Two years ago, the WTO’s dispute settlement body found that the US had flouted its commitments when it imposed levies on $360bn of Chinese imports. The WTO panel ruled that US tariffs were discriminatory and excessive. Fast forward a year, the WTO says that Trump’s US aluminium and steel tariffs broke global trade rules, saying the duties did not come “at a time of war or other emergency”. The US in turn said it stood by the tariffs and “strongly rejects” the ruling and wouldn’t remove the measures.
The US may have cause for its beef with China. China accounts for around a third of USITC dumping investigations, significantly more than Korea, India, and Mexico combined. The most investigated industries include primary metals (eg steel), chemical products and various types of manufactured goods. The US during Trump saw China as a competitor and had plans to utilise trade tools to defend its own position in global trade. This was despite the threats of retaliation from China.
An example of an earlier retaliation was in 2009, when China began an investigation into US chicken parts dumping, two days after Obama imposed tariffs on Chinese tyres. Then in 2018, China announced an investigation into US sorghum exports two weeks after the US announced tariffs on Chinese solar panels and washing machines. In both cases, the US exports targeted by China were worth only a fraction of the imports targeted by the US, but focused on politically sensitive agricultural sectors, an achilles heel of the US trade policy makers.
That said, some trading partners have in some cases waited for the WTO to rule before imposing retaliatory tariffs. These cases were generally drawn out and often spanned several years to the disgruntlement of the trading partners. No surprise then, when in 2017 Trump’s trade team escalated the US’s trade battle with China, Trump weighed going it alone without the WTO, which forced the WTO to reexamine the future of its role in global trade.
Trade war in the form of retaliatory tariffs can gradually ratchet up to the disadvantage of all involved. US exports to China can sharply decline following retaliatory tariffs. When coupled with modestly increasing imports, this can push the trade deficit with China much higher. Are the negative welfare effects of tariffs an acceptable cost in exchange for a more robust domestic manufacturing sector? This, despite the evidence that the tariffs have not boosted manufacturing employment or output even as they increased producer prices.
In 2018, thanks to Trump’s trade policy, the US experienced substantial increases in the price of intermediates and final goods. There were also extreme changes to its supply-chain network, less choices in the availability and the variety of imported goods, and a complete passthrough of the tariffs into domestic prices of imported goods to the detriment of domestic consumers.
In addition, imposition of tariffs forces trade to be redirected and this reorganisation of global value chains places large costs on firms that have established production in both the US and China. This means having to move facilities to other locations as well as finding alternative sources of import and export destinations. The impact doesn’t just stop there, other countries not targeted by tariffs also respond by (opportunistically) raising their prices and this contributes to global inflation.
A Federal Reserve 2019 paper in fact found that the positive impact from the traditional import protection channel is completely offset in the short-run by reduced competitiveness from retaliation and higher costs in downstream industries. Roughly half of US imports are intermediate goods and not finished products. Tariffs will increase the cost of production or imported foreign components and therefore, these inputs will need to be sourced domestically. (E.g. around 1/3 of auto imports for finished cars or trucks used at US factories are intermediate products.) The larger the share of non-substitutable intermediates, the more problematic tariffs are for the firms.
The latest development in this saga is the retaliation by China in response to the US’s semiconductor controls. China has filed a dispute with the WTO to defend its “legitimate rights and interests” after the US introduced sanctions making it harder for China to buy or develop advanced semiconductors. With the suspension of the Appellate Body though, it is unlikely any further actions will be taken to address this complaint and it seems like this dispute will not be resolved via the platform provided by the WTO.
Biden had expounded the need for allies to work together in reforming global trade and yet the US has made it such that the most important disputes are resolved away from the mechanisms of the WTO, supposedly the symbol of a global cooperative effort at sustaining a rules-based trade system.
I think this is a short-sighted mistake made by the US. As it makes China the sole focus of its trade policies it impairs the WTO’s role in global trade, whether unintentionally or deliberately. The nature of trade is that it is a global effort despite the cries of the death of globalisation.
We need to understand that the demographic trends of countries where some will experience population ageing much sooner means they will have to rely on the younger workforce of other countries. The flow of the global value chain means that the calculations of where the intermediate goods will come from is as important as where in the world it is best to place production facilities. More natural disasters mean that factories must be globally dispersed to build strong supply chain resilience.
All this, and much more means that trade giants must consider all trade participants, even the small countries and not shape their policies only in the adversarial context of another trade giant. To that end, the credibility and facility of the WTO should be restored or made even better.
The prosperity of future global trade rests on strengthening the trade ties of all the nations. This cannot be a zero-sum battle played by two giants who, in their obsession with their trade war, are excluding all the other trade partners in their calculations.
EightAteEight 