If countries are allowed to take punitive action at will when disputes with trade partners arise, such moves could trigger chain reactions of retaliations and counter-retaliations, creating endless trade wars all over the world.
This unilateral, retaliatory approach to trade rows would endanger the very foundation of free trade and put the world economy at risk of falling into utter confusion.
Acting as a bulwark to prevent such a situation is the World Trade Organization’s dispute settlement mechanism.
Under this system, countries can file unfair trade complaints about actions and practices of other countries with the WTO, which, acting like a court, hears and decides the cases.
As the WTO-sponsored Doha round of multilateral trade talks has fallen through, major countries have shifted the focus of their trade policies toward negotiations for bilateral and regional trade deals.
Still, the WTO is considered to be the linchpin of the global free trade system because of its dispute settlement function.
Does U.S. President Donald Trump’s administration intend to destroy this last bastion of free trade?
The Trump administration’s report on its trade policy recently submitted to the U.S. Congress downplays the importance of the WTO’s role in settling trade disputes.
“Even if a WTO dispute settlement panel–or the WTO Appellate Body–rules against the United States, such a ruling does not automatically lead to a change in U.S. law or practice,” the report says.
In addition, the document touted Section 301 of the U.S. Trade Act of 1974 as a powerful weapon for trade battles.
“Properly used, section 301 can be a powerful lever to encourage foreign countries to adopt more market-friendly policies,” argues the report, titled “The President’s 2017 Trade Policy Agenda.”
It is a provision of the U.S. trade law that Washington started resorting to in the 1980s, when the United States was locked in fierce economic conflict with Japan. It allows the U.S. government to take unilateral action to punish what it considers unfair trade practices of other countries. Many experts now view this measure as a possible violation of the WTO rules.
The Trump administration’s arguments concerning these topics are tantamount to an arrogant declaration of a unilateral stance toward trade disputes. The administration has effectively declared that it will ignore international rules and agreements if they are disadvantageous to the United States, and that it will set the rules and decide whether other countries are violating them.
Under the slogan of “America First,” the Trump administration has shifted the focus of its trade policy from multilateral trade talks to bilateral negotiations, withdrawing from the Trans-Pacific Partnership trade liberalizing pact. The Trump White House has made it clear that its trade agenda will be aimed at creating new frameworks favorable to the United States.
But trampling on established international rules would be a far more dangerous game.
The Trump administration should immediately withdraw the report. It should restrain itself from committing a folly that could engender the corrosive kind of global wave of protectionism that led to World War II.
Behind the report are specific policy measures. The Trump administration is considering plans to impose retaliatory tariffs on imports from China, the largest source of the huge U.S. trade deficit, and introduce a “border adjustment tax” to reduce the tax burden on exporting companies while increasing it on importers.
Experts have pointed out that both measures could violate WTO agreements.
The United States itself would take a massive hit from any trade war of tit-for-tat reprisals with China, with which it has wide and deep economic ties.
The envisioned border adjustment tax could put a strain on the finances of American households through its effects on the retail industry, which imports enormous amounts of foreign goods.
Can the Trump administration not see this simple and clear reality?
Countries should join forces to put collective peer pressure on the United States to change its mind. Japan should lead this campaign.
Prime Minister Shinzo Abe has claimed he has built a good working relationship with Trump through their meetings. If so, he should use it to give him straightforward advice to help him see things from a proper perspective.