Earlier, we brought you some straightforward bullet points from BNP who recently outlined some possible scenarios for the burgeoning trade war between Washington and Beijing.
In that linked post, we also described the extent to which the recent tech turmoil wasn’t entirely idiosyncratic and company-specific in nature. It all has a Trump-ish flavor to it and it of course came on the heels of a week that saw U.S. equities suffer egregious losses tied to the administration’s decision to slap (more) tariffs on China, an effort that effectively enshrines Peter Navarro’s view on global trade and commerce into U.S. economic policy.
What comes next is anyone’s guess, but it’s likely that Trump will continue to see protectionist rhetoric aimed at China as one of the few remaining levers at his disposal when it comes to bolstering the GOP ahead of the 2018 mid-terms.
The idea, of course, is to foist Navarro’s profoundly ridiculous China bogeyman narrative upon disaffected sectors of the electorate on the way to claiming that the tariffs are evidence that Trump is keeping his promise to protect vulnerable American industries from the “evils” of globalization. Never mind the fact that the effort, if he sees it through, will likely have unfavorable consequences for downstream industries and could ultimately prove deleterious on net for the U.S. economy to the point of negating the fiscal tailwind from the tax cuts.
Additionally, it can’t be emphasized enough that an all-out global trade war represents perhaps the most pressing threat to the “Goldilocks” narrative of synchronous global growth and still-subdued inflation. That would be the narrative that ultimately underpins whatever’s left of the low vol. regime. And to be sure, that regime was thrown into question in Q1:
Well with that as the backdrop, Goldman is out with the latest installment of their “Top of Mind” series. As a reminder, these are basically expansive takes on whatever the market topic du jour happens to be. They combine interviews with Goldman’s own employees and also with outside sources in an effort to provide a balanced and comprehensive assessment on whatever seems to be the most important question on market participants’ minds (hence “Top of Mind”).
The latest edition is called “Trade Wars 2.0” and it includes the following annotated history of U.S. trade policy, which serves as a nice reference guide:
In addition, there’s an interview with Jennifer Hillman, a former member of the WTO’s Appellate Body who also served as a commissioner at the United States International Trade Commission and as general counsel at the Office of the United States Trade Representative. Today, she’s a professor at the Georgetown Law Center.
This interview is definitely worth a read over the holiday weekend and we excerpt it below without further comment.
Allison Nathan: Much has been made of President Trump’s protectionist stance on trade, but past US presidents have also been quite active on trade. What, if anything, is fundamentally different about this president’s approach?
Jennifer Hillman: The difference is that almost all of the actions taken by President Trump of late are outside of WTO norms. Past presidents that took trade action did so within internationally agreed upon trading rules. For example, the last major effort to impose a trade remedy, the 2001-02 steel safeguards under President Bush, was in line with both US law and WTO norms. It was decided largely by the US International Trade Commission (USITC) after a very thorough review to determine if domestic industries were seriously injured; in fact, on about half of the products, the USTIC voted not to impose duties. The WTO was notified throughout the entire course of action, and the measures were then subject to a WTO challenge. So I would argue that what Trump has done on steel and aluminum and has just announced on China are quite different.
Allison Nathan: How do these actions violate WTO norms?
Jennifer Hillman: It’s pretty straightforward. You cannot impose tariffs on any product above bound rates, i.e., the levels that you’ve agreed to with all of your international trading partners. For the vast majority of steel products, the US bound tariff is zero, so anything higher is a violation of that commitment. Aluminum is similarly bound at low levels, all of them well below the President’s 10% number. There are probably numerous other violations given that these tariffs will apply to some aluminum and steel that was already in transit at the time of the announcement; you can’t just turn the boat around or reject the shipment. So there will undoubtedly be complaints about due process. There will also likely be arguments made about the use of the Section 232 and Section 301 provisions. But again, I think it’s already pretty clear that these actions violate WTO and international trade obligations.
Allison Nathan: How unusual is it for countries to act unilaterally in this manner?
Jennifer Hillman: It’s very unusual because there are multiple remedies to respond to increases in imports or concerns about domestic industry within the existing trade framework. First, countries can react with anti-dumping measures, which focus on imports being sold for less than in the producer’s domestic market. You can’t sell your steel for $100 in your home market and then turn around and sell it for $50 in the US market. A dumping duty of $50 on that ton of steel could be applied.
Second, countries can apply countervailing duties. If you get a government subsidy that covers 20% of the cost of production of your good, countries can apply a 20% duty to make up for that. And third, countries can respond with the safeguards I mentioned earlier, by showing that domestic industry has been seriously injured because of a surge in imports.
What’s unusual about the US steel and aluminum tariffs is that the Commerce Department has not made available any of the findings that would normally accompany one of these three types of cases. This action was based instead on a threat to national security. Yet Canada and Mexico—which collectively supply over 25% of our steel imports and over 40% of our aluminum imports—have been exempted as well as other countries. To me, this completely undermines the argument that these tariffs have anything to do with national security. Instead, the President is clearly just trying to get leverage in NAFTA and other negotiations.
Allison Nathan: Looking beyond tariffs, what jurisdiction does the WTO have over issues such as intellectual property (IP) protections? How does that influence US action against China under Section 301?
Jennifer Hillman: The WTO has jurisdiction over IP issues through the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which incorporates most of the major international agreements on patents, trademarks, trade secrets, copyrights, industrial designs, geographical indications, etc. However, some practices that the US takes issue with under Section 301, particularly mandatory technology transfer, doesn’t fall neatly within the TRIPS agreement. The question is whether or not the US has the right to be judge, jury, and executioner on these matters. Section 301 says the United States Trade Representative (USTR) can make a determination and take action accordingly; the WTO rules generally say that you should come to the WTO first. So there is a discrepancy here between US domestic law and WTO norms.
Allison Nathan: What WTO measures could China use to retaliate?
Jennifer Hillman: China could file a challenge at the WTO, arguing that the US unilaterally raising tariffs violates the WTO’s most-favored-nation principle, the idea that you can’t discriminate between WTO members. And China could seek to impose either anti-dumping, countervailing duty, or safeguard actions against the US. The only issue is whether China can make a case for these actions and how fast they can achieve a remedy. In the past, these types of challenges have taken months or even years to bring forward.
Allison Nathan: Are the WTO and other trade frameworks sufficient to address what the Trump Administration sees as unfairness in trade with China?
Jennifer Hillman: No. I may disagree with an awful lot of the President’s tactics, but on this point, he is correct. In part, I think nobody anticipated the pace, depth, and breadth of China’s growth and, more importantly, its market structure. When China joined the WTO, it agreed to do many things that other members thought were putting it on the path to becoming much more of a market economy. That obviously has not happened. In 2014, 136 of the 1,000 largest companies in the world were Chinese; 70 of those 136 were completely state-owned. And state ownership has meant production well beyond market demand. In steel, for example, China added almost 60mn metric tons of production capacity every year for more than a decade, at one point reaching a capacity of 1.2bn metric tons. US steel production at its peak in 1973 was 137mn metric tons; last year, it was 87mn. In a normal economy, many of China’s steel companies would have gone bankrupt.
WTO trading rules simply cannot get at the intricate relationship between the Chinese government and parts of the economy that appear market-oriented but in fact are not. Take, for example, SASAC, the State-Owned Assets Supervision and Administration Commission of the State Council. SASAC controls more than half of the Chinese companies on the Fortune 500 list. That is roughly equivalent to a single US government agency controlling General Electric, General Motors, Ford, Boeing, US Steel, DuPont, Verizon, Honeywell, and United Technologies. And then having that agency behave similarly to a private equity fund, hiring and firing management, deploying and transferring resources across all of these companies, and generating synergies among them. This is what makes the Chinese economy both incredibly exceptional and virtually impossible for the trading system to deal with. It’s difficult in such an opaque system to prove subsidies to the WTO. Even if you get the proof, what can you do about it? You might use a countervailing duty to keep those goods out of the US market, but it simply pushes them into other markets, suppressing prices. And it does nothing to dismantle the capacity that China has built to produce those goods in the first place. That’s where the trading system fails. If we had known in the late 1990s what we know now, the WTO probably would not have invited China into its ranks.
Allison Nathan: Some observers have argued that the Trump Administration’s disregard for the WTO marks the beginning of the end of the institution. Do you agree?
Jennifer Hillman: I think it’s too early to tell. At this point I’m not prepared to join those who are already mourning the end of the WTO. However, I do think Trump’s actions have the potential to destroy the organization. Specifically, the recent use of the national security exemption could prove quite damaging. Indeed, there are WTO rules under Article XXI that allow members to break their trading commitments for the sake of essential security interests relating to, for example, fissionable materials, trafficking in arms, or actions in time of war. My view is that the US tariffs on steel and aluminum do not fit under these exceptions. However, if the WTO agrees with the US, everybody in the world will be able to assert a national security defense to protect their markets. And if that happens, we will be walking away from a rules-based system.
On the other hand, if the WTO disagrees with the US, my fear is that Trump will just say he’s done with the WTO and withdraw. While that would make it very hard for the WTO to move forward, I still believe it could survive. And ultimately, I think the US position on trade will shift back to the norms. Just as more and more companies will likely press the US to join the Trans-Pacific Partnership (TPP) once it takes effect and our trading partners gain new access to Japan and other markets, I think that a taste of the discrimination against the US should it withdraw from the WTO will leave us wanting to come back.