The implications of Trump's challenge to the WTO trading system
Biswajit Dhar contends that by initiating this latest move of tariff wars, the Trump administration is challenging the very existence of the postwar multilateralism in trade, which, despite its limitations, has made efforts to bring order to global trade by binding sovereign states to an extensive set of rules.
AFTER being on course for a relatively stable performance, the first since the Great Recession of 2008, the global economy finds itself in choppy waters once again, this time on account of the likelihood of a trade war between the two largest economies.
During his US presidential campaign, Donald Trump had promised supporters that if elected, he would impose a 45% tariff on all imports from China, and would also target Mexico, a US partner in the North American Free Trade Agreement (NAFTA). Although presidential hopefuls have generally made trade protectionism an integral plank of their campaigns, Trump's position was a departure from past trends on three counts. The first was that trade protectionism, a preferred plank of the Democrats, was being voiced by a Republican hopeful; the second was that past promises of protecting domestic industries seldom spoke of using tariffs as the instrument to be deployed; and the third and most important was the promise to target specific trade partners. But, despite the instant approval that Candidate Trump had received from his support base, few would have thought that President Trump would go down the risky path of targeting imports from the US' major trading partners.
President Trump's strategy of targeting imports, which was first announced on 1 March, has had two clear strands. The first is the target-China strategy, which he put into practice by initiating a tariff war; and the second is to target several other partners by using a number of measures. In the postwar era, no other country has unleashed such a variety of trade policy instruments in this short a period to undermine the interests of its partner countries.
Prior to embarking on the path of unilateral trade protectionism as part of his larger strategy to 'Make America Great Again', the US President had suggested that he would push for the imposition of 'reciprocal tax' against countries applying tariffs on American products. Although the President did not clarify how the 'reciprocal tax' would be designed or implemented, this proposal was bound to draw ominous parallels with the infamous Tariff Act of 1930 (better known as the Smoot-Hawley Tariff, after the act's sponsors, Senator Reed Smoot and Representative Walter Hawley).
The objectives of the Smoot-Hawley Tariff were almost identical to those laid out by Trump, namely, to protect jobs in American industry and agriculture by shielding the domestic industries from import competition, using tariffs on a large number of products. In the wake of the Smoot-Hawley Tariff, trade partners of the US imposed retaliatory tariffs, restricting access to American products in their markets. Many analysts have argued the trade wars were responsible for deepening the economic crisis arising from the stock market crash in 1929 and causing the Great Depression of the 1930s.
There are at least three critical dimensions arising from the actions taken by the Trump administration. The first is that the actions on steel and aluminium imports are part of a pattern of trade protectionism being practised by the administration. The second concerns the response of several major trading nations which have already retaliated or are threatening to retaliate against US imports, thus raising the grim prospect of a trade war reminiscent of the 1930s. The third is that the unilateral action taken by the US poses a serious challenge to the framework of global trade rules governed by the World Trade Organisation (WTO), the implications of which can be far-reaching.
Trump fired the first salvo by targeting imports of steel and aluminium to help revive American fortunes in these two sectors. He implemented the extraordinary decision to impose import tariffs of 25% and 10% on steel and aluminium respectively by invoking the provisions of Section 232 of the Trade Expansion Act of 1962. This provision allows the administration to take measures to protect domestic industries for 'national defence' and 'national security'.
Trump's action was backed by an investigation conducted by the Bureau of Industry and Security of the US Department of Commerce. This investigation had made a strong case for the imposition of import tariffs on the two metals for national security, based on the understanding that 'national security can be interpreted more broadly to include the general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements that are critical to the minimum operations of the economy and government'. This interpretation lends itself easily to bringing substantially more products under the dragnet of import tariffs. Equally egregious is Trump's insistence that the tariff increases on steel and aluminium are for an 'unlimited period'.
While the discussions on Trump's action were riveting around steel and aluminium, few realised that the problems caused by US trade protectionism ran much deeper for two reasons. Firstly, there had already been excessive use of anti-dumping measures on steel. Secondly, there are two other products, namely washing machines and solar cells and modules, whose imports have been restricted by the US President in recent months.
Until mid-April 2018, the US had issued 208 anti-dumping and countervailing duty orders on iron and steel products, half of which were against four countries, namely China, South Korea, India and Japan. As a result of such extensive use of anti-dumping actions, the major exporters face considerable uncertainties in the world's largest market for steel.
At the beginning of the year, Trump authorised imposition of restrictions on imports of washing machines and solar cells and modules using the provisions of Section 201 of the Trade Act of 1974, the first time such authorisations have been made in 16 years. Section 201, which is the analogue of the 'safeguard measures' under the WTO, allows, as a temporary measure, the raising of import duties or imposition of non-tariff barriers on goods entering the US that injure or threaten to injure domestic industries producing similar goods. In the case of washing machines, import quotas have been established for three years wherein, in the first year, a 20% tariff would be imposed on imports of up to 1.2 million washing machines and a 50% tariff on imports beyond the above threshold. The safeguard measures in the case of solar cells and modules would last for four years, with a 30% tariff being imposed in the first year.
The Trump administration's announcement of the tariff hikes on steel and aluminium brought a strong response from its major trade partners, in particular the European Union and Canada, which threatened to retaliate by targeting American icons like Harley-Davidson, Kentucky bourbon and Levi's blue jeans. The EU Trade Commissioner Cecilia Malmstrom announced concrete plans to retaliate against the proposed American tariffs by imposing higher import duties on bourbon, peanut butter, cranberries, orange juice, steel and industrial products. The total value of American exports against which the EU threatened to increase tariffs was _6.4 billion, of which _2.8 billion worth of products would face tariffs of 25% immediately while the remaining products would be targeted after three years.
The response of the US President to the threats of retaliation by the close allies was to provide them temporary reprieve a day before the penal tariffs came into effect on 23 March. Seven partners, namely, the two closest neighbours Canada and Mexico, members of the EU, Australia, Brazil, South Korea and Argentina, were exempted from the tariff hikes under Section 332 until 1 May, pending discussions with these countries to reach a satisfactory long-term solution that would address what the US saw as impairment to its national security interests.
Alongside giving an important exemption, albeit temporary, to the allies, Trump sanctioned tariff hikes on up to $60 billion worth of imports from China, endorsing the findings of the US Trade Representative (USTR) that Chinese firms were violating the intellectual property of American companies. These targeted actions against Chinese imports for intellectual property violations became the centrepiece of the Trump administration's tariff war with its largest trade partner. The coverage of products, followed by the swift response by China, made it clear this sequence of events would not only sow the seeds of uncertainty in the global economy at a critical juncture but, more importantly, trigger the unsavoury prospect of a trade war reminiscent of the 1930s.
The justification provided by the USTR for the first in this sequence of actions was the investigation conducted under Section 301 of the US' Trade Act of 1974 on the 'laws, policies, practices, or actions of the Government of China that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development'.
The results of the investigation, according to the USTR, showed four areas of transgression by China. Firstly, the Chinese government used a number of measures, including joint venture requirements and foreign equity limitations, to regulate or intervene in the operations of American companies in China, and by so doing, forced transfer of technologies and intellectual property to Chinese companies. Secondly, the policies and practices adopted by the Chinese government did not allow US companies to set market-based terms for licensing technologies to Chinese companies. Thirdly, the Chinese government unfairly facilitated investments in, and/or acquisition of, American companies and their assets by Chinese companies with a view to obtaining cutting-edge technologies and intellectual property rights. And, finally, China conducted or supported 'unauthorised intrusions' into American 'commercial computer networks or cyber-enabled theft of intellectual property', providing competitive advantages to Chinese companies or commercial sectors.
Ten days after China was targeted by the US, the Customs Tariff Commission of the Chinese State Council decided to retaliate against the increases in tariffs on Chinese products by imposing tariffs on 128 dutiable products across seven categories. These products accounted for $3 billion of US exports to China in 2017. This measure was aimed at offsetting the losses suffered in the aftermath of the US invoking Section 232 of its Trade Expansion Act of 1962. On the first set of products, covering 120 dutiable products, including fresh fruits, dried fruits and nuts, wines, modified ethanol, American ginseng and seamless steel pipes, the Chinese authorities proposed to impose import tariffs of 15%. The value of these products exported by the US to China was $977 million in 2017. On the second set of products, covering eight dutiable products, including pork and its products, recycled aluminium and other products, the proposed import tariffs were 25%. The value of US exports of these eight products to China was $1.992 billion in 2017.
One feature of the import curbs announced by the US and China in the first round of what now seems to be a long-drawn battle was that the Chinese threat of retaliation was disproportionately low: the US had threatened to impose high tariffs on over 11% of its imports from China, while just over 2% of US exports were targeted by China. However, China, while taking its retaliatory actions, had targeted a number of products originating in the politically sensitive agrarian heartland of the US, which implies that the real cost of the proposed Chinese action for the latter could be much larger than the dollar value.
Predictably, the US reacted immediately. The USTR announced imposition of 25% tariffs on approximately $50 billion worth of Chinese imports. The total value of imports facing the proposed tariff increases would, in the USTR's view, compensate the economic loss suffered by the US from China's implementation of its forced technology transfer policies. The figure of economic loss was revealed in the Section 301 investigation that the USTR had conducted since August 2017.
The proposed list of products for retaliatory action covered nearly 1,300 tariff lines. The USTR unveiled a plan to subject these products to a public review, including a hearing, until the end of May. The final list of products would be determined after this process of public review. In other words, the US would keep the pot boiling through the next several weeks.
Chinese government policies forcing American companies to transfer their technologies and intellectual property to Chinese enterprises, argued the USTR, would enable China to gain ascendancy in the global market in advanced technologies, especially through the implementation of its industrial plans as underlined in 'Made in China 2025'. The USTR revealed that the products proposed for tariff hikes were identified as those that would benefit from China's industrial plans while at the same time undermining the interests of the US. Sectors included for the proposed tariffs were aerospace, information and communication technology, robotics and machinery.
Multilateral trading system undermined
As mentioned earlier, American unilateralism in protecting domestic industries stretches back to the 1930s. The US could easily impose import tariffs unilaterally at the time, since global trade rules were then non-existent. Today the Trump administration is treading the same path of unilateralism, and it is doing so by completely disregarding the disciplines of the WTO.
This disregard for the WTO is not new for the Trump administration. Over the past year, the administration has undermined the multilateral trading system through a systematic process of non-engagement. By initiating this latest move of tariff wars, it is challenging the very essence of the postwar multilateralism in trade, which, despite its limitations, has made efforts to bring order to global trade by binding sovereign states to an extensive set of rules.
Besides the unilateralism in the imposition of tariffs, the Trump administration has also challenged the WTO rulebook by first determining unilaterally that China was infringing intellectual property owned by US companies and then imposing trade sanctions by raising tariffs on imports of high-technology products. These actions by the administration are in violation of WTO rules that prevent any member of the organisation from taking unilateral measures against another member without following the procedures laid down by the WTO's Dispute Settlement Body (DSB).
In this particular case, the US has also violated the commitment it had made before a WTO dispute settlement panel that adjudicated a dispute brought by the EU in 1998 against Sections 301-310 of the US Trade Act of 1974 (henceforth, US-Section 301 Trade Act). This dispute was significant for 16 other members had joined as third parties. The main contention of the complainant and the third parties was that the US had maintained the aforementioned provisions on its statute book, which gave the USTR powers of unilateral action against other countries, even after the WTO was established.
The proceedings before the dispute settlement panel are germane to the present discussion. The panel observed that the language of Section 304 of the Trade Act of 1974 - which gave the USTR the powers to make determinations of whether 'the rights to which the United States is entitled under any trade agreement are being denied' - was 'prima facie inconsistent with Article 23.2(a)' of the Dispute Settlement Understanding (DSU) of the WTO. Article 23.2(a) states that members of the organisation 'shall not make a determination to the effect that a violation has occurred, that benefits have been nullified or impaired or that the attainment of any objective of the covered agreements has been impeded, except through recourse to dispute settlement in accordance with the rules and procedures of this Understanding'. Further, WTO members are instructed to 'make any ... determination [of violation] consistent with the findings contained in the panel or Appellate Body report adopted by the DSB ...' In other words, a member cannot take action against a perceived violation by any other member before referring the case to the DSB and getting a decision from the dispute settlement panel or the Appellate Body.
Despite such strict guidelines written into the DSU, the panel in the US-Section 301 Trade Act case concluded that the US had not violated its WTO commitments by allowing Section 304 to remain on its statute book. The panel arrived at this conclusion on the basis of several statements made by the US in the course of the hearing.
Firstly, the US brought to the notice of the panel that the Statement of Administrative Action (SAA) submitted by the administration to the US Congress for implementing the WTO agreements states that the USTR is required under Section 304 to base a determination of whether agreement rights have been denied on the results of WTO dispute settlement proceedings. Further, the panel observed that the US had 'explicitly, officially, repeatedly and unconditionally confirmed the commitment expressed in the SAA namely that the USTR would ". base any section 301 determination that there has been a violation or denial of US rights under the relevant agreement on the panel or Appellate Body findings adopted by the DSB"'. This implies that in case a dispute settlement panel was unable to complete its proceedings within the time frames provided for in the DSU, the USTR would not be able to make a determination that US agreement rights have been denied.
Secondly, the US argued before the panel that the USTR had never made a Section 304 determination that the rights of the US pertaining to the GATT (General Agreement on Tariffs and Trade) or any WTO agreement rights had been denied which was not based on the results of GATT and WTO dispute settlement proceedings.
The US is now in clear violation of its commitments made to the panel in the US-Section 301 Trade Act case. The conclusion made by the panel in this regard is particularly relevant: 'Should the undertakings articulated in the SAA and confirmed and amplified by the US to this Panel be repudiated or in any other way removed by the US Administration or another branch of the US Government, this finding of conformity [of Section 304 with the WTO rules] would no longer be warranted.'
The challenge thrown by the Trump administration to the multilateral trading system is not limited to the issue considered here. In recent months, the administration's affront to the WTO has dipped to a new low through its non-cooperation over the appointment of members of the WTO's Appellate Body. The Appellate Body performs a critical role in the WTO's dispute settlement process since it reviews the decisions of dispute settlement panels when it is approached to do so. Decisions of the Appellate Body are final and binding on WTO members as WTO rules do not allow review of these decisions.
The Appellate Body is supposed to have seven members, but by the beginning of October, it would have only three members. Over the past year, the US has repeatedly vetoed the appointment of new members on the Appellate Body and this is threatening the functioning of the body. This implies that trade partners of the US which would like to challenge Trump's turn to protectionism in violation of WTO rules could experience an exceptional situation where the WTO would not be able to redress their complaints because of a broken Appellate Body. The inability of the WTO to act as an effective arbiter in trade disputes could really be catastrophic for the global trading system.
Biswajit Dhar is a Professor of Economics at the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi.
*Third World Resurgence No. 328, December 2017, pp 19-22