Unanimous worldwide outrage greeted US President Donald Trump’s announcement of a 25 percent tariff on imported steel and 10 percent tariff on imported aluminium. That this was a blatant violation of trade rules embodied under the WTO was a foregone conclusion.
The US reasoning that other countries’ trade practices endanger American “national security” by undermining domestic production, was clearly a charade for a protectionist measure.
President Trump however cleverly dangled the carrot of exemptions that a country could negotiate, based on criteria such as that country’s level of support for US positions in trade remedy cases at the WTO; and bilateral solutions to address trade deficit with such country.
The collective condemnation of the US action soon became muted with countries lining up for exemptions.
Carrot and Stick Policy
Canada and Mexico were first left off the hook, in view of the ongoing NAFTA re-negotiations. The US subsequently exempted the EU, Australia, South Korea, Argentina and Brazil, who have been given time until May 1 to negotiate “satisfactory alternative means” to address U.S. concerns.
A deal appears to already have been worked out with Korea, which has agreed to reducing its annual steel exports to approximately 70% of the level exported between 2015-17.
Such a quota itself is against WTO rules, which mandates countries not to impose or maintain any ‘voluntary export restraints’.
The US has also indicated it is open for similar reprieve for other countries, and India is also reportedly exploring such an exemption in bilateral talks.
President Trump, for the time being, appears to have successfully translated the threat of tariffs into an effective bargaining tool.
China, the main country in the line of the US ire, on the other hand, has retaliated with import duties of up to
25 percent on 128 food products of US origin, including pork, fruit, nuts and wine, and is currently targeting even more sensitive and vulnerable sectors: US aircraft, soybean and cranberries- all of which will have significant repercussions for American exports. Clearly, this tit-for-tat retaliation is also against WTO rules.
In 2002, similar tariffs by the U.S. against steel imports led to a dispute initiated by 16 countries, which the US lost. It does take up to 2 years for a WTO dispute to be finally decided, and a WTO decision does not have any retrospective applicability; but the initiation of a dispute in the current instance too, would have been a powerful signal of faith in the multilateral trading system.
While China has triggered WTO disputes against U.S. actions, these run in parallel to its unilateral retaliation; and the absence of collective action from other WTO Members is stark.
Trade Under Attack
Many trade economists have concluded that President Trump’s policies will only harm the US and world trade. The Washington-based Peterson Institute has estimated that the scale of the actual trade war would lead to a two-to-three percentage point rise in the unemployment rate, huge declines in asset prices, and disruption of complex supply chains and thus productivity.
However, in a world of trade anarchy, there seems to be little option but for countries to use the same tools of threat of retaliation. It is no longer a case of rules and rights and wrongs, but who can use what chip to gain a perceived short-term advantage.
The Peterson Institute in another recent study has estimated the quantum of retaliation that other countries could resort to; and estimates that India ca justify retaliation against the US to the tune of $ 300 billion. Leveraging this as a threat against specific U.S. imports, or perhaps in sectors of US competitiveness such as aircraft (where India has recently announced the largest procurement deal in the world for 110 fighter aircraft), perhaps needs to be thought through and acted on swiftly.
In a world without any coordinated collective action, the only option in the short-run appears to be an anarchic response and driving a hard bargain. In the long-term, however, this is clearly no solution. Strategic thinking, in partnership with other countries on preserving the multilateral rules-based system, is what is sorely needed.
RV Anuradha is a Partner at Clarus Law Associates, and leads the firm’s practice on international trade and investment laws.