Global Trends by Martin Khor

Monday 14 August 2017

On the brink of a new trade war?

The world is on the edge of trade conflicts as President Trump decides on actions to take against countries he calls “trade cheaters”.  Malaysia may be affected.


Are we on the brink of a new trade war unleashed by the Trump administration?  

It would appear so from reports that the United States President is preparing a variety of trade measures aimed at what he calls “trade cheaters”.  Donald Trump is obsessed with countries having a trade surplus with the US and wants to drastically turn that around.

Although China is on top of the US hit list, Malaysians cannot be complacent.

First, in any trade war between giants, Malaysia will probably be caught in the cross-fire.  For example, if some Chinese exports are blocked from entering the US, Malaysian companies supplying components to the Chinese companies manufacturing the exports will have their business reduced, and jobs in Malaysia will be lost.

But more importantly, Malaysia is on the “hit list” of 16 countries targeted by the US for investigation whether they have cheated or used unfair practices in their trade with the US.

A US Commerce Department report on these countries, and what actions should be taken on each of them, if found “guilty”, is due anytime now.

Those countries with which the US has the biggest trade deficits are on the list.  In 2016, the US had a US$24.8 billion deficit with Malaysia; it exported US$36.6 billion to Malaysia but imported US11.8 billion, according to the US Census Bureau.   The deficits were US$22 billion in 2015, US$17.5 billion in 2014, and US$11.5 billion in January-June 2017.      

We are by no means among the countries with the largest surplus against the US, but US$25 billion is not small.

Countries with the largest trade surplus vis-a-vis the US are China (US$347 billion in 2016), Japan (US$69 billion), Germany (US$65 billion) and Mexico (US$63 billion).

Other Asian countries being probed are Thailand, Indonesia, India and Vietnam.  Many are outraged they are being investigated for being “trade cheaters.”    

“Malaysia is not taking advantage of the US in our bilateral trade”, and the bulk of Malaysian exports to the US are electronic products made by US companies, Second Trade and Industry Minister Datuk Seri Ong Ka Chuan told The Star in April.

That is true.  The US companies are indeed using the cheaper labour in Malaysia and enjoying higher profits by producing here and exporting components back to the US. That doesn’t qualify us for being trade cheats.

But in Trump’s worldview, the relocation of American companies abroad is itself a corporate sin.  “Thousands of factories were stolen from our country,” he declared, when announcing the probe on “cheaters.”

The outcome is thus unpredictable. The report may exonerate Malaysia.  However it may instead recommend measures to “punish” the country.   We then need to plan with the other victims on what counter-measures to take.

Another sign of imminent trade conflict is the recent signal that US trade officials are planning to revive the American trade weapon known as “Section 301”.

The US often made use of Section 301 of its domestic trade law in the 1980s and early 1990s to threaten and punish its trade partners whose exports troubled local producers or whose practices were seen as unfair.

To the rest of the world, the unilateral actions under Section 301 were seen as outright protection and were feared and detested.  One key reason many countries agreed to set up the World Trade Organisation was to counter Section 301; they were assured Section 301 and actions under it would become illegal under the new WTO rules.

Since the WTO’s establishment in 1996, the US has restrained itself from using Section 301, except in some cases where it was successfully challenged at the WTO.

If the Trump administration were to revive the use of the hated Section 301 and apply it liberally, it would cause an outrage and trigger retaliatory moves.  That would be a straight route to increased trade protection and conflict, which the world cannot afford.

“The US trade law Section 301 violates US obligation under WTO Agreements,” said Bhagirath Lal Das, an international trade expert who was once Chairman of the General Council of GATT, the WTO’s predecessor.   “Even if no specific action is taken by the US Trade Representative in pursuance of this provision, the very existence of such a  provision in the US trade law violates Article XVI(4) of the Marrakesh Agreement Establishing the WTO.”

Another expert on the WTO, Chakravarthi Raghavan, the Editor Emeritus of SUNS Bulletin, wrote:   “Any US moves to use Section 301 of its trade law to take action (other than those allowed under WTO agreements) would be a violation of US undertakings given to a WTO panel by the Clinton administration in one of the early disputes that came before the WTO.  

Any trade action or measure has to be in compliance with WTO obligations, irrespective of whether it is in accord with US law or not.”

Trump’s officials are debating whether to use Super 301 (which they know will cause a backlash) or some other measures such as “national security protection” and anti-dumping actions. Trump will then announce how the US intends to act against those they consider “trade cheaters” which have “stolen American factories and jobs.”

Hopefully cool heads will prevail, so the actions are less harmful than the rhetoric.  Otherwise the present trade tensions may progress to trade conflict and then trade war.

It’s something we can ill afford, with the global economy in such a fragile state.  But with the US being so unpredictable under the present President, anything can happen.