I’m not sure how much more evidence investors and analysts need when it comes to admitting that Donald Trump has little to no regard for anything that even approximates decorum or restraint, but based on the fact that U.S. equities had rallied for three consecutive sessions heading into Friday, folks apparently weren’t convinced that he would ultimately keep pushing the envelope on the trade issue.
He’s done his best to disabuse everyone of that notion since Thursday evening when he ordered the USTR to look into an additional $100 billion in tariffs on China, a move which weighed on futures overnight. Friday morning’s lackluster March payrolls report didn’t help the mood and neither did the following inflammatory tweet:
China, which is a great economic power, is considered a Developing Nation within the World Trade Organization. They therefore get tremendous perks and advantages, especially over the U.S. Does anybody think this is fair. We were badly represented. The WTO is unfair to U.S.
— Donald J. Trump (@realDonaldTrump) April 6, 2018
That tweet seemed to catalyze a fresh leg lower in stocks, coming as it did on the heels of comments from Chinese Ministry of Commerce spokesman Gao Feng at a hastily convened press conference (held, by the way, at 8 p.m. in the evening local time on a holiday).
Oh, and Larry Kudlow isn’t going to save you because apparently, he doesn’t know what the fuck is going on.
If you need a refresher on what all of this is likely to mean for the WTO, you’re encouraged to read “The Annotated History Of U.S. Trade And A Fantastic Interview With An Expert,” but here are some excerpts from the interview found in that post between Goldman’s Allison Nathan and 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:
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.