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6 years ago

Trump's trade policy

A threat to rules-based global multilateral trading system

Photo: Reuters
Photo: Reuters

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During his election campaign and also on assumption of his office President Donald Trump has put aggressive trade policy at the centre of his approach to the US economy. His 2017 Trade Policy Agenda and 2016 Annual Report clearly outlined his fundamental approach to US's trade relations with the rest of the world. The main conclusions that can be drawn from  the report is that national sovereignty is more important than trade policy, ipso facto, US citizens should not be directly subject to decisions of the World Trade Organisation (WTO). Such a policy approach is consistent with his "America First'' policy. In effect the US representative to the WTO argued that rulings from the body that administered the dispute settlement process of the WTO should be subject to "positive consensus'' meaning that one nation (in this case the US) could block a ruling it disagrees with.

Trump is apparently very optimistic about   the outcome or, more precisely, the very positive outcome of his very protectionist trade policy as one can glean from his twitter messages and also press conferences.  He is confident in his belief that trade wars are good for the USA - in fact good and easy to win. The foundation of his belief is based on the logic that because the USA runs trade deficits, it can not lose. Surprisingly, he is not the only one who believes in that logic from  the far-right side of politics. But I have also heard the former Greek Finance Minister Yannis Varoufakis (also a Professor of Economics) from the left side of politics on a radio interview giving support to that very logic espoused by Trump. While his argument is reasonable but very controversial, it is indeed Paul Krugman who in 2009 advanced such an argument with the proviso  that  such a logic does make any sense only when much of the global economy has slipped into  recession. With low unemployment in the USA coupled with counter tariffs, that logic sounds rather very counterproductive or even very disruptive.

Now President Trump has unfurled his 'America First' flag and has hit a trifecta - China, the European Union (EU) and its two partners in the North American Trade Agreement (NAFTA). So his "Making America Great Again" (an American I met at  Heathrow airport told  me that it was actually "Making America Great Britain Again"), is on the march again - in fact America is now fighting a war to defend itself unlike his predecessors who were continually aggressing and destroying countries (mostly defenceless ones)  around the world. Countries that run large trade surpluses with the USA like China, Germany and Mexico have become targets of his greatest ire.

International trade is based on the premise that nations sell goods to each other because such exchange is mutually beneficial. We have seen since the mid-19th century there have been concerted efforts to free up trade conferring significant economic benefits to a vast number of people around the world. But the disastrous experience with beggar-thy neighbour policy (the Smoot-Hawley Tariff Act of 1930) of the 1930s made the USA and other like-minded nations to get together to put in place a rule-based global multilateral trading system in the wake of the World War II. The current global multilateral trading system had its origin in 1947 at a conference of 55 countries, including the USA, held in Havana, Cuba. This conference established the rule-based global trading system known as the General Agreement on Tariffs and Trade (GATT) which took effect from 1948. It was a compromise solution and an interim agreement. It took almost another half a century to make improvements and to create a fully-fledged global multilateral trading institution - the World Trade Organisation (WTO) in 1995. It is the lynchpin of present-day rul- based multilateral trading system with 164 members.

International trade is governed by a system of multinational agreements that member countries are not to disregard unilaterally. But Trump's trade policy signals otherwise. He has already imposed tariffs on steel and aluminium on the ground of national security and is threatening to do the same on cars. He has done so on the national security grounds by invoking the Trade Expansion Act of 1962 (section 232). Under the law the President can restrict imports on his own authority. Trump's steel and aluminium tariffs have raised serious questions about their legality and credibility. The European Union (EU) has already filed a suit against the USA in the WTO. Trump, however, used a different legal instrument - the Trade Act of 1974 (section 301) - to unilaterally impose tariffs on Chinese goods.

The Trump Administration is also trying to circumvent WTO rules on tariffs by using the WTO rule book against it. If Trump's tariffs are challenged, the US could invoke the WTO national security clause - Article XXI of GATT. The Article gives member countries an exemption of their free trade treaty obligations if national security is at stake. This self-judging clause has rarely been used, therefore WTO has never made any binding ruling on its appropriateness. If the US decides to follow the route of national security exception, the spirit if not the letter of Article XXI of GATT will be violated.

As Trump started to making good on his protectionist promises, the countries affected also imposed their retaliatory tariffs on targeted US products affecting agricultural products and also selected manufactured goods (e.g. Harley Davidson motor bike). Instead of protecting jobs, US tariffs have caused rising prices of capital, intermediate and final consumption goods at home. Trump's tariffs may actually cause job losses as firms affected by retaliatory tariffs might move overseas as Harley Davidson has decided to do.

More ominously, there are growing fears that the tit-for-tat tariff war and the USA's threat to impose more tariffs would lead to slowdown in economic activity to such an extent that the gross domestic product (GDP) of major economies of the world would fall between 1.5 per cent and 4.5 per cent leading to a global recession. Furthermore, Trump's objective of reducing the US trade deficit by protectionist measures may in effect lead to less trade everywhere, a sure recipe for a global recession.

President Trump's aggressive trade policy to reduce trade deficits is not grounded in economics. His tariffs will not necessarily lead to the end of trade deficits for the US but will likely cause more economic stress to the wider economy and will further strain relations with its major trading partners. Since the end of the World War II, the US has been at the forefront of the movement for liberalisation of trade and now it is viewed as the cause of concern for the countries who support  the rule-based multilateral trading system. There is a growing apprehension that Trump's trade policy is designed to undermine the system that has evolved since 1948.  His continuing criticism of the WTO and frequent threats to withdraw from it have now led many observers to  believe that Trump appears to be more interested in wrecking the current global trading system rather than trying to ensure the system's continued effectiveness in ensuring the rule-based trade relations among its member countries.

Muhammad Mahmood is an independent economic and political analyst.

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