In an awful, but not unexpected, ruling on a long-standing dispute between Europe and the US, the World Trade Organization says that the US must stop permitting US exporters to set up foreign subsidiaries that save as much as 30 percent in taxes they would otherwise pay. Now the US must either raise taxes by eliminating loopholes or face massive new sanctions that will seriously harm our export sector.
In the complaint, the EU said that US tax breaks constitute an unfair subsidy, and the WTO agreed. Of course, by the same logic one might also argue that every American citizen is unfairly subsidized by enjoying more tax loopholes as compared with people in more-socialist states in Western Europe.
There's been a lot of talk recently about foreigners who hate our prosperity and civilization, and seek ways to inflict violence in retaliation. Well, here's another case in point, except these are not swarthy Islamic terrorists; they are diplomats and statesmen on nobody's list of suspicious characters.
If the duties are imposed, what will get hit? The short list include cereals, aircraft and spacecraft, iron and steel, nuclear reactors, boilers, mechanical appliances, electrical machinery, clothing and footwear, aluminum, tools, toys, paper, wood, books and newspapers, and wool and cotton. In short, just about the entire US export sector.
Just what we need: a trade war to follow a hot war, the combination of which could do to the US economy what the Air Force did to Afghanistan. Something or somebody needs to do something quick to avoid it, but the only option that anyone is discussing is the one the WTO seems to be calling for: raising taxes on US exporters.
How does it happen that this shadowy international bureaucracy can tell the US to raise taxes? Why is an international arbiter which is ostensibly devoted to promoting free trade now imposing on the US a choice between trade war and socialism? What got us into this mess?
The trouble began nine years ago, when the debate began on creating a World Trade Organization as a corollary to the IMF and World Bank--the additional institution that the folks who gave us Bretton Woods tried but failed to create after World War II. International trade is one of those glorious institutions of the market economy that needs no central regulatory agency, so good sense tells us that the attempt to erect a kind of regulatory dictator spells trouble.
No surprise that Bill Clinton was all for the World Trade Organization, but so was most of corporate America. Who was against it? Many people on the left who are against all world trade, and also a small group of principled free traders from the Mises Institute and the Competitive Enterprise Institute, who warned that a WTO would eventually try to pull some racket like this. It was obvious enough from the WTO's expansive charter.
The Mises Institute, for example, argued that the WTO could become an "enemy of free trade" and bring about "more trade litigation, reprisals, and disputes than the present system," and that it would "use its global powers to promote a big-government philosophy of full employment, demand-side fiscal management, sustainable development, and wealth redistribution." (The Free Market, February 1994)
But on the other side was a huge range of naive pundits who believed that the path to freedom and free enterprise lay in the creation of another layer of world bureaucracy. They said the WTO would bring about free trade by restraining governments from imposing protectionist policies.
These people promised that the WTO's powers to do harm were nil but (implausibly) its powers to do good were immense. They said that its teeth would never be used to harm the US but (implausibly) always to harm the US's competitors.
They said that the bureaucracy would violate no one's sovereignty, while completely forgetting that the agency might not always be under the political control of the United States, and that the US Congress is always looking for an excuse to increase taxes and regulations.
Consider these famous last words:
- Jerry R. Junkins, CEO of Texas Instruments: "The fact is that WTO cannot change U.S. law; only Congress can do that . . . We want stronger rules--we will benefit from them. The WTO was set up to make sure other countries cannot
cheat . . ." (Washington Times, November 29, 1994)
- Bill Frenzel, special adviser to the National Association of Manufacturers: "The budget issue should not be an issue at all . . . Commerce needs rules and stability. The United States is the biggest trading nation in the world and needs" the WTO. (Washington Times, November 29, 1994)
- Joe Cobb, Heritage Foundation: the WTO is a "major step toward more open trade to the benefit of all trading nations. . . . There are no sinister new powers for successful litigants to enforce the dispute settlement panels's decisions. . . The GATT agreement, and the WTO it creates, seems well structured to keep economic freedom dominant over the interest-group political pressures that compete to influence governments." (Backgrounder, "A Guide to the New GATT," May 25, 1994)
- Claude Barfield, American Enterprise Institute: "A close examination of the new WTO and its power reveals that the organization has little more institutional authority [than Gatt] . . . In the future, neither new WTO rules nor dispute settlement panel decisions will automatically become binding upon the United States." (Washington Post, June 26, 1994)
- William F. Buckley, Jr., syndicated columnist: Under the WTO, "it is all but inconceivable that foreign nations would gang up to force trade sanctions against the United States." (Orange County Register, August 17, 1994)
- Brink Lindsey, The Cato Institute: "The WTO still cannot force a country to change policies or laws that violate its rules, but its rulings highlight practices that rob consumers of the freedom to trade." (Regulation, Volume 20.1, 1997)
- Joe Cobb, again: "Does the WTO have any power over the United States that could undermine U.S. sovereignty? None whatsoever." (Journal of Commerce, November 28, 1994)
- William Kristol, Weekly Standard: The WTO is "an historic free trade agreement and a big nut-plus for both the American economy and free-market principle." (Memo, Project for the Republican Future, November 30, 1994)
- Bryan Riley, Citizens for a Sound Economy: "By enforcing already-established trade rules, the new WTO stands to primarily benefit the United States. . . . [A]s long as the WTO fulfilled its mandate to enforce rules designed to promote trade, individual freedom would gain a powerful ally against protectionist trade barriers worldwide." (Issues and Answers, August 20, 1994)
- Virginia Postrel, Reason Magazine: "The treaty does not force the U.S. government to do or not do anything--neither GATT nor its proposed World Trade Organization has an army. . . . With the new treaty, and its predecessor, national governments bind themselves to respect the right of their citizens to trade." (Journal of Commerce, August 29, 1994)
- Washington Times: "Understand this about the WTO. It has absolutely zero
power--none, nada--to change US laws. . . . The biggest reason to support [the WTO] is to expand individual liberty." (Editorial, November 30, 1994)
- Washington Post: "It is abroad, and especially in Europe, that the art of disguising protectionism as health standards has been brought to it highest level. Much of the language in the WTO's rules is the result of outraged protests by American exporters, who will at least get a weapon against this abuse." (Editorial, December 1, 1994)
Yes, I know it is impolite to actually hold people accountable for their past opinions, but so be it. These were the voices that paved the way for the US to enter into the WTO, which is now attempting to make the US choose between international conflict and higher taxes. Instead of creating the free-trade utopia we should all favor, it is now creating the legal conditions that will bring about trade war in the midst of a terrible recession.
The advocates of the WTO were convinced that if somehow we could give lots of power to a bureaucracy, this bureaucracy would behave exactly the way they hoped it would. Reminds one of what Mises said: "Nobody every recommended a dictatorship aiming at ends other than those he himself approved. He who advocates dictatorship always advocates the unrestricted rule of his own will."
What to do now? It's true that the WTO cannot literally force the US to raise taxes. There's always the option that Congress could throw a wrench into the WTO's gears by lowering corporate taxes across the board, thereby eliminating the alleged subsidy of current tax loopholes. When the news of this amazing event appears in the European papers, many Eurocrats will cough up their morning cappuccinos. It will also be a cold day in Hell.
