Trump’s Tariffs Presage a World With No Rules

Port of Hamburg, Germany. Photo: Getty Images.
Port of Hamburg, Germany. Photo: Getty Images.

On 1 June, the Trump administration announced that exemptions on steel and aluminium tariffs that for the EU, Canada and Mexico would not be renewed. That these tariffs have gone into effect is the latest of many indications that the US government has moved away from supporting the free-trading system, and is instead seeking to attempt to maximize its advantage as a large, diversified economy.

This stance creates a much more dangerous trade landscape. It also rewards larger countries and creates particularly hard choices for the United Kingdom.

A world with no rules

These tariffs, whether by coincidence or design, continue President Trump’s ongoing efforts to undermine the legitimacy of the World Trade Organization (WTO) dispute settlement process.

The tariffs were ostensibly levied on national security grounds, and the WTO allows for trade policy to protect industries relevant for national security. But this has been invoked so rarely and narrowly that there is little precedent as to what constitutes a legitimate national security concern.

Indeed, the WTO will be wary of finding against a state that invokes national security concerns – it is not a politically sustainable position for an unelected international body to claim it understands a state’s national security needs better than the state’s own government, no matter how implausible the justification might be on its face. President Trump has already said he will withdraw the US from the WTO if they receive an unfavourable ruling, and such a ruling would provide a justifiable reason.

Meanwhile, the Trump administration refuses to approve any new members of the WTO Appellate Body, which adjudicates disputes. This will leave it without a quorum to decide cases against the US, China or India when the next Appellate Body member’s term expires in September, and without the requisite three members to adjudicate any disputes by the end of 2019.

Therefore, barring any changes to US policy, the WTO appellate system will effectively cease to function properly before the year is out. In this context, it is worth noting that WTO has no binding power on countries to force them into compliance, but instead designates a ‘proportional’ protectionist response that can be meted out by other WTO members as retaliation. In ideal circumstances, this allows for retaliation in a predictable, proportionate manner, but preventing a tit-for-tat escalation.

In a world where there are no internationally predictable rules, most countries faced with protectionist actions, crudely, have two options – retaliate or concede. If they choose to retaliate, the optimal strategy is to cause enough pain to the political leadership of the protectionist country that they will back down. This is the course of action that the EU and China have so far taken, with the hope that powerful political constituencies in the US will successfully lobby the administration to change course.

However, this can only be effective for large economies that the US exports to significantly. For smaller countries without significant leverage, the alternative is to concede and try to negotiate a favourable settlement, which will still be asymmetrical. This course of action was taken by South Korea in response to the tariffs, which agreed to export quotas on steel in exchange for a permanent exemption.

The case of the UK

This situation only underscores the weakened position of the United Kingdom in developing in an independent trade policy after leaving the EU. As a comparatively small market, the UK is more likely to be in a position like South Korea where they will need to concede to demands by larger economies (not just by the US, but, compared to the status quo, the EU).

Some, including the shadow international trade secretary, have argued that by remaining in the customs union, the UK will be able to maintain the benefits of scale in negotiating as a bloc in collaboration with the EU. However, this is far from guaranteed – Turkey did not receive any exemption from Trump’s tariffs, despite being in a customs union with the EU. If the UK wished to remain in a customs union, it would need to secure an understanding with the EU that they will negotiate on their behalf in trade disputes – an understanding that is not likely to be forthcoming.

Otherwise, the UK faces the worst of both worlds – unable to offer concessions as a small country, but unable to benefit from the leverage of being in a large bloc. The discussion of how to engage in a less orderly trade system has been a minor concern in the Brexit process so far, but in a world where the rules-based order is receding, it now looms larger.

Matthew Oxenford, Research Associate, Global Economy and Finance.

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