Global Trends by Martin Khor

Monday 12 March 2018

Did Trump just launch a trade war?

Last week’s action by President Trump ends the American leadership on liberal trade and may trigger a global trade war with major damaging consequences.


Last Thursday (8 March), President Donald Trump of the United States signed a proclamation to raise tariffs of steel by 25% and aluminium by 10%.

It sent shockwaves across the world not only because of the losses to metal exporters, but due to what it may signify – the start of a global trade war that will cause economic disruption and may 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 West continues very high protection of their agriculture sector which cannot compete with many developing countries.

Moreover, the developed countries champion 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.

They have argued that poorer countries can best grow richer by cutting their tariffs, which benefit 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, so too can other countries.  The basis for liberal trade is destroyed and the old rationale for protectionism is revived.

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 set lower prices for their exports. Or they can take “safeguard” measures of raising tariffs but only for a limited period to help affected local producers to adjust.

Trump however made use of a little-used national security clause (Section 232) in the U.S. trade laws to justify his big jump in steel and aluminium tariffs.  The clause allows the President to take trade action to defend security.  The WTO also has a security exception in GATT Article XXI.  

But what constitutes national security is not clearly spelt out either in the US or the WTO laws and countries can abuse this clause. 

The Trump administration tried to justify invoking the security factor by saying steel and aluminium are needed to make weapons of war.  But this 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 United States.  The exemptions for reasons unrelated to security exposes the security rationale as fake.

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 United States action was attacked. Many countries condemned the US measures being unilateral and for using 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 the over-protected domestic industry will never be able to serve its problems through protectionism.

Many WTO member states will most likely take the US to a dispute panel, and how it will rule 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 ground of security.

If it rules against the US, it will strengthen the anti-liberal trade faction and tendency in the Trump administration to ignore or even leave the WTO.

Malaysia will be affected by the new tariffs as it exports 96,000 tonnes of steel to the US.  This is small compared to Malaysian imports 30 million tonnes of steel in 2017.  (The Sun, 22 February 2018).

But Malaysia is taking a bigger blow in an earlier US measure in January to slap up to 30 per cent tariffs on solar cells and panels. Malaysia is the largest photovoltaic cells exporter to the US with a market share of 30 per cent and the import tariff will have a big impact on the solar industry, according to a solar company chief (The Star, 3 February 2018).

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 report on China’s trade and intellectual property practices issued by the Commerce Department.

If strong action against China is announced, China will take strong retaliatory action.

That may accelerate the trade war that is already on the way.