Trade wars and other emerging threats: Attempts by the US to write new trade rules

Abhijit Das argues that the trade war launched by the US, when viewed in the context of other related actions, evinces a clear intention by the West to consolidate its hegemony of the world trading system.

WHAT is common to the following: the continuing unabated trade war triggered by US President Donald Trump; the US paralysing the dispute settlement mechanism of the World Trade Organisation (WTO); and the determined effort by the developed countries to reform the WTO after making the Doha Round of multilateral trade negotiations dysfunctional?

Joining the dots, it is clear that each of these seemingly unconnected actions by the US and a few other countries is part of a concerted effort by them to craft new trade rules that will further deepen their economic dominance in a fast-changing world. It is therefore relevant to understand what this portends for multilateralism as the world has known it for the past few decades.   

The wave of trade protectionism unleashed by the dubious US tariffs on steel and aluminium products in March this year on the specious ground of national security, and the counter-response by some countries, is setting global trade and multilateralism on a downward spiral. The US has since fired another salvo in the unfolding trade war by imposing tariffs on imports worth $250 billion from China, supposedly to punish it for its alleged theft of intellectual property, with China responding with tariffs of its own on US products.

What explains the trade war triggered by the US? There appear to be three reasons for it.

Firstly, the illegal tariffs on steel and aluminium are a blatant attempt by the US to get back jobs in this sector, which have been shifted by US multinational firms to other countries on account of the declining competitiveness of the manufacturing sector in the US.

Secondly, these tariffs are intended to compel the rest of the world, particularly the developing countries, to export to the US on terms dictated by the latter. If, in the process, WTO norms are violated, then so be it.

Thirdly, the tariffs slapped on China for its alleged theft of intellectual property of US innovators are an attempt by the US to halt China's determined steps to acquire global leadership in high-technology industry under its 'Made in China 2025' initiative.

While the trade war is of relatively recent vintage, attempts at sabotaging the dispute settlement mechanism of the WTO predate President Trump. How does the US seek to paralyse this mechanism?

The judicial arm of the WTO dispute settlement system consists of two tiers. Dispute resolution panels adjudicate on issues of facts and law that are raised by WTO member countries aggrieved by the actions of another member. The Appellate Body is the standing court of appeal for issues of law and legal interpretation arising from decisions rendered by the panels in the first instance. The Appellate Body is composed of seven permanent members appointed by WTO member states by consensus.

While the process of appointment of Appellate Body members was generally a smooth affair in the past, over the last few years the US has blocked the selection of new members. If the US continues with its recalcitrant approach, then by January 2020 the Appellate Body would be rendered inutile, as only one member would be left.

How would the US benefit from this unfortunate situation of the Appellate Body?

Even in the best of times, the US has not been a strong votary of rules-based multilateralism. The dispute settlement mechanism in general, particularly the functioning of the Appellate Body, has imposed some restrictions on the ability of the US to resort to power-play at the WTO.

If the dispute settlement mechanism is paralysed, the rules-based edifice of the WTO would crumble. Consequently, there would be no restraint on the US to take more illegal and unilateral trade actions against countries that do not comply with its wishes and that resist adhering to its vision of what trade rules should be.

Paralysis of the dispute settlement mechanism would provide the US with an opening to resort to illegal action to deny market access to developing countries. Given the significant dependence of many developing countries on the US market for their exports, in no time most of them are likely to be coerced into coming to the negotiating table.

In the asymmetrical power equations in bilateral settings, the US can extract far-reaching concessions from the developing countries, which it has so far been unable to secure at the WTO. This would enable the US to rewrite bilateral trade rules, which would thereafter be made global norms through the third element of this strategy - reforming the WTO.

It is no secret that after failing to achieve their offensive objectives aimed at opening developing-country markets, but being at risk of having to make concessions on their own agricultural subsidies, the developed countries walked away from the multilateral Doha Round negotiations of the WTO. They are now busy crafting a narrative that the WTO needs to be reformed.

While no formal proposal on WTO reforms was made by any WTO member before the summer break, the contours of the likely thrust in this direction are discernible from a 'non-paper' of the European Union and a trilateral joint statement by the EU, Japan and the US. It is relevant to briefly mention some of the main elements of the proposed reforms.

Firstly, subject to the advantage of the developed countries, the 'most-favoured nation' (MFN) principle of the WTO is sought to be set aside. Secondly, the healthy convention of decision-making by consensus at the WTO is sought to be given a go-by. Thirdly, leeway is sought to be given to countries to strike so-called plurilateral trade agreements, without the entire WTO membership being required to endorse such deals exclusively by consensus. Fourthly, the member-driven nature of the WTO is sought to be fundamentally altered by empowering the WTO secretariat. This has the potential of formally allowing the WTO secretariat to meddle with domestic policymaking in developing countries and exercise influence in directions that may not be in their interest. Fifthly, new rules are sought to be negotiated for curtailing the ability of developing countries to financially support their state-owned enterprises. While this may appear to be targeted at China, it would prevent governments in other developing countries from providing incentives to their enterprises in an attempt to catch up with the developed world.

Overall, the seemingly unconnected actions of the US thus appear to be part of a coherent strategy being pursued by Robert Lighthizer, the United States Trade Representative. The proposals for reforming the WTO are nothing short of an attempt to change the fundamental attributes of the multilateral trading regime and rewrite trade rules to perpetuate the economic and commercial dominance of the developed countries and prevent developing countries from pursuing catch-up policies. Those developing countries which resist this attempt of the developed countries are likely to become victims of unilateral trade measures and other forms of arm-twisting aimed at coercing them to fall in line. These illegal actions would be facilitated by a dysfunctional dispute settlement mechanism at the WTO.

It is imperative that the developing countries jointly resist the intense pressure to start discussing reform of the WTO on the terms being proposed by the developed countries. If the developing countries fail to act in cohesion, then they would be compromising their development prospects in the short term in many areas, and in the long term in the digital economy. 

Abhijit Das is Head of the Centre for WTO Studies at the Indian Institute of Foreign Trade in New Delhi. The views expressed here are personal.

*Third World Resurgence No. 331/332, March/April 2018, pp 16-17