The prospect of a global trade war looks more real as governments react to U.S. President Donald Trump’s imposition of tariffs to balance his country’s trade books. Implicit in Trump’s decision is a rejection of the arbiter of trade practices, the World Trade Organization. While that organization is flawed, it can be fixed. Unilateral actions will ensure that a bulwark of a free and open trade system is damaged, perhaps fatally. It makes far more sense to fix the WTO, and use it to remedy unfair trade practices, than to tear it down.
Convinced that the United States has been exploited by its trade partners and that systematic abuse of those relationships has done great harm to the U.S. economy, Trump declared earlier this year that the U.S. would impose tariffs on aluminum and steel imports. He suspended application of the sanctions to facilitate negotiations, assuming that a threat of sanctions would strengthen his leverage. That assumption was wrong. Only South Korea, Brazil and Australia struck deals; the rest said that they would only discuss trade reform when the threat was lifted.
Absent progress, Trump decided last week to impose the sanctions, a decision that European Commission President Jean-Claude Juncker called “a bad day for world trade.” World leaders decried the move and almost all threatened countermeasures, bringing the world to the brink of a trade war. Canadian Prime Minister Justin Trudeau reflected their sentiment when he called the tariffs “totally unacceptable.” A German government spokesperson called the tariffs “unlawful,” adding that they create “the danger of a spiral of escalation, which in the end harms everyone.” At a meeting of Group of Seven finance ministers over the weekend, six of the seven — all but U.S. Treasury Steven Mnuchin — issued a statement conveying their “unanimous concern and disappointment” about the tariffs.
To get around a blatant violation of world trade rules — unilateral sanctions are illegal — Trump used an obscure provision of trade law that allows a country to impose tariffs if it believes its national security is threatened. That is nonsensical on its face: The sanctions primarily punish U.S. allies, countries that in some cases (Canada) have fought alongside the U.S. in every major conflict, any in many cases with which it daily shares some of its most sensitive intelligence. The U.S. counters that reaction is exaggerated, that it will prevail in a trade war, that the real offender is China, which has structured its economy to disadvantage foreign competitors, and that the WTO is ill-suited to deal with that problem.
China does pose a problem for the trade order and the WTO is poorly equipped to deal that challenge. But the U.S. strategy to address that issue is flawed. By lashing out in all directions, Washington has shattered the coalition of nations that is needed to address Chinese trade abuses. Worse, its unilateral acts allow Beijing to paint the U.S. as the bad guy, and forge a coalition against it. At a meeting of international economic officials last week, China called “on all the WTO member states to stand firm against the U.S. trade protectionism along with China.” China’s ambassador to Britain noted the “shared interests for China and Europe in safeguarding the multilateral trade regime. Only if the U.K., Europe and China stand shoulder to shoulder, will they … safeguard the international trade regime from the dangers of protectionism.”
Japan is in the middle of this muddle. The idea the Japan is an unfair trader is one of Trump’s few obsessions and U.S. officials speak openly of the desire to use sanctions to push Tokyo into bilateral trade talks. There have been recent reports that the U.S. will impose tariffs on Japanese car exports to the U.S., news that prompted Prime Minister Shinzo Abe to exclaim that “It’s hard for Japan to understand and we cannot accept it.”
In a meeting with his U.S. and European Union counterparts, trade minister Hiroshige Seko expressed concern to U.S. Trade Representative Robert Lighthizer, and afterward he and EU Trade Commissioner Cecilia Malmstrom issued a joint statement saying that such tariffs are not justified on national security grounds.
The WTO has been a remarkable success. Its 164 members account for over 95 percent of world trade, it has prompted a big drop in average tariffs among members and it can take credit for a surge in world trade. Its dispute settlement mechanism is considered one of its most important contributions to the management of trade. No one believes it is not without problems, however.
Last week, French President Emmanuel Macron called for reforming the WTO — “a complete update of the regulations which structure international competition” — a discussion that could begin immediately in the Group of 20 and G7 processes, with a goal to providing a road map at the November G20 summit in Argentina. That makes far more sense than the destructive unilateralism and tit-for-tat measures that seem to be in vogue today.