U.S. trade policy is roiling markets. At the end of March, the U.S. stock market tumbled 700 points in a single day on news that President Trump would impose tariffs on Chinese exports. A degree of volatility and uncertainty has continued since then as the tariffs continue to make news. Canada, China, Europe, India, and Mexico are all preparing to retaliate.
There are actually two sets of tariffs wreaking havoc at the moment. The first, on steel and aluminum, came under Section 232, a provision under the 1962 Trade Act that allows the president to protect U.S. industry for national security reasons. The second, on Chinese exports, was triggered under Section 301 of the 1974 Trade Act, a “unilateral” measure not used in decades. Taken together, these tariffs have baffled businesses, created uncertainty at home and abroad, and sown doubts about Washington’s commitment to free trade.
Yet the global economy is not descending into chaos. That’s largely because the protagonists are more constrained than the headlines suggest. Indeed, despite threats of major retaliation, the World Trade Organization (WTO) tightly restricts what countries are allowed to do. In other words, the legal discipline of the WTO makes things more predictable than they appear. Here’s why.
To protect U.S. steel and aluminum makers, President Trump invoked national security under Section 232. This is a hard sell: The vast majority of the country’s imports of steel and aluminum come from allies. The U.S. might have taken a “safeguard” action instead, which restricts imports that cause significant harm to a domestic industry, but this would have required that compensation be extended to countries targeted by these tariffs. What China, Europe, and the complainants are doing at the WTO is redefining Trump’s Section 232 tariffs as a safeguard in order to take compensation, via retaliatory tariffs, that the U.S. has failed to offer. In response, the U.S. is likely to challenge this reinterpretation, as well as the value of the retaliatory tariffs.
The bigger worry is that the U.S. will end up defending the Section 232 tariffs by invoking Article XXI of the General Agreement on Tariffs and Trade (GATT), titled “Security Exceptions.” Back in 1947, the drafters of the GATT (the predecessor of the WTO) sought to give member countries a way out of their free trade obligations if national security was at stake. It’s what deters Russia from bringing a WTO case against Australia, Canada, the EU, and the U.S. over their sanctions for its incursion into Ukraine. Were the WTO to, for the first time, rule on the meaning of GATT XXI, because of Trump’s steel and aluminum tariffs, the fear is that the institution won’t get things right. If the WTO says no to Trump, this will come across as a rebuke of Washington’s ability to define, for itself, its national security interests. This is why, in another WTO dispute involving Russia against Ukraine, where GATT XXI also looms large, the U.S. has submitted testimony stating that “there is no basis for [a WTO] Panel to review that invocation or to make findings on the claims raised in the dispute.”
If, on the other hand, the WTO says yes to Trump, this will incentivize protectionism under the guise of national security. India, for one, is eager to see how far this logic can be pushed, and it will have a front-row seat at a WTO panel, having filed its own case against the U.S.
Bad cases make bad case law. There is no case law on GATT XXI. Trump’s Section 232 tariffs, which will mainly hurt U.S. allies, shouldn’t be the dispute on which the WTO cuts its teeth on this important article.
The complainants should tread carefully as well. Their retaliatory threats are premised on reinterpreting Trump’s Section 232 tariffs as a safeguard. This is creative, but it’s for the WTO to decide. To act unilaterally runs against WTO law and, ironically, would undermine China’s other WTO case against the United States: the Section 301 tariffs.
This is actually the second iteration of a WTO dispute filed by Europe in the 1990s. Then, as now, the crux of the matter is whether a WTO member country can judge the “guilt” of a trade partner for alleged infractions, or whether only the WTO can do this. To avoid having Section 301 struck down in 2000, the U.S. agreed that it would always await a WTO judgment before enacting punitive tariffs. China’s challenge today says that the U.S. isn’t doing this. Importantly, the U.S. is sympathetic to China’s view. At the end of March, Washington quietly filed a dispute against China over intellectual property so that, in theory, it could await a WTO ruling. If the U.S. doesn’t wait, other countries will innovate their own unilateral tariffs, bringing the rules-based global economy to a standstill.
There are no good moves available to the protagonists other than to negotiate their way out of this mess. Some say that Trump’s plan all along was to force negotiations; if that’s the case, there were far less risky ways to do it. For example, steel is a problem every few years, largely because no country wants to be the last market open for distressed exports. A framework agreement that gets at this problem, rather than addressing the symptoms, would be a political winner. Likewise, the Section 301 tariffs are being used to address tensions that have more to do with investment than trade. Trump would do well to restart negotiations over a U.S.-China bilateral investment treaty (BIT). After all, Trump’s concern with issues like forced technology transfer was already addressed in the 2012 Model U.S. BIT.
Recent trade tensions serve as a poignant reminder that the global economy is not borderless. The good news is that the WTO’s legal disciplines are working. For all the talk of trade wars, the global economy looks nothing like it did in the 1930s.