The WTO & Domestic Politics

Show Notes

Designing an International Economic Order: A Research Agenda by Renee Bowen and J. Lawrence Broz

What Dr. Bowen is reading: Clashing Over Commerce: A History of US Trade Policy by Douglas A. Irwin

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Transcript

Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the audio before quoting in print and write yeutterinstitute@unl.edu to report any errors. Transcripts will be posted within one week of the show.

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 Dr. Renee Bowen, Professor of Economics and Director of the Center for Commerce and Diplomacy at the University of California San Diego. Dr. Renee Bowen, thanks so much for being on Trade Matters today.

Renee Bowen: Thanks so much for having me Jill.

Jill O'Donnell: So, you and your colleague, Professor Lawrence Broz are doing some really interesting research. I'm very excited to talk with you about this today. There has been a lot of talk in recent years about the decline of the so called liberal rules-based international order, including the economic institutions that are part of that order, like the World Trade Organization. But you and your colleague are looking at this kind of existing and long standing problem in some really interesting new ways. And so, I want to start by introducing listeners to a paper you've recently published with Dr. Broz called, "Designing an International Economic Order: A Research Agenda." And to set our listeners up for understanding what your paper is all about, I want to mention that, what I can see is that the premise of your paper seems to be twofolds, with the first one being that the pressures that are being faced by institutions of global economic cooperation are weakening those organizations, and that can pose a threat to global prosperity and peace over the long run. And the second premise is that scholars who study international organization have not defined a clear research agenda for responding to the challenges that these organizations face. So, I want to start by asking you, why do you think there is a gap in the research agenda in this area when it comes to international economic organizations? And what compelled you and Dr. Broz to tackle this subject at this time?

Renee Bowen: Okay Jill. Thank you so much for that introduction of our paper. You're absolutely right, that one of the things we identified, so it's actually a working paper, so it will be published hopefully soon. But one of the things we've identified as you correctly said, is this decline in the rules-based international economic order. And surely, we're not the first to make this observation, and much has been written about it, much has been written about the international organizations themselves, but the gap that we saw, was thinking about the design of these organizations, and the design of the rules-based international order. And so, one way to think of it is social scientists, political scientists, economists, our usual approach to research is certainly looking back at what we can learn. But particularly in economics, there's a strand of research that's really interested in design. And so, this comes through in thinking about mechanism design, of course, we always think about welfare economics, and so there's an element of thinking about the institution and the design of institutions that can enhance welfare outcomes. And so, this is a little less applied to thinking about international organizations. And I say a little less applied because surely, some folks who are thinking about this with regard to specific organizations. But what we saw as a gap is thinking about the entire system of organizations that were set up, let's say in the 1930s and 1940s, in response to lack of cooperation in the 1930s among major economic powers. Now, why was there no research around the design? Well, to be quite frank, the institutions that were designed around the 1940s, the Bretton Woods Institutions were really pretty novel for that time period, and of course they were implemented by practitioners, and not a whole lot of thought was given to thinking about the research of these institutions. And I would say that for the past 75 years or so, we've taken these institutions for granted, they were working rather well to increase prosperity, and it's only until recently that we've seen their decline, that we started to ask the questions about why. And in asking the questions about why, we're able to start looking into the nuance of the agreements, looking at the actual construction of the agreements, the written text of these legal agreements, and starting to figure out why these cracks are appearing, and what we can do to mend these cracks. So that's what we see as the absence in the research. And of course, this is related to the question of what compelled us to tackle this subject, and I will note that both my co author Lawrence and I have been thinking about these institutions for decades, really. And it's somewhat not until recently that I would say the need for this research has kind of come to the fore, unfortunately, we've been thinking about these things previously, and we've decided to write down our thoughts on a research agenda for this.

Jill O'Donnell: Okay. So, one factor that has been important in underpinning the health of these organizations as they were working for a number of decades as you mentioned, has been U.S leadership of and within these organizations. And that leadership as you note in your paper, used to be sustained by a broad consensus within the United States in supportive of an open world economy, that consensus is broken down. So, in your view, what do you think are the causes and symptoms of that breakdown, and do you think the distinction between the two gets lost sometimes in popular discourse?

Renee Bowen: Yes, thanks for that question. So, let me first start with why we think leadership is necessary in this context. So again, economists think of the provision of freer markets, and whether it's a domestic or global context, as a public good. And notably, consistent with economic theory, if we allow countries to provide their ideal levels of the public good in a unilateral way, then we're going to have under provision of this public good. So it does require some coordination to get the right level, shall we say, of economic integration. And so, where does that coordination come from? Well, it can't come from nowhere, it's unlikely to be organically generated. Surely, if we think about domestic markets, and into studies of international organization, they're repeated game logics that get us to thinking about how to sustain the corporation, but there is not a lot of logic in how we arrive at the cooperation. And so, it's been rather clear the last 75 years that the United States has played a key role in coordinating. And so, that's what we think of as leadership, not so much dictating what should be done, but rather just helping to coordinate this effort. And so, what are the symptoms of the breakdown in this coordination? Well, it will start with the leader having reduced incentives to lead this coordination effort. And why do we think that's happening in particular in the United States, it's also happening in other Western countries, is the domestic consensus is breaking down for this leadership. And that can be traced to the increases in inequality that we've seen as a result of this liberalization, and the increases in inequality are having lots of social sort of knock on effects. Clearly, backlashes against immigration, backlashes against anything that looks like the United States is spending more effort on international interest versus domestic interests.

Jill O'Donnell: Okay. So that leads into where you chose to focus within your papers, and your paper focuses on populism as one of three major threats that you identify to the international economic order, with the other two being state controlled economies and national security. So first, I want to ask, can you define populism for our listeners, and then also share why you chose to focus on that threat in particular?

Renee Bowen: Right. Another great question. Thank you. So, you asked about the definition of populism. The reality is that there are several definitions, and in sense no definition at all. That's really satisfying. So, in fact, my co author and I, we actually don't like the word populism, which is surprising that it shows up in our papers so prominently. But what we have in mind when we discuss populism in this paper, is that sort of groundswell, ground level backlash against international organizations. So, we see it manifest in choices of political candidates, we see it manifest in various social movements, whether it's the Tea Party, or even backlashes against thinking about how we're managing the climate crisis. So, this is all coming from voters, this is coming from everyday folks who are not really seeing the benefits of the international economic order that it was promised, quite frankly.

And so, we chose to focus on this threat because we thought it was a good place to start. It's certainly, I would say only one of these three threats that deserve lots of attention. But it was a threat that we could get a lot of purchase on, given the current trends in politics in the United States and Europe, and we could give an all existing knowledge of how the World Trade Organization works, we could trace that source of threat into the actual breakdown of the World Trade Organization, and the World Trade Organization Appellate Body in particular.

Jill O'Donnell: Okay. And that's a perfect lead in, to where I want to go next with your paper which is that you do specifically focus on populism in the United States as a threat to the World Trade Organization, and specifically the Appellate Body which has broken down. That happened about a year ago as you know, when the U.S refused to allow the appointment of new judges to the Appellate Body as they were retiring because of frustrations the US has, long held frustrations with that body potentially overreaching it's mandate. That's one frustration it's often mentioned the US has there. So, quoting from your paper you write, "It is increasingly clear that the current backlash against globalization is driven by economic grievances that implicate the WTO." So let's walk through how you arrived at that conclusion. I want to mention that you looked at statistics from the WTO inception in 1995 through 2016 and found, again quoting from your paper, "It is inaccurate to say that the WTO is unfair to the United States by the USTR's own scorekeeping, the U.S almost always wins the cases it brings against other WTO members, but it loses most of the cases that other members bring against it." And those are the cases that you focused on, the losses. So, when you looked more closely at those cases that the U.S tends to lose or has tended to lose over time, through the WTO Appellate Body, you found they often deal with US Trade Remedies, which are actions often in the form of additional tariffs that the WTO allows countries to take sometimes to protect domestic industries. So, tell us then a little more about how you connected these cases involving U.S Trade Remedies at the WTO to economic grievances in the United States that perhaps have gone unaddressed or inadequately addressed.

Renee Bowen: Thanks for that great question, and you so eloquently summarized our findings. Let me start by saying that this is really just one pain point in the WTO that we've identified. Other pain points include issues around intellectual property, and other sort of salient issues, including issues around developing countries. So, we decided to hone in on this particular issue of trade remedies. So in fact, this is completely driven by the current USTR's own admission of what he sees as the big issues with the WTO. So, let me also take a step back and say that, prior to, I would say five years ago, any suggestion that there was anything wrong with the WTO, or that the WTO was a failure in any sense, would have somewhat been heresy among WTO scholars. It was heralded as the great success story in international organizations, and it really worked as it should. That sort of belied an underlying frustration among some domestic interest in the United States of how the WTO was working, and how it was intended to work. So, speaking of how it was intended to work, trade remedies were definitely put in place to allow countries to respond to various domestic political reassures that they needed to. And this was intended to give the WTO some wiggle room, and allow countries to respond as they needed to, so that the agreement could be sustained. So, that was certainly a good objective. What happened in practice, is the wiggle room that was required for the United States was a little bit too much more than some of its trading partners were comfortable with. And when I say wiggle room, one of the particular issues was around zeroing, and I would say in particular zeroing with respect to the steel industry. So, your listeners may or may not know this very sort of detailed part of the WTO, that essentially zeroing allows any calculation of trade remedies in the form of anti-dumping duties or countervailing measures, to be calculated such that it looks larger than it should. That's it in summary. And zeroing is one of the major complaints that WTO members had against the United States trade remedies. And so when USTR refers to losses, a number of these losses were in fact against zeroing in particular. So what does that mean? That means that the breakdown in the Appellate Body really can be traced in a large part to this practice of zeroing, and the insistence of the United States to engage in zeroing where as its trading partners we're not happy with this practice. And so, you see how the intended wiggle room that was used to help the WTO sustain itself, was either misconstrued or was, I wouldn't say abused, but some might. But it really didn't unfold as some members of the WTO expected, leading to the current cracks. Now, what does this have to do with domestic interests? Well, naturally, the steel industry is a large part of some important constituencies in United States politics. And one could say this is just politics, but really, this is people. This is people losing their livelihoods, losing their way of life, and so, one can't simply dismiss it as politics, one really has to dig into the specific grievances of these people, and why it really is trickling up if you would into a breakdown in the WTO. And I'll point out that the magnitude of trade affected by zeroing is actually quite small. And so, it's surprising that such a small industry would have such a powerful effect on the entire global trading order. And some might say that's somewhat inefficient, there's a problem with this. My personal interpretation, my co author may or may not agree, is, in fact, it's the power of U.S democratic institutions. A small group of people can really impact the international organization through how democracy works in this country.

Jill O'Donnell: That was a perfect place to pick up, and it's such a good explanation of what you are finding through your research, and I'm actually going to shift now to a different but related piece of research that you and Dr. Broz are working on. It seems to me that a real area of innovation in what you're calling for in your research agenda here, is that you're calling for new scholarship on the WTO crisis that really crosses the international and domestic levels of analysis. You've honed in on people, you've honed in on one industry, sector, and the practice of zeroing in how perhaps it could have an outsized influence on how things unfolded at the World Trade Organization. So, I want to now mention a paper you and Professor Broz are working on, which is researching to what extent WTO Appellate Body rulings matter in domestic U.S politics, and you have found that they do indeed matter. So, tell us a little bit more about how you've set up that particular research question, and how you arrived at your key finding that these Appellate Body losses the U.S has experienced at the WTO, how you trace that back to very specific places in the U.S, where you have seen that they actually have impacts on voting behavior and of electoral outcomes.

Renee Bowen: Great. Thanks so much for that. Yeah. So, the paper is joint work with Lawrence Broz, and Marc Muendler. Lawrence is the political scientist, Marc is the economist. And this is truly an interdisciplinary collaboration. Just to tell you a little bit about the result itself and how we arrived at it, it stems directly from this research agenda that we laid out, and a large part of this research agenda was simply digging into the weeds, if you would of U.S domestic politics and its impact on the WTO and vice versa. So, we started with, again, this issue of the Appellate Body and losses, in particular, from the Appellate Body since these losses had been identified by the current administration, and in fact, I would say it's not only the current administration, prior to the current administration on there, President Obama, there was already growing frustration about the WTO as Appellate Body. So, the research was born out of that motivation, and so the question we asked is, can we indeed statistically find this connection? We could certainly tell the anecdotes, but could we find such a connection in a robust statistical way. And so, the design we set up, was number one to figure out how these Appellate Body losses translated into employment in industries at the county level throughout the United States. Clearly these losses affect particular industries, the WTO provides data on the industry by HS code category, so that's the Harmonized System category. Now, part of the challenge is that the industries match to Harmonized System categories, is not how employment data is categorized domestically. So, employment data in the United States is categorized according to NAICS industries. And so the first challenge was to match these HS industries, into NAICS industries. And once we had HS industries, and the actual losses according to HS industries, we could match these into losses according to NAICS industries. And once we have these losses according to NAICS industries, we could match these losses into employment shares by industry, and so track the employment that was actually exposed to negative Appellate Body rulings by the WTO. And of course, once we have this employment exposure measure, we can now look at the connection between this employment exposure measure, and various political outcomes. And so, one of the political outcomes we look at is the increase in Trump's vote share in the 2016 election, relative to Mitt Romney's vote share in the 2012 election, and we do find a positive and statistically significant effect there. The other thing we look at is various votes to pursue the WTO, so, a little known fact is that every five years, Congress has the opportunity to propose a vote to exit the WTO. And it's rarely taken up, but there are two occasions in which it actually was taken up. And so, we can look at these votes to withdraw from the WTO, and we've looked at these, and we show that in 2005, votes to withdraw from the WTO are statistically correlated with Appellate Body losses, according to congressional district. So, for us this was a very long chain of events, and the fact that we did find statistical significance connecting these electoral outcomes with this political outcomes, to Appellate Body losses, validated that this research would really have some legs.

Jill O'Donnell: That is a really interesting connection. And so, I want to ask you too, so, this finding would assume that voters in these areas that were heavily impacted by WTO Appellate Body losses for the U.S, would assume that voters know what the Appellate Body is, what the WTO is, and perceive a negative impact from those rulings? How do you test for a measure what voters are perceiving in this way, and whether they're attributing economic hardship they might be experiencing to the Appellate Body itself, or to just this general sense of international trade is unfair, or global competition is tough, kind of that sense about things more generally rather than pointing to the WTO Appellate Body and being actually aware of what that does, how it's functioning and how it's decisions might be impacting the area and industries where they live?

Renee Bowen: Right. Yes. So that's again an excellent question, and one we struggled with. And so, there certainly must be some connection between the general angst about these international organizations that is influencing the result we find. But one thing, as you said, we were concerned about is, do these voters, have they even heard of the Appellate Body? We certainly weren't as aware of the Appellate Body and we're WTO scholars. So, one thing we did is started digging into archives of the media in these localities that we identified as heavily affected. And the example we like to discuss is Brooke County, West Virginia, that was heavily impacted by WTO decisions. And sure enough, if you look at the media accounts in Brooke County, West Virginia, whether it's from trade associations, the local newspaper, there is a lot of mention of the WTO and the WTO's decision in particular, to rule against the 2002 steel tariffs that were implemented by the Bush administration. So, this is really just one anecdote. There's a lot more work to do to connect, I would say knowledge of the Appellate Body to voter outcomes, but this gave us some comfort that there was some acknowledgement of WTO decisions and Appellate Body decisions, even if they couldn't ascribe it to the Appellate Body in itself, it was clear that Appellate Body losses were affecting these constituents in particular.

Jill O'Donnell: Okay. So, I do want to switch to another aspect of the research agenda that you've identified, what you're working on here that we've just talked about is really interesting, and I'm really looking forward to following what you and your colleagues are doing on that front. I do want to ask you too though, you noted in your paper on, "Designing A Research Agenda," that you think that scholars who researched domestic sources of U.S global leadership should focus more on Congress, and there's been more focus I think on the presidency so far, and you have mentioned that perhaps more focus on Congress is needed here. So I'd like to ask you just to tell us a little bit more about the questions you think scholars should be asking about the role of Congress in forging U.S consensus on trade policy.

Renee Bowen: Let me just start from the fact that throughout history if we look back, Congress has had way more authority in setting the agenda for trade negotiations and setting up what's important in trade negotiations, more than we give it credit for. And so, it's really only in recent times that the President and the executive has had as much leeway as he has had in negotiating trade agreements. And I'll give an example. An example is Trade Promotion Authority, which gives the president the ability to negotiate trade agreements, with only an up or down vote from Congress. So this is in contrast to Congress being able to tweak various things about the agreement here and there, here Congress either says yes or no. And Trade Promotion Authority has to be granted by Congress. And it's typically granted for a certain period of time, and the current Trade Promotion Authority will expire about June of next year. And so at that moment, Congress has the ability to give back this power to the president, and it's to be determined whether or not they will do that. And so, why haven't scholars focused on this role of Congress? Well, one simple reason is that it's somewhat difficult. Congress of course, is made of lots of individual actors all vying for different policies with different interests, so that is already a very difficult problem to address from a research perspective. But another reason is that trade negotiations are typically thought of at the executive level, so President Trump negotiating with President Xi, or Boris Johnson, negotiating with leaders from the EU. And so, a lot of times when we think about trade negotiations, we're really focused on the motivations of the executive. What gets obscured, is that the motivations of the executive are largely driven by constraints imposed by Congress and different motivations of members of Congress. So again, we're not exactly the first scholars to make this observation, but we are trying to push in the direction of doing that difficult research in thinking about the role of Congress, the motivations of Congress in crafting trade policy and the trade policy agenda for the United States.

Jill O'Donnell: Okay. So, recognizing that you're at a stage where you are suggesting these questions and designing a research agenda in some areas where you think more attention is warranted, and then also recognizing your early findings when it comes to connecting Appellate Body rulings to voter outcomes in certain localities and counties in the United States. I want to ask you a bigger picture question. At this stage, what do you think you can say about what should or could be done with the insights that are gained from research questions like this that you're identifying and then starting to work on? How might they translate into action items, or things that could be done differently, or new things that need to be done to strengthen this overall consensus in the U.S on trade policy or support for U.S leadership of these international economic organizations? It's a big question, but how would you answer that at this stage in your research?

Renee Bowen: No, it's a big question and a really important one. So, I'll say that there's been some talk about post globalization era, some have gone as far as to say that the World Trade Organization is dead, that's not our perspective. The World Trade Organization and its predecessor the GATT, hung around for 75 years. And so, there had to have been some elements of these agreements that were working. And it's one of these things, don't throw the baby out with the bathwater. What are the elements that worked? What are the elements that didn't work? And so, we're focused on the elements that didn't work so that we can improve them.

Another point to note is that international trade is not going anywhere. With advances in various technologies, whether it's shipping technology, the ability to work remotely, different supply chain innovations, international trade is really not going anywhere. So, the idea of a post-global world is a bit misplaced in my view. So, the key is, how do we make this global world work for everyone? Now, I don't believe things will go back to the way they were in the year 2000 or previous to that, and maybe not even in 1994. I really think we're embarking on a new era of globalization, and the important thing is to learn from what worked and what didn't work previously, to make this new era of globalization work better for everyone. And a key part of understanding how to make it work better for everyone is certainly understanding these different domestic pressures that shape these organizations, and not only shape, but  have the ability to bring these organizations down quite frankly. So, in that regard, what we're really hoping to do is, as our research suggests, is really redesign these institutions, really to make it better for everyone, in terms of peace and prosperity, it's a high ideal, but we do think prosperity is key to maintaining peace.

Jill O'Donnell: Thank you Renee, this is really interesting. And I'm really looking forward to following your research as you continue to develop it along with your colleagues. I want to ask you the same last question that I ask every guest on the show, and that is about what you're reading lately. What is something you've read recently about trade or global commerce that's been particularly striking to you?

Renee Bowen: Thanks for that question. So, this may have come up among some of your other guests, but Doug Irwin has a book titled, "Clashing over Commerce," and it's really about the history of U.S trade policy and it traces the importance of Congress throughout history. It traces the importance of tariff revenue, no one talks about tariff revenue anymore. But I'll just preview that, some research that I'm working on with Lawrence Broz and Peter Rosendorff, brings back this idea of tariff revenue as a motivator for different trade policies. And so, looking at the history, it tells us that what we're experiencing now is really not that new to begin with, and that there's certainly a role for these global institutions going forward, just as there were 100 years ago or so.

Jill O'Donnell: Thank you for that. I have that book as well, it's quite a tome but very full of good information, so thank you for mentioning that one. Professor Renee Bowen thank you so much for sharing about your research and where your research is going, and sharing your insights today on Trade Matters, we really appreciate it and look forward to having you on again sometime.

Renee Bowen: Thank you Jill for having me, this was quite a pleasure.

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.