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What Trump’s Trade War Could Mean for the WTO and Global Trade
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What Trump’s Trade War Could Mean for the WTO and Global Trade
U.S. trade policy is roiling markets. At the end of March, the U.S. stock market tumbled 700 points in a single day on news that President Trump would impose tariffs on Chinese exports. A degree of volatility and uncertainty has continued since then as the tariffs continue to make news. Canada, China, Europe, India, and Mexico are all preparing to retaliate.
There are actually two sets of tariffs wreaking havoc at the moment. The first, on steel and aluminum, came under Section 232, a provision under the 1962 Trade Act that allows the president to protect U.S. industry for national security reasons. The second, on Chinese exports, was triggered under Section 301 of the 1974 Trade Act, a “unilateral” measure not used in decades. Taken together, these tariffs have baffled businesses, created uncertainty at home and abroad, and sown doubts about Washington’s commitment to free trade.
Yet the global economy is not descending into chaos. That’s largely because the protagonists are more constrained than the headlines suggest. Indeed, despite threats of major retaliation, the World Trade Organization (WTO) tightly restricts what countries are allowed to do. In other words, the legal discipline of the WTO makes things more predictable than they appear. Here’s why.
To protect U.S. steel and aluminum makers, President Trump invoked national security under Section 232. This is a hard sell: The vast majority of the country’s imports of steel and aluminum come from allies. The U.S. might have taken a “safeguard” action instead, which restricts imports that cause significant harm to a domestic industry, but this would have required that compensation be extended to countries targeted by these tariffs. What China, Europe, and the complainants are doing at the WTO isredefining Trump’s Section 232 tariffs as a safeguard in order to take compensation, via retaliatory tariffs, that the U.S. has failed to offer. In response, the U.S. is likely to challenge this reinterpretation, as well as the value of the retaliatory tariffs.
The bigger worry is that the U.S. will end up defending the Section 232 tariffs by invoking Article XXI of the General Agreement on Tariffs and Trade (GATT), titled “Security Exceptions.” Back in 1947, the drafters of the GATT (the predecessor of the WTO) sought to give member countries a way out of their free trade obligations if national security was at stake. It’s what deters Russia from bringing a WTO case against Australia, Canada, the EU, and the U.S. over their sanctions for its incursion into Ukraine. Were the WTO to, for the first time, rule on the meaning of GATT XXI, because of Trump’s steel and aluminum tariffs, the fear is that the institution won’t get things right. If the WTO says no to Trump, this will come across as a rebuke of Washington’s ability to define, for itself, its national security interests. This is why, in another WTO dispute involving Russia against Ukraine, where GATT XXI also looms large, the U.S. has submitted testimony stating that “there is no basis for [a WTO] Panel to review that invocation or to make findings on the claims raised in the dispute.”
If, on the other hand, the WTO says yes to Trump, this will incentivize protectionism under the guise of national security. India, for one, is eager to see how far this logic can be pushed, and it will have a front-row seat at a WTO panel, having filed its own case against the U.S.
Bad cases make bad case law. There is no case law on GATT XXI. Trump’s Section 232 tariffs, which will mainly hurt U.S. allies, shouldn’t be the dispute on which the WTO cuts its teeth on this important article.
The complainants should tread carefully as well. Their retaliatory threats are premised on reinterpreting Trump’s Section 232 tariffs as a safeguard. This is creative, but it’s for the WTO to decide. To act unilaterally runs against WTO law and, ironically, would undermine China’s other WTO case against the United States: the Section 301 tariffs.
This is actually the second iteration of a WTO dispute filed by Europe in the 1990s. Then, as now, the crux of the matter is whether a WTO member country can judge the “guilt” of a trade partner for alleged infractions, or whether only the WTO can do this. To avoid having Section 301 struck down in 2000, the U.S. agreed that it would always await a WTO judgment before enacting punitive tariffs. China’s challenge today says that the U.S. isn’t doing this. Importantly, the U.S. is sympathetic to China’s view. At the end of March, Washington quietly filed a dispute against China over intellectual property so that, in theory, it couldawait a WTO ruling. If the U.S. doesn’t wait, other countries will innovate their own unilateral tariffs, bringing the rules-based global economy to a standstill.
There are no good moves available to the protagonists other than to negotiate their way out of this mess. Some say that Trump’s plan all along was to force negotiations; if that’s the case, there were far less risky ways to do it. For example, steel is a problem every few years, largely because no country wants to be the last market open for distressed exports. A framework agreement that gets at this problem, rather than addressing the symptoms, would be a political winner. Likewise, the Section 301 tariffs are being used to address tensions that have more to do with investment than trade. Trump would do well to restart negotiations over a U.S.-China bilateral investment treaty (BIT). After all, Trump’s concern with issues like forced technology transfer was already addressed in the 2012 Model U.S. BIT.
Recent trade tensions serve as a poignant reminder that the global economy is not borderless. The good news is that the WTO’s legal disciplines are working. For all the talk of trade wars, the global economy looks nothing like it did in the 1930s.
Everything You Need to Know About the Trade War
Bloomberg News June 28, 2018, 11:27 PM EDTA global trade war is increasingly turning from talk to reality as U.S. President Donald Trump’s administration prepares to impose tariffs on $34 billion of Chinese imports and Beijing vows to retaliate.
This may prove to be only the opening salvo as Trump is also considering slapping a 10 percent tariff on an additional $200 billion of Chinese imports, and even more if Beijing hits back. He’s already imposed tariffs on the steel exports of some countries and is eyeing a 20 percent levy on car shipments from the European Union.
Here is a collection of recent analysis from Bloomberg reporters and economists about what the face-off means for economies, markets, politics and companies.
Tough Talk Turns Into Tariffs in Trade-War Evolution: Timeline
The trade war between the U.S. and the rest of the world is upon us, as tensions continue to rise amid a barrage of presidential tweets and new tariff orders.
Here’s How a Trade War Between the U.S. and China Could Play Out
President Donald Trump is betting Beijing will blink first in the showdown over tariffs. Such an outcome is far from assured -- and it could also take a while.
Can Trump Win a China Trade War? We May Soon Find Out: QuickTake
Economists see a risk that the world is headed toward an all-out trade war, one the World Trade Organization may be ill-equipped to respond to.
Game Theory Shows How Tit-for-Tat Tariffs Can Lead to Trade War
Picking a fight with a trading partner seems like a bad idea, but it’s not necessarily irrational. Probing a partner’s weaknesses can be an effective way to get a better trade deal, according to game theory, the branch of mathematics that deals with strategy.
Trump’s Trade War Sets Bigger Booby Trap for U.S. Economy
The escalating trade battle between the U.S. and the rest of the world is raising the risk of a meaningful slowing in an otherwise vibrant American economy.
The Ship Caught in the Middle as U.S. and China Zigzag on Trade
A ship carrying sorghum is literally riding the waves of the fractious relationship between China and the U.S. over trade.
Trump’s Tariffs Will Pinch U.S. Consumers, Retailers Warn
Americans will pay more for everything from big-screen TVs to school supplies if the Trump administration follows through on threats to slap tariffs on Chinese imports, U.S. retailers warned.
As Trade War Looms, China Wonders Whether It’s Up for the Fight
Xi Jinping vowed to match Donald Trump blow for blow in any trade war. Now as one gets closer, some in Beijing are starting to openly wonder whether China is ready for the fight -- an unusually direct challenge to the leadership of the world’s second-largest economy.
One Conclusion From Trade Tensions: The Dollar Is a Likely Loser
For investors struggling to handicap whether U.S. President Donald Trump will stomach a full-blown trade war, some analysts boil the risks down to this: The dollar stands to lose.
Behind a Calm S&P 500 Facade, Trade Angst Drives a Widening Rift
Don’t be fooled by the S&P 500’s resilience during the latest eruption of U.S.-China trade tensions. Traders are bracing for fallout.
SPECIAL REPORT: Counting the Cost of a Global Trade War
The base case remains more trade skirmish than trade war, but the risks are growing. We look at what’s at stake and gauge the potential impact on the world economy.
GLOBAL INSIGHT: Trade War, Day 1 – Forecasting the Casualties
The announcement of tariffs on $34 billion of imports to come into force on July 6, and a further $16 billion expected soon after, looks genuine enough to conclude that the first shots have been fired. Here’s our thinking on where the casualties will fall.
CHINA INSIGHT: Tariff Troubles? Breaking Down Sector-Level Risks
Which sectors in China are most at risk from a trade war? Those with the weakest profit margins are least able to absorb the cost of tariffs. Those with the highest debt are worst placed to cope with any downturn in profitability.
Trump’s European Car Threat Adds to Strains on Global Auto Trade
Over the past three decades, the global auto industry has gotten, well, more global. Manufacturers built scores of factories outside their home countries to reduce exposure to currency swings, take advantage of cheaper labor and manufacture cars closer to buyers.
Xi Can Make Life Tough for U.S. Companies After Trump Threat
China doesn’t import enough from the U.S. to match Donald Trump’s tariffs dollar for dollar, but President Xi Jinping can still squeeze American companies in other ways in retaliation.
How Trump-China Trade Spat Is Rippling Through Corporate America
Washington’s action against Chinese imports Friday, and the response from Beijing, are hurting some U.S. industries more than others. Here’s a round-up of Bloomberg’s coverage of how the dispute is playing out in corporate America.
U.S. Tariff Talk Strengthens China’s Resolve to Go It Alone
Chimerica is coming apart. The latest sign is the blowup over ZTE Corp., the Chinese telecommunications equipment manufacturer that violated the terms of a 2017 sanctions settlement, then lied about it.
China Opens Europe Charm Offensive as Trump Stokes Trade Dispute
China is reaching out to Europe with pledges to improve market access for companies in a charm offensive that contrasts with President Donald Trump’s escalation of trade disputes worldwide.
Trump’s Tariffs Could Deliver a Sizable Hit to China’s Economy
Economists are already running the numbers on the potential damage to the world’s second-largest economy -- at a time when it is anyway slowing due to an ongoing campaign to curb credit.
U.S. Metal-Tariffs Showdown at WTO to Shake World Trade Order
Move over Russia, Ukraine and Saudi Arabia. The U.S. looks set to join the group of countries embroiled in disputes at the World Trade Organization involving curbs imposed on national-security grounds.
EU Raises Stakes for Trump by Aiming Levies at GOP Heartland
The European Union is preparing punitive tariffs on iconic U.S. brands produced in key Republican constituencies, raising political pressure on President Donald Trump to ditch his plan for taxing steel imports.
Five Big Threats to the Global Trade Cop Trump Deems Unfair
The World Trade Organization is facing the greatest crisis of its 23-year existence. President Donald Trump doesn’t believe the WTO can handle the problems created by China’s rapid economic ascent and is fundamentally challenging the rules that govern international trade.
Trade as National Security Issue? Here’s the U.S. Law: QuickTake
At issue is a little-used part of 1962 trade legislation sometimes called the "nuclear option" or the "big sledgehammer," which invokes national security to counter cheap imports. Such heavy tools can prompt a furious response from other countries, triggering complaints to the World Trade Organization.
In Louisiana, Trump’s Trade War Makes Biggest U.S. Port Tremble
To understand what a trade war means for America, go to the Mississippi. Follow the mud-brown river past Louisiana’s chemical plants, oil refineries, granaries, ports, and the rail networks and highways that spring from its fingers.
Trump’s Tariffs Could Weaken the GOP’s Tenuous Grip on Congress
Farm districts helped put Trump in the White House and are the backbone of the GOP majorities in Congress. They’re also uniquely positioned to suffer from a trade war with China.
— With assistance by Simon Kennedy
