Like most articles of this nature, the author is cherry picking which economic concepts and fundamentals he wants to pay attention to. He then goes on to ignore a bunch of equally if not more important economic concepts and fundamentals.
"Comparative Advantage" is a great way to increase productivity in mutually beneficial ways, but not if in so doing, you create a "Tragedy of the Commons". In trying to separate trade from mutual defense, human rights and protecting the environment, we have created a series of massive commons problems.
On the defense side, we've created an ever growing number of free riders that not only rely on the global supply chains that others protect and defend, but have also made themselves reliant on adversarial nations for some of their essential goods and materials. Like all commons problems, this has resulted in a shrinking number of responsible nations overstretching their militaries to the point that the world is spinning out of control.
Then you have to deal with another pesky economic fundamental. "Bad money chases out good". So companies in responsible nations that would have invested in innovative technologies and designs that would go on to increase productivity while reducing waste are put out of business by companies that simply move production to where they can abuse the workers and dump more pollution into the environment.
Let's not forget "Diminishing Returns". Meaning that as we continue trying to disconnect trade from mutual defense and shared values, by adding more and more nations into free trade agreements, productivity will quit increasing and in fact eventually start to decline as the responsible nations go bankrupt. There will always be someone willing to be even more abusive towards their workers and environments.
Last but not least, at least if you care about smaller countries, you run smack into the "Monopoly" problem. A single world wide trade organization creates a monopoly that traps smaller economies who will be beholden to the larger economies. A much better future would be one where there are a mix of trade/defense alliances. This would force these groups to compete against each other for those smaller economies. This would be particularly true for nations that tend to be on the boundaries of regional power blocks.
Imagine the if the UK or Indonesia were faced with choices between joining the EU led block, the US led block, or the India led block. Since joining would not only tie you in some level of defense alliance, but also set minimum standards for workers right and environmental protections, it would force the different blocks to be more reasonable in setting those standards to prevent a mass exodus from their trade/defense alliance.
But other then that, not a bad critique of the World Trade Organization.
The Tragedy of the Commons framing is fair, but Pettis's point is precisely that the WTO's rules-based neutrality is what enabled the commons problem, you can't solve a coordination failure with an institution that treats all outcomes as equally legitimate.
In reality, the WTO's rules were written under false ideologies and attitudes. This is not a dig at your age, but I was around your age, when all this went down. We had just defeated the Soviet union in the cold war. The attitude at the time was that democratic capitalism had proven itself so dominate that history itself had ended. There would no longer be wars between significant nations. We could use institutions like the WTO, the UN and the IMF, to push nations like China towards democracy and freedom even faster.
I bought into it as much as the average person. Yet problems started arising pretty much from the get go. China had barely even got into the WTO when they claimed the maritime territory of their neighbors and started building artificial islands that they then loaded up with military hardware. In 06, Russia without even seeking permission at the UN, invaded it's neighbor Georgia.
Now, that's not to say that there weren't positive signs as well. In Russia, Putin did initially step down as president. In China, they did accept Hong Kong as a democracy under the "one country, two systems". Even down in Mexico, they changed their justice system from "presumption of guilt" to "presumption of innocence" and started going after the drug cartels.
All the illusions should have been swept away when Vladimir Putin, back to being the president of Russia, annexed Crimea in 2014. Again, a few years after that, China passed laws turning Hong Kong's democracy into a sham. Mexico surrendered to the cartels for the most part under president AMLO.
I write this because economics alone doesn't explain why the WTO was created in the way it was. If you were old enough to vote back in those days, they did talk about the faults and problems in these institutions, but kept pushing the idea that bringing these other nations into these international agreements would give us the tools to reform them into being more like us. We were sold the idea that we could then fix any of the problems along the way.
Now step back and really appreciate that it is not just the WTO. The whole concept behind the European Union is that trade, can for the most part be separated, from mutual defense and shared values. You kind of have the same thing with Mercosur in South America and the growing BRICS coalition. It's a false ideology that has gotten very established much in the same way communism, fascism or colonialism once had. The irony being that it has a lot in common with colonialism.
Now the problem is that a lot of the people in power, have invested heavily into this globalized world order and will fight tooth and nail to keep it the way it is. Just like the colonialist, the Communists, and the Fascists. So it's not the simple economic argument you would think it should be.
How I wish more senior UK policy-makers would read and digest Michael Pettis. The solutions set out here are where we will eventually end up. The question is how much damage must be endured before that point.
The reality of "consensus thinking" is that one never occurs. The WTO must be left to die. Not because there are no good reforms. Not because of spite. The sooner the better. Then a better agreement can be built.
The 'let it collapse and rebuild' view is tempting, but the interregnum is the problem, the vacuum doesn't stay empty, it fills with bilateral power asymmetries that hurt smaller economies far more than the current flawed system does.
Marc Fasteau: Altogether admirable goals. But China is pursuing its work until policies, not just for Financial gain, but for Joe strategic objectives, including becoming the dominant economic power in the world. Particularly, overcoming the United States. So degrading the US industrial base, dominating new, high-tech industries, etc., etc., as a key national objective. So, even more than the other non-Anglosphere countries, they will never agree to abide by even the very sensible metrics that that Pettis suggests for a reformed WTO. I also doubt that our other trade counter parties who have violated WTO, no arms while complaining about the slightest move toward protectionism by the United States would agree. Almost all at one time for another have de value, their currency, either directly or through de facto devaluation by increasing taxes that are refunded on exports and decreasing those that are not.
This is the strongest objection to Pettis's reform case, but it actually strengthens his underlying diagnosis. If China won't agree to surplus constraints, that's not an argument against defining them; it's an argument for making non-compliance costly in ways the current WTO simply cannot
Pettis nails the core flaw, the WTO has been policing the rules while ignoring the outcomes, and a system that allows mercantilist surpluses to be perfectly legal is a system designed to fail.
The article makes several good points. The issue is how to convince the American people that the mercantilist practices of China are a real threat to the global economy. Perhaps if someone made a video like the (in)famous “Harry and Louise” video against the Clinton administration health care initiative. The issue needs to be brought up directly to the American people.
Like most articles of this nature, the author is cherry picking which economic concepts and fundamentals he wants to pay attention to. He then goes on to ignore a bunch of equally if not more important economic concepts and fundamentals.
"Comparative Advantage" is a great way to increase productivity in mutually beneficial ways, but not if in so doing, you create a "Tragedy of the Commons". In trying to separate trade from mutual defense, human rights and protecting the environment, we have created a series of massive commons problems.
On the defense side, we've created an ever growing number of free riders that not only rely on the global supply chains that others protect and defend, but have also made themselves reliant on adversarial nations for some of their essential goods and materials. Like all commons problems, this has resulted in a shrinking number of responsible nations overstretching their militaries to the point that the world is spinning out of control.
Then you have to deal with another pesky economic fundamental. "Bad money chases out good". So companies in responsible nations that would have invested in innovative technologies and designs that would go on to increase productivity while reducing waste are put out of business by companies that simply move production to where they can abuse the workers and dump more pollution into the environment.
Let's not forget "Diminishing Returns". Meaning that as we continue trying to disconnect trade from mutual defense and shared values, by adding more and more nations into free trade agreements, productivity will quit increasing and in fact eventually start to decline as the responsible nations go bankrupt. There will always be someone willing to be even more abusive towards their workers and environments.
Last but not least, at least if you care about smaller countries, you run smack into the "Monopoly" problem. A single world wide trade organization creates a monopoly that traps smaller economies who will be beholden to the larger economies. A much better future would be one where there are a mix of trade/defense alliances. This would force these groups to compete against each other for those smaller economies. This would be particularly true for nations that tend to be on the boundaries of regional power blocks.
Imagine the if the UK or Indonesia were faced with choices between joining the EU led block, the US led block, or the India led block. Since joining would not only tie you in some level of defense alliance, but also set minimum standards for workers right and environmental protections, it would force the different blocks to be more reasonable in setting those standards to prevent a mass exodus from their trade/defense alliance.
But other then that, not a bad critique of the World Trade Organization.
The Tragedy of the Commons framing is fair, but Pettis's point is precisely that the WTO's rules-based neutrality is what enabled the commons problem, you can't solve a coordination failure with an institution that treats all outcomes as equally legitimate.
In reality, the WTO's rules were written under false ideologies and attitudes. This is not a dig at your age, but I was around your age, when all this went down. We had just defeated the Soviet union in the cold war. The attitude at the time was that democratic capitalism had proven itself so dominate that history itself had ended. There would no longer be wars between significant nations. We could use institutions like the WTO, the UN and the IMF, to push nations like China towards democracy and freedom even faster.
I bought into it as much as the average person. Yet problems started arising pretty much from the get go. China had barely even got into the WTO when they claimed the maritime territory of their neighbors and started building artificial islands that they then loaded up with military hardware. In 06, Russia without even seeking permission at the UN, invaded it's neighbor Georgia.
Now, that's not to say that there weren't positive signs as well. In Russia, Putin did initially step down as president. In China, they did accept Hong Kong as a democracy under the "one country, two systems". Even down in Mexico, they changed their justice system from "presumption of guilt" to "presumption of innocence" and started going after the drug cartels.
All the illusions should have been swept away when Vladimir Putin, back to being the president of Russia, annexed Crimea in 2014. Again, a few years after that, China passed laws turning Hong Kong's democracy into a sham. Mexico surrendered to the cartels for the most part under president AMLO.
I write this because economics alone doesn't explain why the WTO was created in the way it was. If you were old enough to vote back in those days, they did talk about the faults and problems in these institutions, but kept pushing the idea that bringing these other nations into these international agreements would give us the tools to reform them into being more like us. We were sold the idea that we could then fix any of the problems along the way.
Now step back and really appreciate that it is not just the WTO. The whole concept behind the European Union is that trade, can for the most part be separated, from mutual defense and shared values. You kind of have the same thing with Mercosur in South America and the growing BRICS coalition. It's a false ideology that has gotten very established much in the same way communism, fascism or colonialism once had. The irony being that it has a lot in common with colonialism.
Now the problem is that a lot of the people in power, have invested heavily into this globalized world order and will fight tooth and nail to keep it the way it is. Just like the colonialist, the Communists, and the Fascists. So it's not the simple economic argument you would think it should be.
How I wish more senior UK policy-makers would read and digest Michael Pettis. The solutions set out here are where we will eventually end up. The question is how much damage must be endured before that point.
The reality of "consensus thinking" is that one never occurs. The WTO must be left to die. Not because there are no good reforms. Not because of spite. The sooner the better. Then a better agreement can be built.
The 'let it collapse and rebuild' view is tempting, but the interregnum is the problem, the vacuum doesn't stay empty, it fills with bilateral power asymmetries that hurt smaller economies far more than the current flawed system does.
Marc Fasteau: Altogether admirable goals. But China is pursuing its work until policies, not just for Financial gain, but for Joe strategic objectives, including becoming the dominant economic power in the world. Particularly, overcoming the United States. So degrading the US industrial base, dominating new, high-tech industries, etc., etc., as a key national objective. So, even more than the other non-Anglosphere countries, they will never agree to abide by even the very sensible metrics that that Pettis suggests for a reformed WTO. I also doubt that our other trade counter parties who have violated WTO, no arms while complaining about the slightest move toward protectionism by the United States would agree. Almost all at one time for another have de value, their currency, either directly or through de facto devaluation by increasing taxes that are refunded on exports and decreasing those that are not.
This is the strongest objection to Pettis's reform case, but it actually strengthens his underlying diagnosis. If China won't agree to surplus constraints, that's not an argument against defining them; it's an argument for making non-compliance costly in ways the current WTO simply cannot
Great analysis
. So how does this happen. Please follow up with a plan to implement these changes.
Pettis nails the core flaw, the WTO has been policing the rules while ignoring the outcomes, and a system that allows mercantilist surpluses to be perfectly legal is a system designed to fail.
The article makes several good points. The issue is how to convince the American people that the mercantilist practices of China are a real threat to the global economy. Perhaps if someone made a video like the (in)famous “Harry and Louise” video against the Clinton administration health care initiative. The issue needs to be brought up directly to the American people.