus on how to fix the WTO, it is inconceivable that the rest of the world could do so". So you're making the case here that the US and EU have to come together on how to deal with China, if we are to get anywhere on this in the WTO. And so my question for you is if both the EU and the United States are equally challenged by China's policies and practices, then what do you think is standing in the way of better alignment on US/EU strategy to pressure China to change? Tell us a little bit more on what you think about that as well as whether you think the China challenge manifests itself differently in the US versus the EU, if the domestic politics on both sides are different here, what it would take for a real coming together of the United States and the EU on this?

Clete Willems: Well, look, I'm optimistic because I do think that the challenge manifests itself in very similar ways for both of us. And you do have an issue across a range of sectors where China is either subsidizing its way to try to be a global champion and then distorting markets. And I think steel is a perfect example of that, where both of our industries were very critically harmed by China's excess capacity. And then you have the issues of technology theft where both the US and the EU have innovative companies and trying to find a way to get its hands on that technology, either through investment or outright theft. And it does the same thing and tries to subsidize it and create global champions. And so I think both of us have the same challenge and therefore, I do think there's a lot of alignment on our interests. I think our problem is really one of history. And if you look at the history of the WTO for years, it was really the US and the EU that were sort of the primary litigants against each other on the dispute settlement system. Obviously there's the Airbus and Boeing dispute. We've been going back and forth on that for a number of years, we have a lot of other longstanding disputes like on hormones, on biotech, on bananas. And so there's some history there with the US and the EU that I think is difficult to overcome. There's also, I think a little bit of a philosophical divide where the US does see this as a very member driven organization that doesn't impinge on our sovereignty, that ultimately it comes down to us to decide how we want the system to operate. And I think the EU is much more comfortable with sort of internationalized thing its policy outcomes and is much more comfortable with the international court system. And look, I think the answer here is lets not force each other to change our long held philosophies, but let's find a way to look past our long held differences and our history, and really focused on the fact that if we can't agree, we have no chance of really reforming the system in a way that deals with the problem posed by China. And what I tried to do in here in my report is really try to put forward a compromise solution on dispute settlement. And that gives a little of what the EU wants and gives a little what the US wants. And I mean, in terms of what the EU wants, EU wants there to remain a second level of review and appellate body, and they want to dispute settlement to be binding in the sense that after the appellate body issues, a report it's adopted, unless all members disagree with its conclusions. And so that's included in here, but on the U S side. I thought it was very important to put in strong disciplines that restore the appellate body to its original mandate of narrowly resolving disputes between them, between the parties, not making new laws, having institutional reforms, the way the secretary had operates so that it doesn't become too strong and really put in place lots of different instruments that will encourage member control. So it was intended to be a compromise. And I think the US and the EU are both going to need to show a little flexibility. And my hope is that I will encourage that kind of thinking on both sides of the Atlantic so that we can really focus on the common problem.

Jill O'Donnell: Okay. So two follow-ups there then, so one is even if the United States and the EU can find a meeting of the minds in some way on some of these issues, whether it's with respect to China or dispute settlement, do you think then that that's still going to be enough critical mass to bring along all of the other countries on whatever it is the two sides can agree to? So that's one, and the second follow-up is dive in a little bit more into some of your recommendations on dispute settlement. That's the area that's gotten a lot of attention because the US has been blocking, as you know, appointments to the appellate body as retirements have occurred, which led to kind of the paralysis of that body almost a year ago with one appellate body member left. So the body could not then hear any appeals. So it has been paralyzed for almost a year. So those two follow-ups there, yeah.

Clete Willems: Sure. Look, I think on the dispute settlement side, I do think if the US and EU came together, you probably would have a good chance of solving that problem, because that is the principle area where we've really been at odds. And in a lot of ways, I think the dispute settlement stuff, it's a question of how does the system operate in Geneva, right? And it doesn't require members to actually change their underlying laws and regulations themselves. So it really just comes down to, can you find the right political compromise to get it done? And some of the ideas that I put out there as I would put into four, I call it four buckets. The first is that you need to have limits on their adjudicative approach. This is a process that David Walker has been working on in Geneva already, which was just to make sure that the appellate body only narrowly resolves the questions between the parties doesn't make new laws and really follows the dispute settlement understanding as originally negotiated. Now that would go, it doesn't fill in gaps, that kind of stuff. That would go along way but the point that US always makes is that's not enough because these are the original rules. So just restating the rules, doesn't get us done. So what I've added to that is what I would call institutional reforms and actually changing the secretariat itself, putting term limits on the director on the head of the dispute settlement, the appellate body director, looking at allowing appellate body members to have their own individual clerks so that they have autonomy in their decision-making. And the idea there is if you actually change the system itself, and you reduce the role of the secretariat, then maybe those provisions about living in the role of the appellate body actually stick over time. I would also compliment that with a third bucket, which is really intended to streamline the process and to have quicker disputes that settlement resolution and make the appellate body less necessary in every case, try to create incentives so we don't appeal every single time and that would help and limit the inputs. And that would limit the mischief that they could do. So that's my way of sort of trying to compromise, but the last piece is maybe the hardest. And this goes then into the relationship between dispute, settlement and negotiation. And the last argument I make on dispute settlement is that you actually have to fix negotiations to truly fix dispute settlement. And why is that? Well, the reason is that if you don't have negotiations that update the agreements, you have a tendency for members to try to update them through litigation. And you have a tendency for adjudicators to try to update those agreements, to reflect modern reality, reflect the digital age, and so you need to get a healthy negotiating function so that you lose that incentive for dispute settlement to go beyond a narrow mandate. And that in many ways is the hardest. And really to your question, I think the US and the EU can solve dispute settlement. But the real question is then how do you solve negotiations? Because that's where you have these big problems with countries like China and India, that really don't want to change. With respect to China, I think the status quo works pretty well for them. And so they don't have an incentive to reach negotiated outcomes. And that's where I think the hardest problems with disputes, or with WTO reform are going to lie.

Jill O'Donnell: Okay. So let's pick up on China for just a second here. And you did make an interesting proposal in your report to bring into the WTO provisions that China has already agreed to outside of the WTO, such as provisions on forced technology transfer and trade secrets protection that are part of the US/China phase one deal. So that bilateral deals we know resulted from pressure that had built up over time due to the new tariffs and retaliation on both sides that have unfolded over the last couple of years. So that was the context for that bilateral deal, but with the pressure for China to agree, to bring those provisions into a multilateral setting, like the WTO carry over into this setting, that bilateral context was unique between US and China. So do you think that there would be enough incentive for China to agree to bring in that into the WTO?

Clete Willems: Well, look, I mean, on its face, you would think that if China agreed to it bilaterally, it could agree to it again the exact same provisions and we didn't get everything we wanted in the phase one deal, but there's some important stuff there on IP things like trade secrets, and even at a high level, China did acknowledge that it wouldn't engage in things like forced technology transfer. And I think applying those in the multilateral system would be a great first step and down payment towards addressing some of the bigger China problems. So, look, I mean, I can't tell you precisely what China is going to do, but I can say if a bunch of countries are clamoring and saying, you already agreed to this over here, how come you can't agree to it over there? It's going to be a pretty hard position for them to explain internationally. And so I do think that that pressure would be useful and would make it likely that they would get provisions in the WTO. And then you could build off of that with the other things that we need to do. And this is I think, an important point, which is the China solution requires multi-faceted sets of tools. And I do think the US bilateral pressure is helpful. We did make some progress there, but we also saw the limits of that, and the fact that some of the most difficult issues, things like state owned enterprises and industrial subsidies, China's probably only going to do, if it's forced to do that by a much broader coalition of countries, and so I think you need to compliment the bilateral approach with both plural lateral and ultimately multilateral approaches as well. If we all sort of can paint China as a bit of an international outlier for what it's doing, rather than having China just see this as a one-on-one, mano-a-mano with the United States then maybe we'd have some more ability to actually get it done, and maybe they have more political space to get it done because it's... Look, it's hard for them to say, "Oh, we're just making these changes because the US is pressuring us." But on the other hand, if it's sort of the entire international community, I think it's going to be hard for them, because they don't generally like being seen as an international outlier in the trading system. And so I think that pressure would be in many ways equally, if not more effective.

Jill O'Donnell: Okay. I want to ask you about one more point in your report, and this is the implementation and monitoring function. I think it's very striking that you point out there that compliance with that function has been actually quite poor among countries, and you cite a lot of statistics. I'll just say one here where you note that compliance with the transparency obligations under the WTO subsidies agreement has traditionally been less than 50%. And under other agreements it's been even lower as you point out in your report. So tell us why this function is so important and why compliance has been so poor and how you propose to fix it?

Clete Willems: Well, look at the implementation and monitoring function is sort of like the underrated forgotten pillar of the FTO, but it really is sort of the day-to-day work that diplomats are doing in Geneva. And that's getting together and talking about sort of members compliance, making sure members follow the rules and engaging on problems before they actually get to dispute settlement. There's a very important part of the WTO system with respect to the transparency obligations. And the idea there is really twofold. I mean, number one, it's, it's critical for business certainty. If you are someone who deals with international trade or selling your product in a lot of different markets you need to know what their laws and regulations are, and if they're not notifying them to the WTO maybe they have an opaque system at home, it's really hard to get a sense of what are the barriers, what are the rules you're dealing with? And so what the WTO is trying to do there is provide businesses with some certain... It's also important because if you're concerned about a country's subsidies, for example, you need to know what those subsidies are. And if you have no information about that, it's really hard to go out and collect data on and on your own in that other country. And so it was really important that these countries provide notice of what they're actually doing so we can understand, are they, or are they not actually following the relevant disciplines in the WTO agreements? And do we need to challenge that? And then when you're thinking about creating new provisions, again, you need to know how are we doing with the ones that exist. So that's really what that's all about. I mean, in terms of the reforms, I basically, my report, I think in many ways I do adapt with what the US has proposed, which is just at some level, if yo, aren't going to follow these very basic obligations of the WTO, there need to be consequences for that. There needs to be some sort of penalty that's imposed. And I don't try to be prescriptive about what that should be, but at some level we need to have an organization where members respect and follow the rules. And if members don't respect the very most basic rules of transparency and notification, it does raise questions about the effectiveness of the system overall. And so really that's the idea there.

Jill O'Donnell: Okay. Thank you, Clete. You've clearly been thinking and writing a lot about this, but I want to ask you one last question that I ask every guest on this podcast. And that is what have you been reading lately about international trade or global commerce that's been especially striking to you?

Clete Willems: Yeah, well, look, I'm in the middle of a great book right now that a good friend of mine actually wrote, and it's not directly sort of only a trade book, but I think it's a really helpful way to think about trade, to think about trade wars and to think about where we're going globally. And the book is, it's called Geopolitical Alpha written by Marko Papic, who's an analyst with the Clock Tower Group in LA. And really his whole idea on this book is that we spend way too much time thinking about individual actors on the global stage. We think about Donald Trump and what are Donald Trump's preferences, but we don't think enough about sort of the constraints imposed on Donald Trump by the broader environment. And the thesis of the book says, preferences are optional and subject to constraints, whereas constraints are neither optional nor subject to preferences and what Marco does in this book, and as he applies it to the China trade war, and basically explains that he thinks that there was going to be a phase one outcome, which happened. And then that there was going to be there's going to be a limit to the level of decoupling that happens between the United States and China. And I think it's fascinating really to think about the world in this way. And it may help you predict how do some of these play out. And I think it also helps people realize a very, very important point that I want to conclude with, which is that the things I talked about today, the issues with China, the issues with the WTO, these aren't Republican or Democrat things. These aren't Donald Trump things. These are American issues, and they're going to be there no matter what happens next Tuesday in the election. And these are things imposed by the constraints of the external environment. And the fact that China has become the second largest economy in the world. It's not playing by the rules, that's hurting companies in the US and it needs to be dealt with, and that the system that we have at the WTO, isn't sufficiently doing that to date. And so that's going to be an issue no matter what happens, and we're going to have to deal with it. And again, I think that's an interesting theme that is born out by the book. And a lot of people I think are saying like, "Look, there's going to be election and everything's going to change." And I think that's going to happen much less than most people expect.

Jill O'Donnell: Clete, thank you. Thank you for that book recommendation. It sounds really fascinating. And thank you also for walking us through all of these many challenges and the proposals for reform, which all of these issues which we know are going to persist no matter the outcome of the election for quite some time going forward. So thanks for helping all of us understand that a little bit better today. We really appreciate it. Thank you.

Clete Willems: My pleasure. Thank you.

Jill O’Donnell: That's it for this episode of Trade Matters. Thanks for listening, and a big thank you to Alex Voichoskie and Jacy Thoman for helping produce this podcast. Please subscribe to Trade Matters on iTunes, Spotify, Stitcher, or wherever you get your podcasts. If you have ideas or topics you would like to hear about on Trade Matters, we'd love to hear from you. Send us an email at yeutterinstitute@unl.edu or follow us on Twitter @YeutterUNL. Opinions expressed on Trade Matters are solely those of the guests or hosts and not the Yeutter Institute or the University of Nebraska - Lincoln.