Trade wars: Trump’s national security argument to rock global trading system

A World Trade Organization case against the United States’ Section 232 steel and aluminium tariffs is bound to rock the global trading system, writes Jennifer Freedman.

Despite President Donald Trump’s claim that US duties on foreign steel and aluminium would safeguard American jobs and revive domestic industry, there is broad global consensus that little good would come out of the planned tariffs. Au contraire, as the French might say, such duties would distort trade, cost jobs and possibly spark a string of tit-for-tat responses that escalate worldwide tensions.

One of the main victims would be the global trading system, because the US has justified the dumping and antisubsidy tariffs on national security grounds. The representative of that system, the World Trade Organization, has long been in the gunsights of Trump, who just last week said the WTO “has been a disaster for this country”.

So what are the systemic consequences of the duties and the retaliation they are bound to bring from trade partners? Although WTO chief Roberto Azevêdo urged members yesterday to “avoid the fall of the first dominoes” in a trade war, governments are unlikely to step back.

The EU has already warned Trump to expect reciprocal strikes against American icons such as Harley-Davidson, Levi’s jeans and Kentucky bourbon if he goes ahead with the punitive tariffs while Canada – the top steel exporter to the US – will “take responsive measures to defend its trade interests and workers” if hit with the levies, Canadian Foreign Minister Chrystia Freeland said.

“The systemic concern is that at the WTO, there has been a practice of allowing countries to effectively self-define their own notions of national security and there has been an understandable deference to WTO members on this basis,” said John Veroneau, a former senior US trade official who is now at law firm Covington & Burling. “But now, there will be a growing concern that these Section 232 investigations aren’t really premised upon legitimate national security concerns.”

National security vs flag waving

Any WTO challenge of the US duties “will put a panel in a difficult position”, Veroneau told Borderlex. Even with the tradition of deference to governments deciding when national security is at issue, “a panel and the Appellate Body will be concerned about not allowing members simply to wave the national security flag and prevent any scrutiny whatsoever of the measure, even if there is deep concern that perhaps national security concerns were not paramount in the justification”.

Under rules dating back to the 1947 General Agreement on Tariffs and Trade, WTO members can raise trade barriers to protect national security without having to prove that their rationale conforms to some agreed definition of ‘national security’ or ‘national security threat’. Article XXI of the GATT – the “National Security Exception” – was added to the agreement with the expectation that it would only be invoked for compelling reasons.

The US is certain to invoke its privileges under Article XXI if the steel or aluminium tariffs are challenged at the WTO, according to Daniel Ikenson, director of the Cato Institute’s trade policy studies centre.

“The likelihood of the WTO Dispute Settlement Body issuing a rebuke of the US government’s rationale for concluding that its national security is threatened or impaired is pretty close to zero,” Ikenson wrote. “The DSB is already deferential when facts aren’t clearly established or when obligations aren’t clearly delineated. But on matters of national security, which necessarily require subjective risk assessments and nuanced analyses of murky gray areas, maximal deference would likely prevail.”

Any other outcome would put the WTO at risk, says Renato Antonini of law firm Jones Day. “The national security exception is very important to the balance of the system, and an overly restrictive interpretation of this concept would endanger the viability of the WTO system,” he told Borderlex.

Avoiding precedents

But with the US “obviously abusing the security exception”, according to Swedish MEP Christofer Fjellner, “it will be necessary to get clarification so that Trump’s decision won’t become a precedent for countries to engage in blatant protectionism claiming the security exception”. He noted that only 3% of US-produced steel is used for the country’s defence.

Indeed, as Ikenson remarked: “Any US decision to restrict imports based on the argument that an abundance of low-priced raw materials from a diversity of sources somehow threatens national security would lower the bar so significantly as to invite every other member of the World Trade Organization to invoke national security to protect favored industries.”

Still, a US loss at the WTO could have “significant systemic repercussions”, says Antonini. The White House –  already deeply critical of the Geneva-based trade body – would doubtless reject any ruling that faults the US measures and could rebuff “the WTO as a whole”, he explained.

“Even concerning the MES dispute with China, the US already took the position that a finding against the US’s claims ‘would be cataclysmic for the WTO’,” Antonini said, referring to comments by US Trade Representative Robert Lighthizer. “I guess that, in the view of the US, even stronger words would be suitable when it comes to the national security exception.”

American arm-twisting?

Laurent Ruessmann of law firm Fieldfisher believes that Trump’s decision to impose tariffs was at least partially motivated by a recognition of the WTO’s limitations, and essentially pushes trade partners to tackle the global oversupply of steel and aluminium through national measures that will end up in a common show of strength against China, which both the US and the EU blame for the glut.

“It’s basically the US saying this is definitely beyond the reach of what the WTO agreements were set up to handle,” Ruessmann said. “The US is inviting Europe and other countries to do something similar, basically impose safeguard measures, which I think the EU and others will be forced to do because of trade diversion.”

The EU is the world’s biggest steel exporter, shipping $109 billion of the alloy overseas in 2016 – more than double China’s $51.8 billion in exports – the International Trade Centre’s Trade Map shows. “China alone accounted for 33.7% of US steel imports,” ITC said. The EU had 37.5% of the world’s aluminium export market in 2016, followed by China, with a 13.6% share. The US was the biggest buyer of foreign aluminium and the second-largest importer of steel, according to Trade Map.

Much hinges on whether Trump decides to institute across-the-board tariffs, or whether he hands out exemptions to select allies and trading partners. He’s already signalled that he would consider exempting Canadian and Mexican products from the levies if the US were to get certain concessions amid ongoing efforts to retool the North American Free Trade Agreement.

But after his threat this weekend to slap a tax on European car imports if the EU retaliates, Trump is hardly sounding conciliatory toward the US’s closest and most important trade partner. Perhaps he really does believe a trade war is “good, and easy to win”.