Has Trump just launched a global trade war?
The recent trade action by President Donald Trump has ended the United States' leadership on liberal trade and may trigger a global trade war with major damaging consequences.
ON 8 March, Trump signed a proclamation to impose tariffs of 25% on steel and 10% on aluminium. It sent shockwaves across the world not only because of the losses to metal exporters, but due to what it could well signify: the start of a global trade war causing economic disruption in many countries, and that may also damage if not destroy the multilateral trade system.
The United States, joined by Europe, has been the anchor of the global free trade system ever since the end of the Second World War. In practice, this rhetoric of free trade was hypocritical because the developed countries continue to practise very high protection of their agriculture sector, which cannot compete with many developing countries if there really was 'free trade'.
Moreover, the developed countries introduced and continue to champion mandatory high intellectual property rights standards through an agreement in the World Trade Organisation (WTO), under which their companies create monopolies, set high prices and make excessive profits. This is against the free competition touted by free trade advocates.
In manufactures and metals, the developed countries have pressed the others to join them in cutting or removing tariffs and expand trade, through negotiations in the WTO and its predecessor the GATT (General Agreement on Tariffs and Trade).
They have argued that poorer countries can best grow richer by cutting their tariffs, which would benefit their consumers and force their producers to become more efficient.
Trump's move upends the ideology of free trade. If cheaper imports displace local steel and aluminium producers, they must be stopped because a country must make its own key products, according to the Trump philosophy of 'America First'.
Since the United States has been the flag-bearer of the free trade religion, this has profound effects on other countries. If the leader has changed its mind and now believes in protecting its industries, then so too can other countries. The basis for liberal trade is destroyed and the old rationale for protectionism is revived.
Lack of clarity
The WTO rules allow countries adversely affected by imports to take certain measures, but they have to prove that the producers of exporting countries unfairly receive subsidies, or that they set lower prices for their exports compared with the same goods sold domestically. Or if countries can show that their domestic firms have been adversely affected, they can take 'safeguard' measures of raising tariffs, but only for a limited period to help the affected local producers to adjust.
Trump however took recourse to a little-used national security clause (Section 232) in the US trade laws to justify his big jump in steel and aluminium tariffs. The clause allows the president to take trade action to defend national security. The WTO also has a security exception in GATT Article XXI but it has rarely if ever been used by countries to justify tariff increases.
What constitutes national security is not clearly spelt out in the US or the WTO laws, and because of the ambiguity and lack of clarity, this clause can be abused. The US and other countries can claim they are imposing higher import duties because it is necessary to protect their national security, but in reality this could be a disguise or excuse to protect their economies from other countries' more efficient producers.
The Trump administration tried to justify invoking the security factor by saying steel and aluminium are needed to make tanks, fighter planes and other weapons of war. But this claim was undercut by giving exemptions from the increased duties to Canada and Mexico due to their membership of NAFTA, a trade agreement that includes the US. These exemptions for reasons unrelated to security expose the security rationale as fake.
'Opening a Pandora's box'
Other countries are angry and preparing to retaliate. The European Union has drawn up a list of American products on which its countries will raise tariffs. China warned it would make an appropriate and necessary response.
At the WTO General Council on 8 March, the US action was attacked. Many countries condemned the US measures for being unilateral and for misusing the national security rationale. Canada said the security issue 'may be opening a Pandora's box we would not be able to close'.
Brazil expressed deep concern about an elastic or broad application of the national security exception. India said the national security exception under GATT should not be misused and unilateral measures have no place in the trade system. China argued that the over-protected domestic industry will never be able to resolve its problems through protectionism.
Many WTO member states will most likely take the US to a dispute panel in the WTO, and how it rules will have strong consequences. If it rules for the US, then other countries will view it as allowing all countries to take protectionist measures on the same ground of national security. If it rules against the US, it will embolden the anti-liberal trade faction in the Trump administration and strengthen their argument that the US should ignore or even leave the WTO. The US would then be much more unrestrained to undertake further protectionist measures.
In either case, there is a danger that the rest of the world, or significant parts of it, would also feel they should not be constrained by the WTO's general trade rules. Over time, trade protectionism would gain ground.
The next big protectionist move from the US may come in a few weeks when Trump decides what action, if any, to take against China after considering a US Commerce Department report on China's trade and intellectual property practices. If, as expected, big action against China is announced, China will almost certainly take equally strong retaliatory action.
That will escalate the trade war that is already on the way. - IPS
Martin Khor is Executive Director of the South Centre, a Geneva-based think-tank for developing countries, and former Director of the Third World Network.
*Third World Resurgence No. 328, December 2017, pp 11-12