Trump and his 'trade wars'
In evaluating the current moves by President Trump to impose increased tariffs on steel and aluminium, with a slew of other goods to possibly follow, in what appears to be a prelude to a trade war, Chakravarthi Raghavan reminds us of the bloody origins of the current world trading system. While a trade war may not (as in the past) plunge the world into a real war, it will inevitably result in an impoverishment of all nations, with no winners. The chief casualty will be the multilateral trading system, as embodied in the World Trade Organisation.
'TRADE' and 'war' are two words antithetical to each other.
Trade, according to the Merriam-Webster dictionary, is 'the business of buying and selling or bartering commodities'. The original form of trade, barter, saw the direct exchange of goods and services for other goods and services. Much later, the invention of money (coins of precious metals, credit, paper money) greatly simplified and promoted trade. By its nature, trade is a voluntary act between two or more individuals or enterprises.
War, on the other hand, is a coercive instrument by which one nation or country prevails over another and forces it to yield and act according to what the winning side wants.
Yet, over the ages, and more so since feudalism gave way to mercantilism, war or the threat of war has been used to force countries to trade or open up to trade. Two extreme, egregious instances can be mentioned:
1. Britain and its 'Opium Wars' against China
Britain fought with China in 1839-42 and again in 1860 to take control of trade with China. The wars, known as the Opium Wars, were waged by Britain to enable it to sell opium to the Chinese. Britain forced the peasantry in India, its colony, to cultivate and produce poppy, out of whose latex was produced morphine and opium. Britain demanded of China the right to sell that opium and use the proceeds to buy silk and other Chinese commodities. It was not as if earlier China had refused to trade with British merchants or sell them silk etc; only, they had demanded payment in gold, which for Britain was in scarce supply.
2. The United States and China (1844) and the opening up of Japan (1853)
Soon after the 13 British colonies in North America fought the revolutionary war and joined to proclaim independence from colonial rule in 1776, the newly formed United States sought to establish consular relations (preliminary to trade relations) with China in 1784. This was rebuffed by the then more powerful Emperor Qianlong's court in Beijing, delaying the establishment of diplomatic relations. It was only in 1844, after the British victory in the First Opium War, that China, in the Treaty of Wangxia, agreed to establish consular relations with the US.1
After the Opium Wars, and the establishment of special trading rights and coastal settlements (exercising virtually sovereign jurisdiction within the area) for the British, other European nations soon followed, as did the US. All these colonial trading rights and extra-territoriality on the Chinese mainland came to an end only after the 1949 Chinese revolution under Mao and the establishment of the People's Republic of China.
As for Japan and opening it up to foreign trade, on 8 July 1853, Commodore Matthew Perry led a small squadron of US naval vessels into the harbour at Tokyo Bay, carrying a letter and gifts to the Emperor (who was merely a figurehead with no powers while the shoguns ruled Japan). The US side called for facilities for American ships and for sailors in distress to be able to seek shelter on Japanese shores.
More than two centuries earlier, Portuguese, Spanish and Dutch traders had engaged in regular trade with Japan, with presence in Japanese ports. However, persistent attempts by the Europeans to convert the Japanese to Catholicism and their tendency to engage in unfair trading practices led Japan to expel most foreigners in 1639. For the two centuries that followed, Japan limited trade access to Dutch and Chinese ships with special charters.
In the face of the US naval show of force led by Perry, Japan, which earlier had refused to receive such missions from foreign (European) nations, accepted the letter Perry delivered and pondered on its response. Perry returned a year later with a much bigger squadron to receive Japan's answer. The Japanese grudgingly agreed to Perry's demands, and the two sides signed the Treaty of Kanagawa on 31 March 1854.
According to the terms of the treaty, Japan would protect stranded seamen and open two ports (Shimoda and Hakodate) for refuelling and provisioning American ships. Japan also gave the US the right to appoint consuls to live in these port cities, and while not granting a right to trade, the treaty contained a 'most favoured nation' clause under which all future concessions Japan granted to other foreign powers would also be granted to the US. The treaty thus provided an opening that would allow future American contact and trade with Japan.2
The above are but two extreme, disagreeable examples of trade-related developments that would have long-term repercussions for relations between the countries concerned. (These are reflected even now in Chinese dealings with, and suspicions of, Americans and Europeans and many other foreigners.)
Trade war threat
US President Donald Trump often talks about 'trade wars' and has tweeted that 'trade wars are good and easy to win'; and there is loose talk, nay sabre-rattling, in US government circles under Trump of 'trade wars'.
After having put in place increased tariffs on imports of steel and aluminium (claiming 'national security' needs), the Trump administration unveiled plans for a slew of tariffs on up to $60 billion of imports from China. In a tit-for-tat trade spat, China retaliated with tariffs on $3 billion of imports from the US (to counter the US steel and aluminium tariffs) and announced plans for counter-tariffs (to take effect when the $60 billion US tariffs become effective) on up to $50 billion of imports of other US goods (soyabeans, aircraft and other politically sensitive items, hitting Trump supporters).
Amidst stumbling stock markets and media headlines of 'trade wars', most recently, on 4 April, Trump and his economic advisers all began announcing there is no trade war, negotiations are under way, and that economic effects would be minimal. However, within 48 hours, the mercurial Trump changed his stance and asked the US Trade Representative to levy additional duties on up to $100 billion of imports from China. Beijing for its part made clear it would impose 'comprehensive countermeasures ... to the end and at any cost' if Trump goes ahead with his threats.
At the moment, both sides are engaged in some shadow-boxing; it will be about 60 days before the US-announced $60 billion tariffs take effect, and then the Chinese $50 billion counter-tariffs.
However, even before these tariffs and counter-tariffs come into force, the mere announcement is having negative effects on US farmers and on markets for the products China has unveiled as well as on US enterprises producing or trading these products.
As for the Trump threat of additional tariffs on $100 billion of imports from China, Beijing has made clear it will respond with equivalence, while appealing to US manufacturers to pressure the Trump administration to cease the 'trade war threats'.
The US bought more than $500 billion in goods from China in 2017. It is considering tariff increases on some $150 billion of those imports, but faces a potentially devastating hit to its Chinese market if China responds in kind as it has promised. With the US in 2017 selling no more than $130 billion in goods to China, the latter's retaliation would involve US services, a sector where the US has a trade surplus with China (of perhaps about $30 billion).
While Trump has said he will act to help US farmers affected by the Chinese measures, any additional farm support would in turn provoke a trade fight with other trading nations, which would resist the threat to their own farmers posed by the subsidised US agri-exports.
Meanwhile China is also applying some pressure tactics: it has appealed to US businesses to stop Trump from triggering a trade war between the world's top two economic powers. On 8 April, Chinese state media published an article calling on industrial and commercial leaders in the US to stand up to the White House's plans to charge tariffs on an additional $100 billion of Chinese exports, warning that China will mount a fierce counterattack if Trump moves forward.
US businesses too seem inclined to back China's position, with many complaining that the tariffs will make other countries more attractive to Chinese buyers. 'Growing trade disputes have placed farmers and ranchers in a precarious position', Zippy Duvall, president of the American Farm Bureau Federation, said on 6 April. Patrick Delaney, a spokesman for the American Soybean Association, was cited by The New York Times as saying that his group was working to stop the tariffs from taking effect. 'It's a whole lot easier not to wreck the car in the first place than it is to think about what a repair might look like,' he said. China's Xinhua news agency reported that top US aircraft manufacturer Boeing had expressed deep concern about the US-China trade dispute. The tariff battle 'could do harm to the global aerospace industry', Boeing said in a short statement released on 4 April, announcing its own efforts to proactively engage both governments (to head off a trade war).
The US-China measures and countermeasures are reminiscent of events that preceded the 1914-18 Great War, the uneasy peace and depression era of the interwar years, the unsuccessful efforts of European nations to appease Nazi Germany, leading finally to World War II and its consequences, and the US-led international order (political and social, security, economic, money, finance and trade) centred on the United Nations Charter. Trump and his supporters now seem intent on breaking up that order.
In conceptualising and putting in place the postwar international order, including the multilateral trading system, the US had pursued a mercantilist policy, cloaking it in talk of 'free trade' (by President Franklin Roosevelt's Secretary of State Cordell Hull). Roosevelt's successors too, Democrats and Republicans alike, adopted the same posture. But now, President Trump has thrown aside this pretence of free trade and makes no bones about his mercantilist approach that seeks to ensure surpluses in trade with other countries.
If he succeeds, the US will end up in a situation of current account surpluses. The counterpart of this will be to make the US dollar a scarce currency for trading partners, resulting in the US losing the seignorage and advantages of the dollar being a reserve currency and one used by nations for trade transactions. This will also have the effect of ending the enormous power that the US now enjoys when other nations use the dollar as a reserve and transactional currency, the power to impose unilateral sanctions via its banking sector.
The Prussian general and military theorist Carl Philipp Gottfried (or Gottlieb) von Clausewitz wrote, 'War is the continuation of politics by other means.' Clausewitz, who in his writings drew heavily on the rationalist ideas of the European Enlightenment and the dialectical interaction of diverse factors, noted how unexpected developments unfolding under the 'fog of war' (i.e., in the face of incomplete, dubious and often completely erroneous information and high levels of fear, doubt and excitement) call for rapid decisions by alert commanders, and saw history as a vital check on erudite abstractions that did not accord with experience.
These remarks are perhaps as relevant to Trump and his officials and their talk of trade wars as they are to military conflicts. History shows that outcomes of wars are more often than not unpredictable. And the history of political economy shows that there are no winners in trade wars: all are losers.
When two countries engage in 'trade wars' with tit-for-tat tariffs or other trade measures against each other, the trade-surplus country tends to lose more than the deficit one. But this may no longer be the case in today's world of global value chains and production spread across countries. In any event, while the US has trade deficits with China and many other countries, it has no deficit when trade in goods and services are taken together. Also, as mentioned above, the trade deficit is a necessary counterpart of the US dollar as an international reserve currency and countries accumulating dollar balances in their central banks as a reserve. If there be no US deficit, the dollar will become a scarce currency, which will result in countries not buying US goods and services.
However, dealing with Trump and his trade war threats is a whole new ball game, since he is qualitatively different from a long line of his postwar predecessors. He is trying to bring down the entire edifice of the postwar world order that the US, the sole hegemonic power at the end of the war, had conceived, built and fostered. With his experience in the construction industry, and how to become rich by resorting to bankruptcies, Trump is willing to use a wrecking ball against the present world order. While he has so far offered no alternative, his dislike of the UN system, the World Trade Organisation (WTO), multilateral trade and multilateralism is clear.
His administration has mounted a three-pronged assault on the WTO:
(a) Blocking consensus for launching a process to fill three vacancies (and two pending) on the WTO's Appellate Body (AB), thus threatening to make the AB and the WTO system for resolving trade disputes non-functional. The US Trade Representative has proposed going back to the old system (under GATT, the WTO's predecessor) of parties negotiating settlement after dispute panel reports are issued (and being able to block adoption of panel reports with which they disagree). This, in spite of the fact that it was the US itself - frustrated with the EU (it was then the European Community) blocking consensus and preventing adoption of rulings favouring the US in the French wheat flour and Italian pasta disputes - that had, at the time the WTO framework was being finalised, sought effectively binding dispute settlement rulings.
(b) Slapping tariffs of 25% on imports of steel and 10% on imports of aluminium (as mentioned above), by invoking Section 232 of the US' Trade Expansion Act of 1962 and citing 'national security' grounds. After the initial shock administered to all trading partners by this move, the US has now (temporarily) lifted the tariffs for imports from the EU, Australia, Argentina, Brazil, Canada, Mexico and some others, pending talks with individual nations for some trade concessions. This makes a mockery of the 'security' justification put forward for the tariffs. (The US action has been challenged by two exporters in US domestic proceedings - see below for details.)
(c) Making clear that his principal trade target is China, Trump has also announced (after a Section 301 investigation on alleged 'unfair' trade practices by China) a list of various imports from China that will be subject to increased tariffs (as mentioned above). The proposed slew of tariffs and trade restrictions (including on Chinese investments and acquisitions of US enterprises) is in response to alleged Chinese theft of intellectual property (by forcing US enterprises to transfer technology in return for market access or setting up joint ventures) and other restrictions on US investments. This unilateral use of Section 301 of the US' Trade Act of 1974 is contrary to express commitments made previously by the US before a WTO dispute panel, recorded by that panel as an international commitment that if disregarded may attract liability of a State under international law.
These assaults, and attempts to dismantle the WTO and its multilateral trading system, call for a collective response from the entire WTO membership. Unfortunately, the major industrialised nations are silent on the Trump assaults, acquiescing in a sense in the attacks against China. This is a short-sighted expediency. They should rather join hands and demand that the US either abide fully and in good faith with WTO rules and its own commitments, or withdraw from the WTO.3
More generally, Trump and his 'zombie' economic advisers (as Nobel economics laureate Paul Krugman calls them) are talking of reciprocal tariffs, product-by-product and country-wise. These will not only violate WTO rules but also run contrary to almost a century of trade policy that has evolved worldwide, grounded on twin principles of non-discrimination and 'most favoured nation' treatment.
But will this cause war? Not so clear, historically.
The Smoot-Hawley Tariff Act, which raised US import duties significantly, came into force on 17 June 1930. While groups of economists had signed petitions against it and lobbied US President Herbert Hoover, some industries and producers who stood to benefit lobbied in support, and Hoover yielded to them and signed it. It resulted in counter-tariffs that other countries erected in response. And that triggered the Great Depression, but was not the ultimate cause.
As Mark Weisbrot of the Washington-based Center for Economic and Policy Research contends in The Nation (28 March), the prospect of a real war is greater than that of a trade war. With CIA director Mike Pompeo as US Secretary of State designate and John Bolton as National Security Advisor, a war with Iran, North Korea or elsewhere, and even one with Russia, is far more likely.
'The Chinese, like most of the world,' writes Weisbrot, 'know that Trump's recent [trade] actions don't really represent the long-term trade policy of the United States. That policy is generally made by corporations, working through the best Congress that money can buy.'
Foreign governments and corporations, instead of getting into a trade war or any kind of fight that could cause economic damage, may be smart enough to wait for Trump to finish his stay in the White House or move on to his next distraction. The goods on which Trump has threatened to impose tariffs, Weisbrot notes, represent about 3.6% of China's exports, and the tariffs would only cost the country a fraction of that. In the world recession of 2009, China's exports fell by 11.3%, but its economy still grew by 9.2%.
Measures, countermeasures (and appeasement)
After announcing his decision to levy the steel and aluminium tariffs, Trump, as stated above, subsequently exempted the EU, Argentina, Australia, Brazil, Canada, Mexico and several others until trade issues could be negotiated with them.
The first accord negotiated was with South Korea, which agreed to increase its quota of US car imports and to reduce some exports of steel to the US (such 'voluntary export restraints' are illegal under the WTO).4 Having described it as 'a wonderful deal with a wonderful ally', Trump said on 29 March he might postpone finalising the agreement until he secured a deal in denuclearising North Korea. Trump has no leverage over North Korea, so he is pressuring South Korea!
Trump has also tied Canada's exemption from the steel and aluminium duties to the successful conclusion of ongoing talks to modify the North American Free Trade Agreement (NAFTA). What he will demand of the EU is not clear at this point.
With regard to the Section 301 tariffs on Chinese exports, Trump's Treasury Secretary Steven Mnuchin is reportedly engaged in talks with China (purportedly also the main nation against which the steel and aluminium tariffs are aimed). The US is reportedly seeking changes to Chinese intellectual property protection (to enable more of US pharmaceuticals and devices to be sold in the Chinese market) and greater opening to US financial services in return for modifying or abating the tariffs on Chinese products. But even while these talks are going on, and China announced it would respond with counter-tariffs on $50 billion of US goods, Trump has threatened further escalation with tariffs on an additional $100 billion of products, with China responding that it would take 'comprehensive countermeasures'.
Whatever the final outcome, it is clear that none of the contemplated or imposed US tariffs will just increase profits for Big Pharma and benefit the richest Americans via better Wall Street access to Chinese markets. They will bring no additional jobs to the US and, in some cases (as with the steel and aluminium tariffs), will raise costs for a whole range of downstream US industries.
Initially at least, the responses of China, the EU and others targeted have been restrained. China announced some counter-tariffs on about $3 billion of US products in retaliation against the steel and aluminium duties. Developed-country trade partners have remained mute or restrained. Perhaps they are hoping that pressure from affected US industries, importers and consumers may yet force Trump to modify his initial announcements, or that other domestic developments (the Mueller inquiry, various lawsuits against Trump that courts have allowed to move forward, the mid-term elections in 2018) might intervene to put an end to Trump's mercurial policy shifts.
Individual nations might also be trying to appease Trump by making some minor concession or another. If they are pursuing this course, with each trading partner hoping to ward off Trump's action against itself, they might recall Winston Churchill's definition of an 'appeaser' as 'one who feeds a crocodile hoping it will eat him last'.5
The various trade measures announced or already implemented by the Trump administration - the Section 301 tariffs, and the Section 232 tariffs citing 'national security' grounds and claiming this can be invoked through a 'self-judging' subjective process under Article XXI (on security exceptions) of the General Agreement on Tariffs and Trade (GATT) - have provoked a lively discussion among US trade law academics, with several posts and comments on the International Economic Law and Policy (IELP) blog.
Among these, Prof. Regis Bismuth (from Sciences Po Law School, France) points to the case law of the International Court of Justice (ICJ) concerning the interpretation of 'self-judging' clauses, suggesting that they do not grant a pure discretionary power to the State invoking these. In Certain Questions of Mutual Assistance in Criminal Matters (Djibouti v. France), interpreting Article 2(c) of the 1986 Convention on Mutual Assistance in Criminal Matters (which provides that a State may refuse a request for mutual assistance 'if it considers that execution of the request is likely to prejudice [the] sovereignty, ... security, ... ordre public or other ... essential interests' of the State), the ICJ stated: '... while it is correct ... that the terms of Article 2 provide a State to which a request for assistance has been made with a very considerable discretion, this exercise of discretion is still subject to the obligation of good faith codified in Article 26 of the 1969 Vienna Convention on the Law of Treaties...'
In another comment on the IELP blog, Prof. Simon Lester, who runs the blog, said that even where Article XXI of GATT has been invoked, a GATT non-violation impairment complaint and dispute could be raised.
On the Section 301 tariffs, Lester said, 'If the United States imposes tariffs on China, at a rate above the bound rate in the US Schedule [of WTO commitments], there will be a violation of GATT Articles I and II.' The US claim that it could unilaterally decide on Chinese 'unfair trade' practices, and its levy of additional tariffs on imports from China would be contrary to the US' scheduled commitments.
Prof. Steve Charnovitz, another US trade law academic, has contended that any Section 301 tariffs by the US and counter-tariffs by China would be WTO-illegal. He also said that he did not agree with the notion that GATT Article XXI is a justification for Section 232 tariffs whose sole purpose is the protection of domestic production against imports. If Article XXI could justify protective tariffs, he said, there would not be any trading system left. Instead, the steel tariffs, he argued, should be understood as tariff modifications under GATT Article XXVIII, and in that light, China has a right to withdraw substantially equivalent concessions.6
In fact, the US steel tariffs have been challenged in the US Court of International Trade in New York. The complaint by Severstal Export GmbH and Severstal Export Miami Corporation says that while the tariffs were imposed on the grounds that the importation of steel articles threatened to 'impair the national security', the national security basis was 'a pretext to the actual intent for the imposition of tariffs on steel articles: President Trump's regularly stated intent, both prior to entering the Office of the President, and after assuming the Presidency, to obtain a "positive trade balance" with other countries, to "bring jobs home", and win trade wars. Because President Trump did not base his decision on national security grounds as required under Section 232 in issuing the Steel Proclamation, the Proclamation is unlawful.'7
To sum up, Trump and his economic advisers have mounted a three-front assault on the WTO and its multilateral trading system:
1. On the WTO dispute settlement system: Making the system non-functional by blocking proposals to fill vacancies in the Appellate Body. In its latest intervention at the WTO's Dispute Settlement Body (DSB) on 27 March, the US questioned Rule 15 of the AB's working procedures, which enables retiring AB members engaged in hearing ongoing appeals to continue (even after their terms have expired) until decisions can be handed down. In challenging Rule 15 (on the ground that the continuation of an AB member was for the DSB to decide, not the AB itself), the US could only cite systemic concerns voiced by India at the time the AB's working procedures were notified to the DSB. At that time, and until now, the US itself had raised no objections, nor had it apparently voiced any view when India had voiced its concerns.8 In any proceedings before domestic courts, this US position would have been untenable - the estoppel doctrine would have been applied by the court.
2. On the steel and aluminium tariffs: Citing the security exception, the US contends that it involves the 'subjective satisfaction' of the country invoking it. While this has not been adjudicated at the WTO (and if the AB is rendered non-functional, it will effectively prevent a final ruling on the matter), the ICJ ruling/opinion in the Djibouti vs France case cited above is dispositive of the legal issue of 'subjective satisfaction', namely that 'this exercise of discretion is still subject to the obligation of good faith codified in Article 26 of the 1969 Vienna Convention on the Law of Treaties'.
3. On the Section 301 investigations and announced tariffs on a variety of imports from China: The Trump administration claims China's 'unfair trade practices' are not covered by WTO agreements and that hence it has the right to make its own judgement without having to go through the WTO dispute settlement system. This is a spurious argument. Firstly, the two grounds cited - inadequate intellectual property protection in China and China forcing technology transfer as a condition for investments by US enterprises - are specifically covered in commitments China undertook when it acceded to the WTO. Secondly, even if there are areas where Chinese practices are not covered by existing WTO agreements, to the extent the US' planned unilateral 'remedial' actions involve tariff and non-tariff measures on imports of Chinese goods or Chinese access to US services markets (to the extent of the US schedule of commitments in these areas) or the intellectual property of Chinese enterprises, they will violate US commitments and obligations in the WTO.
It is thus time for the rest of the WTO membership to consider this overall threat to the multilateral trading system and take a collective stand to save the system, by asking the US to either abide by the WTO rules or withdraw from the WTO. At the moment of writing, the developed-country trading partners of the US have remained silent (thus tacitly supporting the US). They will come to rue this.
In looking to developing countries for support, China too has to make up its mind. It can't expect developing countries to stand in solidarity with it and against the US when it is simultaneously pushing to bring onto the WTO agenda such items as electronic commerce and investment facilitation - issues opposed by most developing countries - ahead of completing the unfinished Doha Development Agenda of the WTO. - 9 April 2018
Chakravarthi Raghavan is Editor Emeritus of the South-North Development Monitor (SUNS) published by the Third World Network. He is the author of, among other books, Recolonization: GATT, the Uruguay Round and the Third World; The Third World in the Third Millennium CE: The Journey from Colonialism Towards Sovereign Equality and Justice; and The Third World in the Third Millennium CE: The WTO - Towards Multilateral Trade or Global Corporatism?.
1. Address by Kevin Rudd, former Australian Prime Minister and President of Asia Society Policy Institute, to US West Point Military Academy cadets, 5 March 2018, https://nb.sinocism.com/p/understanding-chinas-rise-under-xi-jinping-by-the-honourable-kevin-rudd?utm_medium=web&utm_campaign=share-web
3. See Chakravarthi Raghavan, 'Contemplating the unthinkable, a WTO without the US', SUNS, No. 8590, 6 December 2017.
4. The actual effect was much less, since, for example, US automobile companies have not been able to fill even existing quotas.
5. Fred Metcalf (ed.), Dictionary of Humorous Political Quotations, Biteback, 2012.
6. The above citations, and other related posts and comments on the IELP blog can be found at: http://worldtradelaw.typepad.com/ielpblog/2018/03/litigating-gatt-article-xxi-the-us-view-of-the-scope-of-the-exception.html#comments; and http://worldtradelaw.typepad.com/ielpblog/2018/04/the-us-china-national-securitysafeguardstariff-fight.html#comments
8. Kanaga Raja, 'US continues to block appointment of new AB members', SUNS, No. 8653, 3 April 2018.
*Third World Resurgence No. 328, December 2017, pp 13-18