9 March 2018
Even if steel and aluminium tariffs don’t spark a trade war, the US president’s agenda will continue to carry real risks.
Matthew Oxenford

Matthew Oxenford

Research Associate, Global Economy and Finance

2018-03-09-Trump.jpg

President Trump holds up the proclamation on steel imports on 8 March. Photo: Getty Images.
President Trump holds up the proclamation on steel imports on 8 March. Photo: Getty Images.

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Until two weeks ago, the trade policies of the Trump administration were considered by markets and politicians as relatively benign, compared to his sharply protectionist rhetoric on the campaign trail.

Most of the high-profile interventions that the administration had pursued had been small, such as invoking anti-dumping restrictions against Chinese solar panels and washing machines in January, or expected, such as withdrawing from the Trans-Pacific Partnership. It seemed possible that the risks posed by Trump to the global trading system were overblown.

The US president’s announcement on 1 March of import tariffs of 25% on steel and 10% on aluminium was therefore met with shock by analysts and financial markets.

However, these tariffs represent only the most high-profile of many actions taken by the Trump administration that risk profoundly reshaping and weakening the international trade system.

Indeed, the macroeconomic effects of these tariffs themselves are likely to be minor. But, combined with other actions that President Trump has taken, they create risks for the effective functioning of the global trading system that are not all likely to be resolved or sidestepped. Even if this round of tariffs is somehow eventually moderated or revoked to the point that they do not provoke a full-scale trade war, these risks will remain.    

The most recent tariffs, if they are implemented as announced, are uniquely disruptive in many ways. Unlike previous tariffs implemented by American presidents, which usually cite ‘anti-dumping’ or other ‘safeguard’ responses to supply gluts in the affected industry, these tariffs cite national security grounds.

This is a legitimate if rarely invoked exception to WTO rules, but the justification is tenuous, given that the largest importers of steel to the United States include Canada, the EU, South Korea, and Brazil, rather than potential geopolitical rivals such as Russia or China.

Given that this justification has so rarely been invoked, its use as a defence in WTO dispute settlement is largely untested, and it is unclear how much credulity the WTO’s appellate body would extend to this justification. International bodies are generally wary on second-guessing what a sovereign state deems in its national security interests, but despite the official reasons, the public language Trump administration officials have used to defend the tariffs has generally been economic rather than security-focused.

If a dispute against these tariffs were taken to the WTO, it would reach an appellate body with a weakened position. Under normal circumstances, the WTO would decide on a proportional level of sanctions which countries are allowed to mete out in response to protectionist measures. However, Donald Trump said on the campaign trail in 2016 that he would pull out of the WTO if the US were ruled against in this way.

Additionally, the Trump administration is already sabotaging the WTO in a more subtle way. The WTO Appellate Body is made up of seven members who sit as three-member panels to adjudicate disputes brought by countries. Since the stalling of the Doha Round of negotiations in 2008, this is the most important day-to-day function of the organization. However, due to its large size, the US retains an effective veto on the appointment of new members of the body, and since 2017, the terms of three of the members of the appellate body have expired, and the US has exercised this veto power to block any replacements.

With four members currently left, the term of Shree Baboo Chekitan Servansing of Mauritius expires in September. Since there is a convention that a member cannot adjudicate on a case involving their home country, this means that after September, the WTO may not be able to effectively adjudicate against the home countries of its remaining members, which happen to be China, India, and the US – the three most populous countries on Earth.

In this context, the options of the EU and other markets become increasingly risky. While EU Trade Commissioner Cecilia Malmström has said it was the EU’s intention ‘to retaliate but not escalate’, President Trump has claimed that any retaliatory measures would be met with new tariffs.

In the absence of a neutral arbiter in the form of the WTO, there is no defence against tariffs other than retaliation, which historically has led to further escalation. Even if the dispute over these tariffs is somehow defused, without an effective appellate body in place at the WTO, any future tariff has the potential to spiral into a much larger trade war.      

However, the Trump administration shows every intention of pushing this protectionist agenda further. The president has stated that he will ‘temporarily’ not impose tariffs against Canada or Mexico in exchange for a favourable settlement of NAFTA renegotiations. But these negotiations have not made significant progress – largely due to the administration’s insistence on policies that will reduce America’s trade deficit. Connecting them to tariffs raises their risks of failure even further.

Meanwhile, a prominent voice for free trade in the White House, Gary Cohn, the erstwhile head of the National Economic Council, has departed. In contrast, the more protectionist senior adviser Peter Navarro’s influence seems to be growing.

If Trump continues along this path, the only potential backstop would be action from Congress to overrule the president – which would require a two-thirds majority in both houses. Despite strong bipartisan opposition, it does not currently appear such legislation will be forthcoming. Under these circumstances – steel and aluminium tariffs, the renegotiation of NAFTA, and Trump’s hobbling the WTO appellate body – the risks of a serious breakdown in the global trade system will only continue to increase.

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