EU Commission President Jean Claude Juncker threatened to retaliate with trade restrictions within days of any US import duties on steel and aluminium products. That was the firing shot to the G20 summit in Hamburg, Germany, where leaders managed to cobble together an ambivalent text on free trade. Now it seems the WTO system itself is at stake.
“We will keep markets open noting the importance of reciprocal and mutually advantageous trade and investment frameworks and the principle of non-discrimination, and continue to fight protectionism including all unfair trade practices and recognise the role of legitimate trade defence instruments in this regard”, reads the convoluted communiqué.
Whether that language will reassure World Trade Organization Director-General Roberto Azevêdo is not clear. At the start of the meeting on July 7, the Brazilian diplomat expressed worries about the future of the system of global trade rules he is the guarantor of.
“Trade sanctions and similar security-related measures have been adopted for decades. What truly concerns me is the fact that these measures are finding their way into the WTO dispute settlement system, which could cause irreparable damage”, said Azevêdo.
The US administration has missed several self-imposed deadlines in its ongoing ‘Section 232’ investigation on whether imports of steel and aluminium are a threat to the country’s national security. Washington postponed a final decision to after the G20 summit.
A positive answer from the US administration “would hit Canada, Mexico, Germany, South Korea and Japan more than China”, the main target country for the White House, explains Chad Bown, Senior Fellow at the Peterson Institute for International Economics in Washington.
Unusual EU tough talk
The EU has been watching anxiously what is being prepared on trade policy in the United States since Donald Trump took office. After all, the US is Europe’s main export and investment destination.
In the first months of 2017, there were plans for a Border Adjustment Tax – which now appear lost in the meanders of Congressional decision-making. The current running concern is ‘Section 232’.
Until very recently EU leaders kept a low profile on EU US trade issues, refraining from making bold statements on the Trump administration’s trade plans. But in recent weeks, the EU leadership, known for preaching rules-based trade, respect for WTO rules, openness and cooperation, has adopted a very different tone.
The EU has announced it is ready to go for full-out tit-for-tat trade retaliation should the US go ahead with imposing tariffs under Section 232. There are reports that Brussels is targeting US agricultural products, food, and beverages.
Juncker, at the start of the G20 meeting told reporters: “I don’t want to tell you in detail what we’re doing. But what I would like to tell you is that within a few days – we won’t need two months for that – we could react with counter-measures.”
“I am telling you this in the hope that all of this won’t be necessary. But we are in an elevated battle mood”, said Juncker.
The Juncker statement clearly alarmed Azevêdo: “I urge leaders to be exceptionally cautious – both when deciding to adopt such measures, and also when responding to them”, the WTO chief said.
China trade defence
There were other trade tensions at the G20, namely those surrounding a standoff between China and Western countries over its ‘market economy status’ in the WTO. The US, Japan, the EU, and others criticise persistent industrial overcapacities as China keeps on pumping subsidies into distressed sectors such as steel, and thus flooding world markets with goods whose prices are distorted.
This is why Washington and Tokyo do not want to come clean on a promise they made in 2001 to China to start treating its imports like those of other WTO members in their trade defence and antidumping investigations. Instead they continue to treat China as a so-called ‘non market economy’. This means antidumping duties in Chinese imports are systematically higher than normal, something Beijing wants to see an end to.
China is now suing the EU and US for missing those December 2016 deadlines in the WTO’s dispute settlement. China is also putting a lot of pressure on the EU and individual member states to move faster in an ongoing politically convoluted legislative process to comply with China’s WTO accession protocol.
The US fears losing the WTO case, which is still in its preliminary stages. United States Trade Representative Robert Lighthizer, a long-time critic of the WTO’s Appellate Body, which he thinks infringes US sovereignty, is now pushing for a ‘reform’ of the dispute settlement system.
The outcome and consequences of the China market economy status cases will be defining for the future of the organisation.
“If China’s complaint against the US goes to the dispute settlement body and the ruling is that [non market economy] treatment violates US obligations, there is no way that the United States would abide by that decision”, wrote Dan Ikenson, Senior Fellow at the Cato Institute in Washington in an e-mail to Borderlex.
“That, to my mind, would be license for China to ignore similar findings against its policies”. But if the dispute settlement body came down in support of the US or the EU, “China would feel massively affronted and deceived and likely would lose faith in the WTO”, Ikenson added.
Whether the EU’s talk of swift retaliation is only bluff – a means to respond to Trump strongman rhetoric with similar strongman rhetoric – remains to be seen.
Immediate retaliation such as envisaged by Juncker would be WTO-illegal.
Article XXI of the GATT, the WTO’s founding treaty, allows members to take any trade measures necessary to protect their security interests.
“The test under GATT is whether the US considers that this is necessary to protect its essential security interests. That is a subjective test, but that is not unlimited”, explained Lorand Bartels, Senior Counsel at Linklaters in London.
Also under GATT rules, a national security exception is only permissible in three situations: when it is about trade in fissionable articles, when there is a war, when the matter is “relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment”.
WTO rules also allow trading partners hurt by a country’s protectionist measures to retaliate with countermeasures. But before doing so they must go through the WTO’s dispute settlement system, be proven right, and then, at the end of the process, authorised to retaliate. The measures must be proportionate to the damage incurred. The entire process can take several years.
That’s why the national security dimension of the US threat of trade barriers could bring the WTO system to the brink of collapse. Accordingly, WTO members have used the national security exception sparingly.
Whether the painstaking compromise building process that led to the G20 communiqué and Juncker bluster will do the trick and make the Trump administration refrain from Section 232 measures remains to be seen.
“My big concern is with Trump’s lack of commitment to the WTO & his direct weakening of the system”, tweeted the PIIE’s Chad Bown.