Comprehension

Happy Birthday, WTO?

An organization best known for sparking riots also deserves some credit for promoting the interests of American entrepreneurs.

By Elizabeth Wasserman | Jan 1, 2005

People aren't clamoring to celebrate the World Trade Organization's 10th birthday this month. Since the WTO came into being on January 1, 1995, tear gas -- not balloons -- has accompanied its gatherings. The Geneva-based group, which is modeled on the United Nations and has 148 member states, was set up as a forum for governments to negotiate trade agreements, settle disputes, and hash out a system of trade rules. The hoped-for result: economic development in both rich and poor countries.

Over the past decade, however, the WTO has found itself embroiled in one controversy after another. Its honeymoon was cut short when the Clinton administration threatened to double tariffs on Japanese luxury cars, prompting a trade war only a few months after the group's creation. Four years later, the WTO's annual meeting in Seattle was eclipsed by riots outside the convention hall and gripes within that the group put corporate interests ahead of health, labor, and environmental concerns. Last year at a summit in Cancun, a group of developing nations banded together to blast the U.S. and the Europeans for hypocritically pouring billions into farm subsidies for cotton, sugar, and other crops. More generally, the group is criticized for promoting policies that lead to the outsourcing of jobs to the developing world.

As the WTO marks its first decade, observers will surely rehash these failures -- and mention America's record trade deficit, for good measure. But it should also be noted that American entrepreneurs have directly benefited from the WTO's tariff-reducing agreements. U.S. exports of goods and services topped $1 trillion starting in 2001.

Between 1992 and 2001, the number of small and midsize companies exporting grew nearly twice as fast as the number of large exporters, according to the U.S. Department of Commerce. Small and midsize companies now represent 97% of all firms that export goods and services, and they account for about a third of all goods the U.S. exports.

The case that the WTO is responsible for this expansion of trade is a pretty good one. While big multinationals rely on money, political access, and armies of lawyers to protect their interests on a global scale, the WTO's efforts help the average firm. "When we cut tariffs, it directly helps small businesses," says Chris Padilla, the assistant U.S. trade representative for public liaison. "They usually cannot invest overseas to get around the tariff laws the way an IBM invests in Brazil and gets behind tariff protections in Brazil."

To be sure, there is still work to be done. Tariffs remain high in many countries. While two-thirds of all goods imported into the U.S. are duty-free -- and our average industrial tariff falls below 2% -- many nonindustrial nations maintain tariffs that are 12 times as high.

This situation persists in part because, like the U.N., the WTO struggles to forge consensus on the most basic issues among its 148 members. For example, simplifying customs rules has ranked among the priorities of U.S. negotiators in the talks that started at the WTO's Fourth Ministerial Conference in Qatar, back in 2001. Nevertheless, customs procedures are often so antiquated that Padilla says some countries don't post rules on the Internet, can't rush approval for express deliveries, and maintain different rules and fee structures in different ports in the same country.

Another problem with the WTO, from an American perspective at least, is that other nations seem to be more aggressive than we are when it comes to getting what they want. The Chinese, who joined the WTO in 2001, have masterfully exploited current agreements that do not prohibit currency manipulation. Beijing has maintained its currency at its 1994 level against the dollar, thus artificially increasing the prices of our exports and lowering the prices of theirs, enabling them to flood the international markets with cheap goods.

Some Americans have found a way around this trap. For a while, Tony Raimondo, CEO of Behlen Mfg. Co. of Columbus, Nebr., had suspended exports to China. His company -- which manufactures agricultural grain bins, drying systems, and metal-frame building systems -- had suffered because Chinese copycats could manufacture these materials cheaper, owing to the unfair currency valuation. Later on, Raimondo stumbled on the idea of setting up a joint venture in Beijing that would also benefit from the cheap currency. "In order for us to sustain market share, we had to be on the inside," he says. He now does $10 million a year overseas, or 10% of his annual revenue.

Like China, the Europeans often seem to be more astute when it comes to trade diplomacy. Jerry Smith, the owner of Transcom Trading, a 15-person company in Irmo, S.C., saw this firsthand. His company, which exports equine, pet, and livestock products to Europe and Asia, used to benefit from tax advantages under which the U.S. government allowed small businesses to shelter some export income in foreign sales corporations. A few years ago, the European Union brought a complaint against the U.S. before the WTO, arguing that those incentives amounted to subsidies. The Europeans won.

But then, in a move that still irks Smith, the WTO ruled that the E.U. countries were allowed to keep tax breaks for their small businesses. "There are all sorts of subsidies other governments find to duck the regulations," he grouses. "I'm confident that our competitors overseas will find ways to help their exports."

Such disappointments aside, the WTO's efforts have removed some of the cost from exporting. The group has also generated more interest in overseas markets. "A major part of the reason that small and midsize exporters grew in the last 20 years is the WTO," says Jim Morrison, of the Small Business Exporters Association in Washington, D.C. "In some cases, if someone is just making a sale to Canada or Mexico, it's incremental change. But others are opening their minds to possibilities that might not have been there before."

Randy Tofteland is emblematic of the entrepreneurs who have stepped up their international sales efforts in recent years. He's the president and CEO of SoftBrands, a 500-person Minneapolis firm that sells software to the hospitality and manufacturing industries. The company now has clients in 60 different countries. International sales account for almost half of its $70 million in annual revenue. "Trade is now seamless and global," he says, "and those that take advantage of it are going to be the long-term winners." One can imagine the founding fathers of the WTO making the same bold prediction a decade ago.

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