The Trade War Has Claimed Its First Victim
Tariffs from the United States, Canada, China, Mexico, and the EU may have damaged the WTO beyond repair.
The World Trade Organization (WTO) might be the first victim of the trade war between China, the United States, and the European Union. Today, each is in flagrant violation of its rules, and the institution’s credibility as the protector of a rules-based trading system is in serious doubt.
U.S. President Donald Trump initiated the trade war in March when he announced the imposition of a 25 percent tariff on steel imports and 10 percent tariff on aluminum imports from most countries. In May, he expanded the duty to include imports from Canada, Mexico, and the EU. In a move that surprised few, China reacted by imposing tariffs of its own on an equivalent volume of steel and aluminum imports from the United States. Canada, Mexico, and the EU eventually joined China in retaliating, too.
As legal cover for its decision, the United States invoked a rarely used WTO clause that allows members to suspend some trade concessions on national security grounds. Trump’s tariffs undoubtedly violated the spirit of the clause—it is hard to see how steel and aluminum imports that mostly come from friendly nations endanger U.S. national security. But WTO scholars agree that Trump did not violate the letter of the law, which means that he will probably get a pass.
Even so, several WTO members, including Canada, China, Mexico, Norway, Russia, Turkey, and the EU, have requested that the organization establish a dispute panel to review the United States’ new trade barriers. Washington’s defense has been quite clear: According to the national security clause, the WTO cannot “prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests,” and only the United States can decide what is required to protect those interests. As such, not only are its actions valid under WTO rules, but they are also, in fact, beyond review.
Things aren’t as complicated when it comes to Canada, China, Mexico, and the EU. WTO rules require that whenever one member country believes that another has violated its trading rights, it must bring the matter to the WTO Dispute Settlement Body. Only this body can authorize retaliation. Since these countries acted wholly unilaterally in retaliating to Trump’s gambit, there is no question that they broke the rules. Unsurprisingly, the United States has already formally asked the WTO for a review.
Of course, the United States hasn’t been as careful to keep on the right side of the law in every case. Following the steel and aluminum tariffs, by the end of September, the United States had imposed subsequent tariffs on imports from China worth $250 billion. (China, naturally, responded in kind.) This time, the president used U.S. law—Section 301 of Trade Act of 1974—to justify the decision. As a result of a 2000 case brought to the WTO by the EU, though, the WTO had already deemed trade restrictions imposed under this law invalid. As such, the United States is not even close to being in the legal clear this time, but it isn’t obvious that it will matter.
In short, there’s clear writing on the wall for the WTO and the multilateral trading system. It is telling, after all, that in instigating the trade war, the United States simply talked its way around longstanding trade rules and that, in responding, its trade partners didn’t care if they broke them. It is similarly worth noting that the United States was happy to break the rules itself the second time around. If the WTO does decide to review the United States, then Washington could simply walk away from the organization. And if it doesn’t, any country could justify future trade restrictions as being in its national interest. Meanwhile, if the WTO rules that Canada, China, Mexico, and the EU violated its rules while giving a pass to the United States, these countries may choose to leave the organization themselves.
Even if reviews by the Dispute Settlement Body don’t become a sticking point, the issue of the larger and more acrimonious dispute between the United States and China remains. By all indications, Trump is in no mood to back off his trade war. Indeed, his administration’s recent success in renegotiating NAFTA is likely to embolden him. At the same time, China has become progressively more aggressive and belligerent in promoting its own narrow self-interest.
An optimist may imagine two outcomes. First, as the trade war progresses, supply chain disruptions and the associated losses of jobs and declines in output would multiply. That may eventually teach Trump and other world leaders what reasoning and analysis could not—namely, that trade is not the enemy. Second, in two years, the White House could have a new occupant who will restore the pre-trade war status quo.
But the prospects for either scenario are quite dim. In the United States, the view that China does not play by the rules and that it needs to be contained is not new. Although Trump has given it much sharper edges, the same sentiment can be found in President Barack Obama’s reports on trade to Congress. And as controversial as Trump is, there is some bipartisan support for his toughness on China. In March, when Trump first announced the decision to go ahead with tariffs on Chinese imports, leading Democratic Sen. Chuck Schumer and leading Republican Rep. Kevin Brady offered high praise for his hard line.
The United States has also long expressed dissatisfaction with the functioning of the WTO. Efforts to bring the Doha Round of trade negotiations to a close have effectively failed. Whoever is in the White House come 2021 is likely to believe that the WTO fails to adequately protect U.S. interests, that the United States is more open to trade than its trading partners (as reflected in its large current account deficit) even without WTO meddling, and that China unfairly exploits the rules of the game. In other words, the next occupant probably isn’t going to be a leading champion of the WTO, even leaving aside the damage to the organization that has already been done.
The first wave of globalization, which flourished from 1870 to the beginning of World War I, brought unusual prosperity to the Western world. But during the interwar period, the temptation for beggar-thy-neighbor tariffs was too great to avoid. A frenzy of new trade barriers, including the United States’ infamous Smoot-Hawley tariffs, eventually contributed to the deepening of the Great Depression. Today, after a long period of prosperity around the globe in the aftermath of World War II, the world may be entering a new era of trade conflicts. Where it will end remains to be seen.
Arvind Panagariya is a professor of economics and the Jagdish Bhagwati professor of Indian political economy at Columbia University.