A firestorm is raging in world trade. It was set off by US president Donald Trump announcing on March 3, that the US will levy tariffs on imported metals—25% on steel, 10% on aluminium.
A firestorm is raging in world trade. It was set off by US president Donald Trump announcing on March 3, that the US will levy tariffs on imported metals—25% on steel, 10% on aluminium. Since then, there have been threats of retaliation and counter-threats, with the major economies at the forefront. The world is clearly at risk of a trade war, and if there is one, economic recession also looms. We look at multilateral trading system rules. Then, we assess the risks of a trade war and its economic consequences. What are the rules? Where members have bound their tariffs under the WTO Agreement, it implies that they have undertaken a general commitment not to raise import duties on any goods. There are, nevertheless, certain circumstances in which they can raise import tariffs. If the imported goods are either dumped or subsidised and cause or threaten material injury to domestic industry, countervailing or anti-dumping duties may be imposed. Also, if there is a surge in imports of a particular product, causing or threatening serious injury to domestic industry, the importing country may impose a temporary duty by way of safeguard measures. In the case of safeguard measures, the rules provide for the member taking action to enter into consultation with affected members with a view to reach an understanding on the compensatory concessions to be granted for the adverse effect of the measure. If there is no agreement between members on the concession, the affected members can possibly initiate retaliatory action within 90 days of the action.
If any WTO member imposes these duties inconsistently with the provisions of the WTO Agreement, the affected members may take retaliatory measures, but only after raising a dispute and obtaining an authorisation to retaliate from the Dispute Settlement Body (DSB). Article XXI of GATT 1994, which is one of the multilateral agreements on goods annexed to the WTO Agreement, provides for security exceptions. The provision appears to give to WTO members complete flexibility to take action in the context of hostilities and other emergency in international relations. The spirit of the rule is that it is for the country concerned to define its security interests, and the action can’t be subject to quasi-judicial scrutiny in any trade body. On the past two occasions, when the US took action against Nicaragua or the EEC took action against Argentina pursuant to security interest, they imposed an embargo on all trade or suspended all imports. It was underlined at the time when GATT was drafted that the objective must be to safeguard security and not commercial interests. In 1975, Sweden tried to justify the imposition of global quotas on certain footwear by arguing that it was necessary to maintain a minimum domestic production capacity in vital industries, as such capacity was “indispensable” for supplying essential products in case of war or other emergency in international relations. But the argument was not recognised as valid and Sweden later withdrew the measure. Selective action on military supplies or on export of dual-use items may seem to be permitted. But the argument for maintaining minimum viable production in steel and aluminium to safeguard essential security interest strains credibility.
The affected countries will include those with which the US has subsisting long-term military alliances. The purpose appears to be to advance commercial interests and not to safeguard essential security interests. There is real risk of a trade war breaking out. We know that the EU is making preparations for retaliatory action. Strictly speaking, if it wants its retaliatory action to be consistent with the WTO rules, it ought to first raise a dispute and obtain an authorisation for retaliation from the DSB. The way the war drums are being beaten, it doesn’t seem EU will pursue this path. The EU says that the measure proposed by the US is like a safeguard action and it should have the possibility of taking compensatory action. But the US action is not a safeguard action and the EU action, if taken, will be in the grey as far as consistency with WTO rules is concerned, just as much as the US raising tariffs on steel and aluminium for reasons of protection of essential security interests will be. Import trade barriers result in adverse trade effects for the trading partners, but they also hurt the countries raising these barriers. The idea behind the choice of products for retaliation by the EU is to maximise the political pain and economic cost for the target exporting country and to minimise it for the importing country. EU has reportedly selected products such as Harley-Davidson motorcycles, Levi’s jeans and bourbon—produced in the constituencies of important Republican leaders. It’s obvious higher tariffs on metals will hurt downstream industries in the US.
Analysts have estimated the proposed tariffs would increase employment by about 33,000 in steel and aluminium industries, but 179,000 jobs would be lost in the rest of the economy—a net loss of 146,000 jobs. More jobs would be threatened in the areas in which partner countries take retaliatory action. Some influential Republicans are expressing worry, but the action seems to have support from the majority in the GOP. The top presidential economic adviser, Gary Cohn, has quit, reportedly because of his disagreement with Trump on this issue. At Geneva, the delegations of a number of important trading nations have urged the US to rethink the proposed measure. The WTO Director General has warned of recession if retaliatory actions are triggered and has called upon representatives to avoid the fall of the first dominoes. But all this does not seem to have weakened the resolve of US the administration on the tariffs. Trump has given the impression that he likes the sound of a trade war and seems convinced that he is going to win it. In fact, he has threatened counter-retaliation on EU auto exports if it retaliates. There will be no winners in this trade war, only losers. The situation calls for convening an emergency meeting of the G20 to counsel reason with the principal actors, in order to avoid world trade being seriously affected by the vortex of retaliation and counter-retaliation. But is anyone listening?