The global economy that has just recovered from the post-2008 crisis appears to have to deal with a new big challenge which can present itself as a real nightmare to the global economic stability. The nightmare is apparently the start of a new period in which the global economic powers embark on a kind of mercantilist policy and move far away from the policies governing the international trade for the past half a century. Now the trade is grappling with structural obstacles, represented in challenges deriving from the emergence of new technologies, the flaws of the nationalist and populist approaches, and also the deglobalization in the Western world.
But there are bigger factors negatively affecting the future of the global trade. It is the American President Donald Trump’s harsh protest at impairment of the US traditional base in the global stage and also his willingness to wage a trade war against other powers since he assumed the power at the White House in early 2017. The president since the beginning rejected that remaining in the NAFTA (North America Free Trade Agreement), TPP (Trans-Pacific Pact), WTO (World Trade Organization), and KORUS (South Korea-US Free Trade Agreement) served Washington’s economic interests.
Early this year, Trump announced a 25 and 10 percent tariff respectively on the steel and aluminum imports to the country, sparking a mix of controversy, criticism, and reciprocal responses from the US trade partners, and also at home. He justified his move as a step to protect national steel and aluminum industries and creating new jobs inside the country. The main target steel exporters were China, Canada, and, Mexico. During his presidential campaign speeches, Trump over and over attacked China for its trade and economic strategies.
An array of global trade partners have chosen to respond, mainly China and the European Union, and some other countries, warning that a trade war have will severe impacts but no winners. Roberto Azevedo, the director-general of the World Trade Organization, warned that first signs of a trade war have begun to emerge.
“We are seeing the first movements toward a commercial war. It would mean a severe impact on the global economy,” he was quoted as saying on Wednesday.
A look at Trump’s stances just before making his way to the White House makes it clear that the WTO chief’s concerns are not utter pessimism. Rather, they have roots in the Trump’s negative view of the global trade body. In one of his speeches, Trump said that the WTO was created to exploit the US. The president built his argument on the claim that in every legal case at the WTO, Washington comes out losing. He even threatened that if the WTO fails to review rules to suit the US interests, he will withdraw. Any US-pressured decisions, changes, and possible US withdrawal from the WTO will leave fundamental effects on the global trade.
The US is said to have about $20 trillion foreign debts. The country has 10 percent deficit in its trade with China. While the US was busy waging wars and other adventures in the West Asia region, China powerfully pressed ahead with its business strategies, making it quite natural that Beijing after nearly two decades shows an upper hand to the US in global trade terms. Trump earlier said the Chinese membership was supposed to be based on the basic world trade principles like reforming and opening its markets for business. But the analysts believe that the US never thought that China will economically thrive that fast to transform into a major trade power on the global stage and challenge the US trade policies. So, now the US president struggles to restore the trade balance to the US advantage and decrease the US national debt using hegemonic instruments rather than utter business regulations.
He wants to foist the deficit crisis on other trade partners and involve them in business pacts that are meant to be in best US interest. This aim is brazen in the remarks of Trump who stresses that the WTO rules should change to the US advantage. Trump, during his presidential campaign, vowed to cut the Chinese exports to the US, but a year in the office shows that his only move has been accusing Beijing of dumping, blaming trade with Mexico, saying that the Mexicans should accede to agreement reviewed by the Americans. Instead of revising his restrictions, he warned the American companies that they will be fined in various ways if they transfer their operations abroad.
WTO’s role in global trade
During the world war and after it, there were efforts that wanted to sort out the inter-state political and economic relations. That was because during this period the countries grew economically, the global ties grew complicated, the states engaged in interwoven ties, and sensitivity to other actors’ economic changes increased. The first outcome was the General Agreement on Tariffs and Trade (GATT), reached in 1947, a tool regulating the trade between the countries. Some countries did business with each other based on GATT regulations for about half a century. But the agreement had no legal guarantees. This gave rise to a need for a responsible organization with a legal basis. In 1995, the WTO replaced GATT. It now has 164 members. In addition to a general agreement on tariffs and trade, the organization also devises legal regulations according to which it supervises the members’ commitments. It, moreover, settles the trade disputes between the member states.
The WTO has a set of principles, the most important of them is the “most favored nation” (MFN) status. Here is the exact words WTO agreement uses: “Most-favored-nation (MFN): treating other people equally. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favor (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.”
Another principle is that the use of non-tariff barriers in the trade like introducing rationing system and withholding importation permissions is banned. And the countries only can protect their home industries by introducing customs duties. To make sure that tariffs do not block trade, the WTO in another article repaired this principle. It suggests that after cutting non-tariff trade barriers, the states should stabilize their customs duties, and then cut them gradually. The exceptions of this article cover agricultural products in countries with payment issues, and of course do not involve steel and aluminum.
Trump’s restrictive policies are not only at odds with the spirit and philosophy of the WTO which aims at facilitating the trade between the states. Rather, they run counter to the principle of gradual tariff cutting to ensure that other countries and investors face fewer risks of investment. Trump’s tariff imposition comes after over 60 years of the GATT and 23 years of the WTO. The president of a founding country was expected to facilitate the global trade both as part of international community and as a member country. But Trump’s decisions came to surprise all.
Trump decision’s consequences
Trump’s economic policies, mainly built on neo-mercantilism, are on a collision course with the liberal order the US government as a superpower has a claim to protect. Now after a string of isolationist policies made by Trump, the ground is prepared for a global trade war. Some countries on whose imports Trump issued new tariffs promised tit-for-tat responses. The European Union, a major actor on the global trade arena, has reacted to Trump’s tariffs, warning that once the decision takes effect, it will slap with new tariffs on US goods imported to the member states. China and Canada were other parties to respond. China’s Foreign Minister Wang Yi has asserted that Beijing will not sit on its hands while Washington harms the Chinese interests. Facing strong threats, Trump gave Canada, the EU, and Mexico exemption from the new tariffs but gave them a month to find a fixed trade formula in which the US interests also observed. The deadline will end in early May. The President of the European Commission Jean-Claude Juncker on March 23 said that it looks “highly impossible” to address and resolve all the issues of contention inside only five weeks.
The future potential scenarios
If Trump finalizes his tariff threats, two scenarios are likely: Such big actors as the EU and China will take the US economic role worldwide which means a step closer to the US economic power decline. The US which accounts only for 13 percent of the global trade can withdraw from the WTO but others still keep moving within the organization. China has once said that even if Washington pulls out of the WTO, Beijing has the potentials to save it. In the event of the US withdrawal, the EU will revoke trade accords with Canada and Japan and will seek finalization of TPP-11 (Trans-Pacific Pact with 11 members) this year. The 27-member bloc is expected to expand business with Mexico and other parts of the world from now on.
Another scenario is a domino effect withdrawal of other states from the WTO and implementation of protectionist and mercantilist economic policies that will be challenging to the global trade. The US will no stay away from the negative impacts, certainly.
The US leader’s decision can also trigger trade polarizations. Despite the fact that Trump seeks to avoid such polarizations by giving tariff exceptions to Japan, which provides 5 percent of the US steel, or others including NAFTA members like Mexico and Canada, the tariff hike implies to the world that the US no longer can guarantee the international trade. This decision, beside withdrawing from UNESCO and Paris Climate Agreement and other international organizations to which once the US encouraged the other nations to join, can question the US superpower status.
But the US has fixed shadow decision makers who direct Trump’s decisions. They risk with Trump’s decisions with the premise that if the major global actors build a front and unanimously respond to the US trade policies, they can put the wrong decisions down to Trump personally and not the American state. Next steps could be impeaching him or cutting supports for him in next election to make him lose.