While a future U.S. president may repair some of the relationships Trump has damaged, the wounds Tariff Man has inflicted on the institutionally established rules of our global trading system may be too deep to heal in the foreseeable future.
This article was first published in our Q3 print edition released in October 2019.
Few presidents have stayed as true to their campaign promises as Donald Trump. Economic nationalism has been at the centre of Tariff Man’s agenda in office, exercising proudly the ancient art of protectionist self-harm. Sadly, that agenda is leaving us all poorer. By dishing out tariffs on everything from solar panels to steel and aluminium and breaking apart the structure of the World Trade Organisation, the U.S. President is tearing down the multilateral trade system at breakneck speed.
Protectionist measures to support specific industries is nothing new. During the early 1980s recession, free-trade champion Ronald Reagan capped imports to protect the steel and automotive industries. But the Trump administration’s tariffs do not share the same qualities. As Harvard economist Dani Rodrik notes, much of Reagan’s protectionism was negotiated multilaterally and designed to ease the economic burden on exporters. The voluntary export restraints (VERs) of the 1980s in automotives and steel, for example, were administered by the exporting countries. This allowed Japanese and European companies to cooperate in bumping up their export prices for the U.S. market. Thanks to U.S. trade restrictions, these companies may even have become more profitable. In contrast, Trump’s tariffs on steel and aluminium were slapped on unilaterally, with no dialogue between to-be impacted parties.
When Tariff Man had to protect steel and aluminium, his advisors dusted off ‘Section 232 of the Trade Expansion Act of 1962.’ This outdated Cold War statute provides the president with authority to restrict imports on anything the Commerce Department finds to threaten a domestic industry the government has deemed vital to national security. But the case for steel and aluminium as ‘vital for national security’ in need of protective measures was incredibly weak. Domestic production in the United States is more than 30 times the amount required to satisfy Defense Department needs – before having to use a single ton of imported steel. Defense’s share of the high-purity aluminium produced domestically too “is more than adequately met” by existing U.S. sources, according to the Aerospace Industries Association of America. More absurd was that most imports came from Canada, Japan, Germany and Mexico with only a small portion coming from China and Russia. Still, Trump used the protectionist loophole to impose tariffs on steel and aluminium unilaterally, angering trade partners.
“I don’t believe there’s any country in the world that will retaliate for the simple reason that we are the biggest and most lucrative market in the world.” Peter Navarro, assistant to the President and Director of the Office of Trade and Manufacturing Policy
The administration did not expect much retaliation, however. “I don’t believe there’s any country in the world that will retaliate for the simple reason that we are the biggest and most lucrative market in the world,” Peter Navarro, the president’s trade advisor, said in 2018. More than a glimpse into American self-perception, Navarro highlights just how unprepared the administration was for international retaliation – and boy, they hit back hard. China, Canada, the EU and others all levied tariffs on U.S. agricultural exports as well as various other products. With his steel and aluminium tariffs, Trump hoped to grow a hurting industry by at least 25,000 jobs. Unfortunately, he forgot Economics 101’s basic lesson: tariffs translate into higher prices, hurting domestic manufacturers using the metals for production. Moreover, with international blowback, Trump effectively undermined the welfare of 3.2 million U.S. farmers to help a steel and aluminium industry of about 140,000 workers. Together, these after effects of Tariff Man’s rampage means that for every steel and aluminium job gained, an estimated 16 jobs will be lost.
Since the steel and aluminium debacle, Trump has instigated a full-blown trade war, imposing tariffs totalling $550bn on numerous Chinese products in an attempt to decouple the two economies. In response, China has so far imposed similar tariffs worth $185bn. The Donald has also threatened taxes on EU cars, to which the EU has already prepared €35 bn worth of blowback. At the moment, the increased uncertainty may hurt even more than the tariffs themselves. Bloomberg puts the price tag for the uncertainty caused by the trade war at $585 billion. With the U.S. manufacturing sector hurting, the yield curve inverting, and the export-dependent German economy already contracting, Trump’s trade conflict is undoubtedly bringing a recession closer. Fortunately, over the summer, the U.S. president appears to be waking up to economic reality. After turbulent markets in August, he delayed a 10% tariff on products of mass consumption, including mobile phones, laptops, video game consoles, some toys, computer monitors, and specific footwear and clothing produced in China. And now, in the past few weeks, the U.S. and China agreed on the outlines of a partial trade accord which could possibly dampen the trade war. Still, by dishing out tariffs willy-nilly, Trump is dragging us from a world of diplomatic relationships into his reality of zero-sum and big flashy deals. While a future president may repair some of these damaged relationships, the wounds Trump has inflicted on the institutionally established rules of the global trading system may be too deep to heal within the foreseeable future.
Back to GATT
Our rules-based trading system was born out of the ashes of the trade wars of the 1930s, where fascists and nationalists raised barriers in dreams of autarky. After the Second World War, the U.S. spearheaded the creation of the General Agreement on Tariffs and Trade, which established basic rules to resolve trade disputes. The GATT evolved into the WTO in 1995, under which trade barriers have fallen and world prosperity has grown immensely. Now, with the Trump administration pushing the argument that “economic security equals national security” and the White House’s eagerness to undermine the WTO, our instituted standards of trade policy are breaking apart.
Since taking office, Donald Trump has attacked the Geneva-based organization for a multitude of reasons. Generally, Trump’s criticisms of the WTO fall into two categories: the ability of WTO members to self-identify as “developing countries” to receive special treatment, and overreach by the Appellate Body.
The Trump administration is unhappy that many countries, including China and Singapore, are still considered ‘developing countries’ by the WTO, allowing their governments longer timelines for implementing free trade commitments, as well as the ability to protect some domestic industries and maintain subsidies. China has used this position to let larger state-owned enterprises subsidize Chinese firms enabling them to export manufacturing components at unfairly low costs. The underlying issue lies in that the WTO does not have any standard for what constitutes a developing country. In fact, the WTO leaves it to individual members to self-declare their status. This system has engendered frustration not only in the U.S, but in the EU and Japan as well, and, arguably, the WTO is due for an upgrade in this regard.
Wendy Cutler, Vice President at the Asia Society Policy Institute and a former acting deputy United States Trade Representative, outlines four roads the WTO can take to reform itself. Firstly, the WTO can consider developing an objective standard based on applicable metrics in line with those used by the United Nations, the IMF and the World Bank. A second option worth exploring is for a member to qualify as “developing” for specified sectors only. South Korea, for example, maintains self-declared “developing country” status, but in practice only exercises it in the most sensitive areas like agriculture and fisheries, while accepting full obligations in other sectors. A third possibility would be to accept self-declared developing status for existing WTO agreements and obligations, while updating the terms for status declaration or eliminating developing status for future agreements. In the future, countries could negotiate for their status based on objective metrics like those suggested above. A final option would be for individual WTO members to reassess their current economic situations and self-declare themselves as “developed” countries, but China has continuously refused any such reconsideration.
Trump is also very concerned about a decision made by the WTO’s Dispute Settlement Panel and Dispute Settlement Body which enables the WTO’s dispute settlement bodies to determine the legality of a member state’s use of “national security” as a cause for taking measures that go against WTO agreements. This would potentially allow the body to declare Trump’s steel and aluminium tariffs non-compliant. In fear of that happening, the U.S. has repeatedly vetoed new judges to the WTO Appellate Body throughout the past year. If this continues, the Appellate Body will not have enough members to review cases and the WTO dispute settlement system will grind to a halt.
Last year, Appellate Body Chair Ujal Singh Bhatia warned of the “profound implications” of a paralyzed Appellate Body, given that “any losing party could prevent the adoption of the panel report by appealing it to a paralyzed Appellate Body.” Such a result, he said, would “warp us back to the GATT era”. This is exactly where Trump wants to take us. The Trump Administration is pushing for a return to the GATT’s “positive consensus”, where parties had the option of vetoing report adoptions, dispute panel establishments, or certain other steps in these legal proceedings. Under GATT, member countries haphazardly vetoed dispute rulings, leaving the system broken and causing a rise in unilateral trade retaliation. Eventually, that led to calls for peace and the 1994 creation of the WTO and its binding dispute settlement system. The return of dispute veto powers would help Trump defend his use of national security as a justification for tariffs on steel and aluminium, and could even be used to evade WTO-sanctioned retaliation for targeting foreign trade abuses with unilateral tariffs.
As a temporary alternative to the blocked Appellate Body, the EU, Canada, and other countries have set up the use of arbitrators, rather than three-judge panels, to hear appeals. By creating this system, however, WTO members may be giving Trump the very thing he wants. Trump and his aides want to not only set up different dispute settlement systems between different countries, but also different systems from one case to the next. At the moment, the EU and Canada are playing into just that. If Trump is successful in breaking down the rules-based trading system, we may very well see a return to the final years of the GATT, where size and power, not fair standards, determine the outcome of disputes.
By consistently handing out tariffs and taking jabs at the WTO throughout the past two years, the U.S. administration has taken calculated steps to impair the global trading system that has brought us so much prosperity. All we can hope for is that Tariff Man becomes Recession Man before his reelection, so the West can begin rebuilding what is left with a less solipsistic White House.
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