Trump's Tariffs: The looming risk of global trade war

Muhammad Mahmood | Published: April 15, 2018 21:20:08 | Updated: April 18, 2018 20:06:26

President Donald Trump since January this year has announced a series of tariffs, starting with solar panels and washing machines and gradually escalating tariff measures to incorporate now aluminium and steel. Since the signing of the Smoot-Hawley Tariff Act of 1930 (the Act encompassed over 20,000 imported goods), that precipitated the Great Depression  engulfing the whole world, the US appears to be once again turning to protectionism. We are all also aware of the far more dangerous consequences of the Act which led to the World War II. Already retaliatory measures by China and US allies in Europe have started to take shape and as tit-for-tat measures intensify, this can only lead to trade war which can escalate into military conflict.

It is now fairly clear that President Trump's action can threaten to bring down the entire post-war global multilateral trading system which US played the leading role to put in place beginning with the General Agreement on Tariffs and Trade  (GATT) and finally establishing the World Trade Organisation (WTO). Now the Trump administration regards that very system it helped to create is contributing to weaken the economic position of the USA in relations to its old rivals like Germany and Japan and other emerging ones, in particular China.

Trump's proclamation of tariff measures against importation of aluminium and steel was made under "national security'' provisions of a piece of legislation introduced in 1962. The provision clearly violates WTO rules. But Wilbur Ross, the US Commerce Secretary, believes that the WTO provisions do make an exception on the grounds of national security. It is true there are exclusion clauses to WTO rules, but this one is not one of those. The USA has always interpreted rules relating to free movement of goods in its own way as it did with Japanese cars in the 1970s and 1980s. When Japanese cars posed a serious competitive challenge to US car manufactures in the US market, the US came up with a new trade restricting provision called "Voluntary Export Restraint" or VER. The argument was very simple that the GATT provisions did not include any penalty measures for restricting exports but only on restricting imports, so if Japan did not restrict car exports to the USA, it would bring in penalty measures on the basis of Japan dumping cars in the US market. While VER did not violate the letter of the rules, it definitely violated the spirit of the rule as the measure restricted the free movement of goods. The economic effects of a VER are similar to that of a quota.

 Furthermore, to deal with huge trade deficits with Japan in the 1980s, the USA forced Japan to revalue its currency which directly contributed developing a bubble economy in Japan in the following years. The current US Trade Representative Robert Lighthizer was also involved in the trade dispute with Japan at that time. The USA has a propensity to ignore the WTO when its ruling goes against it. When the WTO ruled against the USA on President Bush's 30 per cent tariff on steel on the national security ground in 2002, the USA just ignored it. But that type of bullying tactics are unlikely to work with China.

Trump's decision created dissension within the administration. His National Economic  Council head Gary Cohn resigned over his opposition to the tariff measures. Criticism of Trump's policy has also been voiced within the Republican Party. But such opposition arose from the standpoint that these measures should be wholly directed against China, not US allies. This anti-China agenda is increasingly driven by anti-China hawks like Commerce Secretary Wilbur Ross, Trade Adviser Peter Navarro, US Trade Representative Robert Lighthizer and  National Security Adviser John Bolton, with Lighthizer being in the driver's seat. These men have an obsession with China and firmly believe that China is undermining America's capacity  to become great again. These people, including their President, are behaving in a manner as if halting China's progress  is the only key  to achieving America's greatness.

For these champions of "America First" to "make America great again'', the  trade conflict with China is more than the US trade deficit of US$375 billion with China (when Chinese exports to the USA adjusted for imported inputs from other countries, including the USA, that go into those exports, the trade deficit comes down to US$200 billion). For them continuing economic growth of China and the consequent China's move into high-tech products in the areas of communication, robotics, artificial intelligence and pharmaceuticals is considered as an existential threat to US economic and military dominance. Navarro made it clear in a radio interview that if China seized the high ground technologically, the US did not have a future both economically and militarily. Trump's national economic adviser Lawrence Kudlow was even more to the point when he said "Technology is everything to this country. We can't just let China willy-nilly steal our technology''. Beneath all these rhetoric, the central concern  remains that any technological advances made by China are considered as a threat to both economic and military supremacy of the USA - the accusation of technology theft is just a smokescreen to justify its anti-China tariff policy. The US is in full combat ready mood to counter China's "Made in China, 2025" Policy to transit into a high-tech economy. It is increasingly becoming clear that the USA will use all possible means to prevent that happening even if that means plunging the world into an economic recession that we have not witnessed since the Great Depression of the 1930s.

More alarming is that under such circumstances a global armed conflict can not be ruled out. The US aggressive stance against China is further demonstrated by the National Security Report, 2017 which identifies China as a "strategic competitor''.

China has responded in kind by imposing 15 to 25 per cent tariffs on 128 US products. This Chinese response of initial tariffs on about US$3 billion is very modest compared the US tariffs on US$60 billion worth of Chinese goods. Now the USA has threatened to impose tariffs on a further US$100 billion of Chinese goods in response to China's decision to target 106 agricultural commodities including soybean. While both sides are talking of striking a deal, nothing seems to be happening on the ground and this has also been confirmed by Chinese officials. On the latest count Trump has threatened punitive tariffs against Chinese goods amounting to US$150 billion and China so far China targeted US$50 billion of US products but carefully crafted to hit Trump voter base of soybean farmers and auto workers.

As the trade dispute increasingly taking the shape of a slow motion trade  war at this point in time, both sides are seeking allies with particular focus on Europe. China canvassing the case that China and the European Union (EU) must stand together with a strong position  against protectionism and defend the rule-based multilateral global trading system which the USA is currently undermining to the point of making it unworkable. But Kudlow appears to be on a war footing against China. He said that the US could make a deal with China only if other countries joined the US action against China. He described  it "a trade coalition of the willing'' for actions against China; a rhetoric reminiscent the US invasion and occupation of Iraq in 2003. Kudlow's target coalition partners  are primarily Germany and France. The French President Emmanuel Macron will be on an official visit to the USA very soon and the German Chancellor Angela Merkel  will also be there possibly soon after the Macron's visit. All eyes will be focused on these visits which will tell us how the Europeans are going play this game in the face of the metal tariffs that could come into effect next month negatively impacting on EU exports to the USA.

President Trump in his bid to "make America great again'' seems to be using his tariff measures to kick start manufacturing to rejuvenate a languid economy. In the process China has become his rhetorical target and accused China of undermining America's capacity to become great again. His view is grounded more in trying to forestall continuing economic and military decline of his country. No wonder he framed his tariff policy within the parameters of national security rather than using sound economic logic. On the domestic front, even after one year in office, there is no evidence to suggest that any improvement in  the quality of life for the very people who voted him to power -  high inequality and joblessness continue. If Trump is determined to press ahead with his tariff policy, that will tear up the rule based global trading system thus creating the conditions for a global trade war.

Muhammad Mahmood is an independent economic and political analyst.

Share if you like