The respect for trade rules is in a free fall. On April 2, China imposed additional duties worth $3 billion on imports from the US. This questionable tit-for-tat of China is in response to the additional tariffs imposed by the US on imports of steel and aluminium products from the world. The initial US action itself was on dubious grounds of national security. This may be the onset of a trade war.
While US President Donald Trump appears to target China, he has also conveyed a loud and clear message to other countries. A country would be allowed to trade with the US only on terms and conditions judged appropriate by President Trump. If this requires the US to break WTO rules, so be it. While this approach of the US to international trade and commitment to trade rules is disruptive, the response of almost all influential countries to the recent actions of President Trump has been equally disappointing.
No doubt, many countries criticised President Trump after he slapped tariffs on steel and aluminium on a global basis. However, in no time, most countries affected by the US action started queuing at Trump’s door for seeking exemptions from these tariffs. By behaving like supplicants, these countries have chosen the path of convenience, rather than correctness. In the long run, this strategy is doomed to fail. Supplicants are rarely known to change the behaviour of bullies.
What explains the tepid response of the global community to the illegal actions of the US on the trade front? The desire of countries to access the US market, and even gain if China’s exports to the US take a hit, appears to have forced them to become complicit with the WTO-inconsistent actions of President Trump.
The strategy of key global economies, except China, to give primacy to their individual and immediate export interests and thereby tolerate the illegal actions of the US might just boomerang. Perhaps not many countries retain the memory of how the lure of the US market compelled them to repeatedly acquiesce to the GATT-inconsistent actions of the US, thereby wrecking the multilateral trade rules. As these episodes of the past have a striking similarity with the response of most countries to what President Trump is doing today, it is relevant to briefly digress and recall three examples.
First, in the 1950s, the US threatened to leave the GATT, if it was not allowed to continue to provide huge subsidies to its farmers. Afraid of the biggest economy exiting the GATT, its contracting parties reluctantly granted a waiver to the US from the applicable rules. In no time, many other developed countries followed the US example. Farmers in developing countries continue to suffer from the decision of their governments to appease the US and other developed countries in the 1950s.
Second, starting in the 1960s, the US arm-twisted many developing countries into accepting quotas on exports of their textile products. No doubt, the quotas violated the basic cannons of GATT, but in their keenness to continue to export to the US, developing countries turned a blind eye to the transgressions of the US. Over time, many other developed countries started imposing textile quotas. For over five decades, the illegal quota regime significantly constrained the exports of many developing countries. During the Uruguay Round of GATT negotiations, developing countries had to pay a heavy price for getting developed countries to abolish the quota regime, which, in the first place, was GATT-inconsistent.
Third, in the 1970s, the US compelled countries that were exporting steel and automobiles to voluntarily limit their exports to it. While the voluntary export restraints (VER) could not be justified under the rules of GATT, the exporting countries opted to go along with the illegal actions of the US in order to continue to access the US market.
These three examples highlight what happens when countries choose the “convenient” repartee, instead of the “correct” response to the actions that blatantly violate multilateral trade rules. Both sets of actions—initial illegal actions by some countries and other countries acquiescing to them in order to continue to export—damaged the GATT. In the long run, the exporting countries had to pay a huge price for their “pragmatism” of the past. The WTO members appear to be at risk of repeating some of their past mistakes.
While a downward spiral into a trade war will not be the solution to the difficult times, nevertheless “pragmatic”, “convenient” and uncoordinated response by most of the WTO members will surely fail to halt President Trump’s tirade against trade rules. In fact, he may even feel emboldened to further rip the fabric of WTO rules and target other countries. Let us remember that at the behest of American pharmaceutical giants, almost each year India faces the threat of unilateral and illegal action by the US under Section 301—the provision used by Trump to target China. A few other countries may also feel tempted to resort to similar action.
China acting alone is unlikely to persuade the US to play by the trade rules. No country, big or small, will escape the consequences if the edifice of WTO rules crumbles on account of ineffective response of influential countries to the WTO-inconsistent actions of President Trump. Make no mistake about it.
Wisdom lies in WTO members setting aside their immediate quest for market access into the US and collectively sending a strong message to Trump—that if the US wants to continue to enjoy the benefits of a rule-based multilateral trading system, then he must bring his country back on the path of respecting WTO rules.