Can This Man Stop a Trade War?

Stephen DUBNER: So, are we in a trade war yet?

Roberto AZEVÊDO: Well, define a trade war and I’ll give you that answer.

For the past several months, the United States has been trying to gain some leverage with its trading partners.

NEWS ANCHOR: The president, slapping new tariffs on steel and aluminum imports from America’s closest neighbors and allies.

Sometimes, it gets a bit rough.

Justin TRUDEAU: Canadians, we’re polite, we’re reasonable, but we also will not be pushed around.

Just this week, a new trade deal was struck with our polite Canadian friends and with Mexico.

Donald TRUMP: We have successfully completed negotiations on a brand new deal to terminate and replace Nafta and the Nafta trade agreements with an incredible new U.S., Mexico, Canada agreement called U.S.M.C.A. — sort of just works, M-C-A.

But the aggressive trade renegotiations have continued, especially with America’s biggest frenemy.

TRUMP: We cannot continue to allow China to rape our country, and that’s what they’re doing. It’s the greatest theft in the history of the world.

NEWS ANCHOR: China is imposing new tariffs on U.S. goods today, after President Trump put tariffs on $200 billion worth of Chinese imports.

Here’s what a Chinese trade negotiator said: it’s hard “to negotiate with someone when he puts a knife on your neck.” I’m no expert but … that kinda sounds like a trade war.

AZEVÊDO: Regardless of whether or not we are in a full-blown trade war — I think not a full-blown trade war — I think the first shots have been fired, clearly.

The modern global economy requires a delicate balance in which countries collaborate on trade while simultaneously competing against one another. This competition often requires a referee, to make sure everyone’s following the rules. And that referee is: this man.

AZEVÊDO: My name is Roberto Azevêdo. I am the director-general of the World Trade Organization since 2013.

DUBNER: And would you describe the director-general role of the W.T.O. as essentially a diplomatic role?

AZEVÊDO: The diplomatic role of the director-general is the one that — he has to perform as a builder of bridges. He has to approximate positions. You have 164 members now to guide, and they have very different perspectives of everything, on everything: on politics, economics.

*      *      *

The World Trade Organization was founded only in 1995, but has its roots in the Bretton Woods Conference, in 1944, which also gave rise to the World Bank and the International Monetary Fund. These institutions were set up to help resuscitate, and grow, the postwar global economy. But the political timing wasn’t right for a global trade organization. Instead, an agreement between 23 countries, called the General Agreement on Tariffs and Trade, was signed in 1947. When the number of signatory countries reached 123, the agreement was formalized, and given more teeth, with the establishment of the W.T.O. Its mission is to “ensure that trade flows as smoothly, predictably, and freely as possible.” But in recent months, global trade has become quite a bit less smooth and much less predictable, with the U.S. threatening or enacting massive tariffs against a variety of countries and industries, with retaliatory tariffs quickly following. That’s where we begin the conversation with Roberto Azevêdo. We spoke a few weeks ago; I was in New York and Azevêdo was at W.T.O. headquarters in Geneva.

DUBNER: So we are in a particularly noisy trade environment at the moment. It’s in the headlines all the time. Considering the threatened and actual tariffs emanating from the U.S. and considering the U.S. role in the global economy, what share of your time currently is taken with issues that concern directly or indirectly the U.S.?

AZEVÊDO: Well, you are talking about the largest economy in the world. So it’s natural that a lot of my time will have some kind of relationship with the actions taken by the United States. Also, because an action that is taken by the United States has repercussions everywhere across the world. So anything that the U.S. does will have a global systemic effect. So of course a lot of my time has to do with that.

But what is important also, you have to realize that President Trump didn’t just happen; he didn’t just fall from the skies in an ambient that was not ripe, and then found traction that didn’t, that was not there. He is the result of a very real situation in American society and in the American economy. And if you don’t understand the forces that put him there, I think that’s part of getting the wrong diagnosis. And I have to tell you, there is a lot of sympathy for some things that are said on the part of the United States that are welcome in other areas of the world; but not everything, of course.

DUBNER: When you say there are things other people around the world hear and they agree with what Trump is saying, what are you talking about specifically? I gather you’re talking about maybe the notion that China doesn’t play fair; is that what you’re referring to?

AZEVÊDO: It’s more general. For example, governments have a tendency to help their domestic producers, their economy, and sometimes they adopt measures which are destructive. China has been cited, yes; but others have, too. The situation on steel is not to be ignored. There is, in fact, a glut in steel and aluminum production, and that is a result of overcapacity. There is no doubt. And I think everybody agrees. But everybody blames somebody else for the overcapacity. So the only way to figure this out is to sit down and try to find a common way forward.

DUBNER: The W.T.O. is opposed to tariffs generally, and most economists agree that tariffs are really a distortive way to do trade. But it strikes me that there are a lot of instances where a tariff exists under a different name. One of the U.S.’s biggest complaints is that China, for instance, doesn’t honor intellectual property; that, rather than being bought or licensed, the property is copied. So that would essentially be a tariff on the imported version. Then there are governments that subsidize their airline industries or their agricultural industries or oil and gas and sugar. Do you, the W.T.O., have any ability to directly request or command that these tariffs, not by name but in essence, be eliminated?

AZEVÊDO: Absolutely. Happens all the time. Industries like protection. They want to be supported by the government. They want to get help and they are now seeing this uprise in what we call behind-the-border protection. And that happens in the form of technical barriers. It happens in the form of insufficient enforcement of certain rules, like, you mentioned, intellectual property. And that’s much more difficult to assess because tariffs you can measure, tariffs you include on your spreadsheet and you’ll prepare to pay that additional cost. A behind-the-border measure, you don’t know when they come. You don’t know what form they will take. So it’s tough. We have committees here in the W.T.O. who discuss exactly that.

DUBNER: Do you have any sense, if you had to estimate, the size of those un-tariffs, what they would be compared to the official tariff rates?

AZEVÊDO: Not really. Also because some of those are perfectly legal. You would see some countries put in place technical barriers or technical standards that are more demanding than what other countries apply. And that could be for the protection of the consumer. It could be for preventive measures. And those things are difficult to measure. But they can be very significant, definitely. In several situations, they just stop trade altogether. So that’s, whatever, an infinite tariff at the border. How do you measure that?

The W.T.O. says the average tariff rate among its members fell by 15 percent between the organization’s founding in 1995 and 2013. There are, however, many caveats. Tariff rules are less stringent for developing countries, for instance. Furthermore, trade deals negotiated in good faith by one country’s administration can be deemed, by a later administration, to be unfair or just unpalatable. Nafta, the U.S.-Canada-Mexico free-trade treaty, was signed a year before the W.T.O. came into existence. President Trump was not a fan of Nafta.

TRUMP: I have long contended that Nafta was perhaps the worst trade deal ever made.

So he decided to tear it apart and put it back together again. The new terms, which address the auto, dairy, and other industries, are more to his liking:

TRUMP: Throughout the campaign, I promised to renegotiate Nafta, and today we have kept that promise.

But when it comes to the trade deals under which the W.T.O. operates, Roberto Azevêdo defends the terms, and the logic.

AZEVÊDO: I understand, I think, a lot of the concerns that have been expressed by the president and others, particularly if you don’t follow the evolution of the global trading system. For example, it is a fair question to ask, “Why does my country charge two percent when I’m importing a particular product, and I want to export the same product to somebody else, I have to pay 10 or 15 percent? Where’s the fairness in this?” It’s a legitimate question, I think. But it’s — it’s much more complex than that. These tariffs are there because they were negotiated over 80 years. If you talk about industrial tariffs only, you’re talking about more than 10,000 lines, 10,000 duties.

And that’s industrial only. Now you have to add to that the agricultural side, you have to add to that deals on services, as well. And it’s impossible to negotiate line by line. And it’s also impossible to apply a different tariff to a different country. Imagine a situation when you applied the very same tariff as the others apply to you. You have 164 countries and then you apply a different tariff for that product for 164? And then they apply the same as yours. How do you square that circle? It’s absolutely impossible.

So these negotiations were done on a package. So there is a balance which is not mathematical. It is essentially a political balance that is struck. Now, what I understand as the American position at this point in time is that we have to revise this, you know. These were bad deals. So, I’m simplifying, of course, a very complex scenario, but it’s just to say that we can understand the legitimacy and the perplexity of some situations, but those situations are not there by accident. They are there because there is a history behind them and this is why we got to these tariffs and these commitments negotiated in the W.T.O.

DUBNER: Well, let me ask you this: Trump’s methodology — in addition to actually enacting tariffs that are larger and more dramatic than we’ve seen in the past, his methodology is different in that he communicates directly to the world primarily via Twitter. The trade negotiations the W.T.O. works on are multi-year, considered, done around a table with a lot of negotiators and arbitrators, and are kind of the opposite of a 280-character political message. And I’m really curious about the degree to which those proclamations are essentially effective as bargaining statements, and the degree to which they are chaotic.

AZEVÊDO: I think the problem you have with short but very strong, concise, and clear messages, sometimes, is that you get the concern, you get what the problem is, or what is annoying that party; but what you don’t get is clarity about: Okay, so how do we fix this? Sometimes the answer to this question is very broad in nature and asks for things that clearly are impossible to do. So the option on the other side is to either live with this uncertainty or take action that assumes the worst. And that I think is not the best way to proceed.

I think what we need is not only to understand the concerns. What they need to understand now is: so what? What do we do now? What are the things that we need to do, reasonably speaking, that can be done? How to actually roll up their sleeves, work, and figure something out that is acceptable to everyone? That’s a big challenge.

DUBNER: So are those challenges being met? Are those long and hard conversations actually happening? Or are we in more of a kind of stormy holding pattern at the moment?

AZEVÊDO: I think we are progressively moving forward and making progress. I remember maybe a couple of years ago, there was a G20 meeting in Hangzhou in China, and I made a presentation and I explained the situation of technology and the impact that it had on the labor market. And I gave this figure: 80 percent of the jobs lost are lost to new technologies. Everybody was surprised. And that was just two years ago. And some people came to me right there when we broke for coffee and said, “Where did you get those numbers; how did you get this information?” I say, “It’s out there. We’re just not looking for it.”

We’re not looking for the causes of all this but if we do, the causes are pretty evident. In two years’ time, everybody is talking about this now. This is no news any longer. And some have already begun to talk about reforming the system, reforming the W.T.O. They realize that some of these concerns have roots in the shortcomings of the system. And unless we address this, these kinds of tensions that we see today in terms of trade are only going to increase.

So recently, I think, President Trump and President Juncker of the E.U. said that a W.T.O. reform was a need. The E.U. and China are working on a joint working group on W.T.O. reform. There is a conversation between the U.S., the E.U., and Japan about W.T.O. reform. Canada has called a ministerial meeting on these issues. All this is still in the early stages. I know the question will be: so what will be the reform? I don’t know what the reform’s going to be. There is a long way to go.

DUBNER: In addition to President Trump critiquing the W.T.O. itself — calling it “a disaster,” saying “if they don’t shape up, I will withdraw” — and his tariff activity, the U.S. has also been blocking the appointment of a W.T.O. appeals judge, without whom the organization could really be stymied to some large degree. I’m curious if you could talk about what you are doing to try to keep the W.T.O. from being paralyzed or stymied?

AZEVÊDO: We have to fix this situation as soon as we can. By the end of next year, we may reach a critical moment when we have less than three appellate body members. That means that with less than three, we cannot hear an appeal and therefore, basically, the system of dispute settlement collapses.

But having said that, members are looking at alternatives. The first option, of course, is to get a conversation going. The misgivings of the U.S. administration with the dispute-settlement mechanism of the W.T.O. is not new. I myself had heard that before, from previous administrations. People have been asking. “So if you are not happy with the system, what do you think needs to change? How do we fix the problems you have?”

Of course, some things are not negotiable. The system will have to continue to be independent. It will have to continue to be impartial. But it can function better. What is also a bit peculiar is that the United States has been bringing cases to the W.T.O. They just brought five a few weeks ago.

DUBNER: Can you give an example where another country, a single country, held something up and what was the resolution?

AZEVÊDO: Well I don’t like to be finger-pointing and saying, “This country did this and this country did that.” It’s not my role and it’s never helpful. But there are — look, if I sit down here for two minutes, I would think of ten different examples of things that happen of a similar nature. We get these kinds of blockages all the time. But this I would say is different because of the sensitivity of the issue and the fact that we are still spinning wheels in trying to understand what to do to overcome this.

DUBNER: So have you, Director-General Azevêdo, had direct conversations ever with President Trump, whether about the blocking of the appointment of the judge, or trade itself generally, or anything? Have you had face-to-face or direct conversations with him?

AZEVÊDO: Not directly, no. I do have open contacts with Robert Lighthizer, the U.S.T.R. I sometimes have conversations in different scenarios with other ministers as well. But not directly with President Trump, no.

DUBNER: Have you had direct conversations with the leaders of other large countries?

AZEVÊDO: Yes, quite frequently. I met recently with President Macron from France, and he was very concerned with all this, and we had a very, very good conversation. And he was very much on top of what’s happening. That’s surprising, because a while back, whenever I talked to leaders, it took me a while to explain to them what was going on. This was not the case now. I talked to him, I talked to Prime Minister May. I’m going to be next month in Germany to talk with Chancellor Merkel. I recently was in Japan; I talked to Prime Minister Abe. I have been covering a lot of ground and we’ve been talking and they’re all concerned.

DUBNER: There is recent news that the leaders of Russia and China have gotten together and boosted their newfound strategic partnership. I’m curious how you think about, you know — the W.T.O. has positioned itself to be theoretically a friend to all, or at least a referee to all, but when there is something proactive and maybe unilateral like U.S. tariffs, and other countries respond by making their own deals, I’m curious how that makes you feel as director-general of the W.T.O.? Do you feel excluded? Do you try to get involved in those discussions and make sure they fall within the proper parameters of W.T.O. behavior?

AZEVÊDO: To be frank with you I don’t have to try very hard. They reach out to me very quickly. Sometimes I try to discourage some courses of action. But I also have to understand the political sensitivities in many of these players. We have, I’m happy to say, conversations, which are very open and very frank. And of course, I can’t share with you and the listeners the content of those conversations, but they are very, very frank and we explore all kinds of options before us, I tell them about the importance of the system and not to compromise the system. And I would say that pretty much everybody I talk to tells me that the system must be preserved, even strengthened, but it’s not easy under these circumstances to be toeing the line when others aren’t.

If you want to hear more conversations like this one, check out a couple episodes from our podcast archive. One is called “Not Your Grandmother’s I.M.F.,” an interview with the head of the International Monetary Fund, Christine Lagarde; the other is called “Hacking the World Bank,” with Jim Yong Kim, president of the World Bank.

*      *      *

Roberto Azevêdo, Director-General of the World Trade Organization, was appointed to the post in 2013 when the trade waters were considerably less choppy than they are today.

DUBNER: So, you are from Brazil, and you studied electrical engineering before becoming a diplomat. I’d like to just very quickly hear how those three factors — Brazilian, engineering, and being a career diplomat — how they inform your role as director-general of the W.T.O.

AZEVÊDO: Brazilian: Well, the good thing about being a Brazilian is that it gives me a very diverse perspective. Brazil has — is a big economy. It’s a big country with several ethnicities, a very diverse cultural background. And it has aspects of a developed nation — very sophisticated industry — but also has important aspects of developing country, very social challenges, and that gives me this different perspective.

Engineer: I was always good with numbers, and I think it was natural for me to become an engineer. And it was, until I met my wife and she decided to get into the diplomatic career. And at that point in time, I had to decide what would I do? An engineer married to a diplomat was going to be pretty challenging, especially when she was posted abroad. So I thought, “You know what, let’s work for the family.” So I took the exams, and I passed the exams, and I joined the diplomatic career. I think that was a love story in its own right.

DUBNER: Can you give me a quick example of an engineering-like solution to a trade or economic problem?

AZEVÊDO: So when I’m in a meeting or something like that, I try to understand the basic motivations and then figure out a way to make those motivations work together. And that’s something I think that engineers do. They try to get very complex situations and problems, try to reduce them to the elemental constitutive parts, and figure out a way to make them work. Personal chemistry is very important as well, even between negotiators. I know some people think that everything you need to know you learned in kindergarten. And I think that’s quite accurate. But I found out that you’re forever learning how to relate to people, how to take into account diverse personalities, cultures, objectives.

DUBNER: So as long as the world still has independent nations — and it seems that will be the case for at least another few decades — that we’re not becoming one big global nation — it strikes me that there is an inherent friction around trade in which every country has to strike a balance between protectionism and globalism. So I’m curious whether you agree or disagree with this notion; and, however you answer, what’s to be done about that?

AZEVÊDO: There’s this tension that exists even today with regard to trade; it always existed. Countries that do trade, and that have a cooperative relationship with the other partners, they essentially gain from that. But it is also a reality that when you trade, some sectors in the domestic economy will lose. Many gain, many are better off with a trading relationship, but that some lose in the sense that they are not competitive enough; sometimes factories close in a particular sector. And you cannot ignore that.

I think what you see today is something different from this very traditional, very historic tension. Today, we are seeing a transformation of the economic structure of the global economy. We’re producing things differently; we’re producing things faster. We don’t require as much human input as we did before. And this is increasing. Now, clearly even for governments and for politicians, it is easier to blame, you know, the foreign for these problems which are happening inside their own economies. It’s easier to blame the imports for the loss of jobs, when they are — they have a role, of course, but they are minor in this structural change. And I think if we don’t realize that, and if we don’t try to find a solution for this we will be hurting much more than helping.

DUBNER: Okay, so you’ve just described — I would argue, beautifully and succinctly — a big problem that, of course, a lot of economists and some others have described. But you’re right: that’s not the political rhetoric. So it’s easy to think of what’s the wrong medicine; how involved is the W.T.O. in trying to discover and administer the right medicine?

AZEVÊDO: I think the W.T.O. is already at least trying to help governments and public opinion to understand the situation and reach the right diagnosis. If we get the wrong diagnosis, you get definitely the wrong medicine. The important thing to understand is that whatever medicine we choose, it’s not going to work overnight. There is no quick fix for this.

This is essentially something akin to the Industrial Revolution. So there will be a need to rethink the whole educational system in countries; the permanent and constant update of the workforce — how to support the displaced people, those who lost their jobs but cannot find jobs somewhere else in the economy: how do you help them find another economic activity that will work for them and will help them support their family? And the state, of course — and I understand that people don’t want this; I myself have very strong reservations against a big state — but the state, at least, has to think about this and think about the mechanisms that will allow us to handle these displaced masses of workers.

DUBNER: You’ve said that if you want the truth in trade, you have to get into the numbers, which a political discussion almost inevitably doesn’t. Can you talk about that for a moment and maybe give a particular example of where the political discussion on trade is just wrong, or shallow, or only partially true, and what needs to be done to address that?

AZEVÊDO: One of the big problems we have is that politicians are looking at the electoral cycle. They are looking at the next elections so proposing solutions that will last 10, 15, 20 years — or that would take 10, 15, 20 years to come about — is no good. The voter doesn’t want to hear any of that. They want immediate. It’s amazing that I still hear people say, “Oh, but the economy is great.” Of course it’s great! It hasn’t been affected yet! There is, I would call it, I don’t know, maybe an “incubation period,” that you’ll have to go through. And politicians, I think it’s easier for them to say, “Don’t worry, what we’re doing is okay, see? The economy is fine. Nothing happened.”

DUBNER: You mentioned that most people assume that job loss — especially in manufacturing — is due to trade issues; whereas, in fact, technology is behind an awful lot of job loss. And we’ve discussed that on this program before. We’ve discussed that with Christine Lagarde, who made the point that that perception, or maybe misperception, was and remains really a big part of a lot of the political movements in Europe and elsewhere — including Brexit. As you’ve mentioned, people like to look for the villain. I’d like you to talk about Brexit for a moment. I’d like you to talk about what you feel were the legitimate and maybe illegitimate factors that produced it; and where the W.T.O. stands on it now, what you’re trying to accomplish.

AZEVÊDO: Well, the first thing to say about Brexit in particular is that it tends to be bunched together with all of these other phenomena that you see happening in the world, particularly in terms of protectionism. And I would say Brexit is somewhat different. Brexit was more a child of migration policies and sovereignty issues. Of course, these things are difficult to quantify, but I would say they played a much bigger role than any kind of tension introduced by trade. So that’s the first distinction I would say.

Brexit, again, is part of this transformative structural changes that we see out there. A lot of — a very significant part of the population feels left behind. And they feel, “Somebody has to look at me. Something has to happen and nobody’s doing that.” It was more like an anti-establishment kind of vote rather than vote for a certain political alternative. It was more the kind of vote of “No more. We need to change, and people had better listen.” Rather than having a clear, well-formulated agenda for either social or political policies.

DUBNER: Have you had any conversations with government officials anywhere in the world about universal basic income and the viability thereof?

AZEVÊDO: There were a few conversations, not specifically about this, but this is something that came up in a few of those conversations. As you can imagine, it’s a very contentious issue. Some see it as a possible way forward. Some say that it’s already there, that the state is already providing that in some shape or form, either by providing social assistance or by providing minimum income salaries, things like that. It varies from country to country but clearly this is part of the conversation.

DUBNER: So, as everyone knows, predicting the future of economics and politics and so on is really hard. To me, one of the least predicted developments that very much affect global trade is the rise of the U.S. as an oil exporter. So it’s estimated that next year the U.S. will surpass Saudi Arabia to become the number one exporter in the world, in large part because of fracking and other technologies. I’m really curious to hear your thoughts on this, considering that importing oil has for so long been a major part of not only the U.S. economy but also U.S. political concerns.

AZEVÊDO: I think it will change things considerably, even in terms of geopolitics. And I would say that what we’re seeing, this phenomenon that we’re seeing with the shale oil, is just the tip of the iceberg. Every scientist, every economist that has been digging into this tells me that we are on the verge of major breakthroughs in the energy field and that the costs of energy may go down very, very significantly. And that includes electric energy. So, for example, the combustion engine for the automobile industry: some say is in the last stages. I don’t know; my crystal ball doesn’t allow me to go that far.

DUBNER: The economist and law professor Jagdish Bhagwati at Columbia has said this about the world trading system. He said, “It’s characterized by a chaotic crisscrossing of preferences with a plethora of different trade barriers applying to products depending on which countries they originate from. This is a fool’s way of doing trade.” It sounds as though you largely agree, that we get to where we get through a strange brew of evolution and history and best efforts and things changing over time. So let me just leave you with this final question: If you, as director-general of the W.T.O. had for a day or a week some kind of magic wand to make things more equitable, more transparent, tell me a few things that you would do to help make a little bit more order and equity out of this chaos.

AZEVÊDO: I think the biggest challenge for us is to have a conversation, I would try to make sure that we give space for more discussions. Whenever you sit, if the two sides, or three or four or how many sides, want a solution, a solution will come. I will give you one anecdote, something that happened with me, actually. I was at a negotiating table and we all had very significant political problems at home. Right? And we were struggling with the language of a provision. It was a very important provision for everyone. And in the middle of the conversation, somebody said, “Why don’t we write this down like this?” And he drafted a sentence. And I said, “What the hell does that mean? I don’t understand this sentence.” And the other said, “I don’t either.” And nobody understood the sentence. “Okay, so let’s take it!” Nobody knew what it meant, but it worked for everyone precisely because nobody knew what it meant! And then we got an agreement. So when you want things done, you can find a way, but you have to sit down and be determined that you want a solution.

DUBNER: I appreciate the call for conversation. I assume if President Trump were to hear this conversation and call you, you’d be happy to go visit and try to sit down and work some things out, yes?

AZEVÊDO: Oh, I’m always available. I’m always available.

*      *      *

Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Zack Lapinski, with help from Alison Craiglow. Our staff also includes Greg Rosalsky, Greg Rippin, Alvin Melathe, Harry Huggins, and Andy Meisenheimer. The music you hear throughout the episode was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts, Stitcher, or wherever you get your podcasts.