We have been hearing more about protectionism. What is happening?
Trump has announced the imposition of tariffs. This in itself is not unusual. There are many tariffs in the world at the moment. We should disabuse ourselves of any notion that the world was tariff free before Donald Trump became President. We in the UK, and our partners in the EU, are protected by the Common External Tariff (a tax on all imports into the customs union where there is no alternative free-trade agreement). In fact, one of the reasons that China is relatively unaffected by the recently announced steel and aluminium tariffs was that their exports to the US were already captured by so-called countervailing tariffs. These were introduced by President Obama to protect the US from dumping (selling at a price which has been manipulated by subsidies to undermine competition). What is different is not what President Trump is doing, but rather how he justifies it.
President Trump described the tariffs as being essential for US national security. These were directed at all trading partners although subsequently they have been softened to exclude, Canada, Mexico, and later the UK and European Union (but not Japan).
What is contentious about this is that while WTO rules do permit countries to assess their national security requirements and protect industries if they feel it is necessary, certain passages in the World Trade Organisation (WTO) rule seem to limit that provision to either explicit military-related goods or a broader range of goods during wartime. It is dangerous to conclude that a broader range of goods could be considered essential to national security because the same interpretation could be made by many industries and governments, in which case decades of work reducing tariffs through multilateral negotiation could be undone.
In the worst-case scenario this trade dispute could cause long-standing international agreements to unravel. For example, if the US were to leave the WTO it would have implications for the 60% of US two-way trade not covered by free trade agreements. Currently this is conducted under the WTO’s most favoured nation terms. Ceasing membership of the WTO would mean that every country could set its tariff levels (or other forms of protectionism) with the US with discretion, making it easier to apply tariffs on goods where the US is very competitive.
The most obvious advantages of this are that each country treats all its peers equally. That makes for a more competitive environment which brings benefits to consumers. It also avoids the need for lots of bureaucracy which otherwise has to identify the point of origin for goods that might have components from many different companies, each with their own bilateral tariffs with the US. Finally, the WTO makes it possible for smaller, less developed countries to compete in the global market. This advantage for developing countries is not, however, a disadvantage for developed economies like the US because as those less developing economies grow they become more profitable markets for US firms to sell into (larger markets for iPhone for example).
The Trump Administration’s imposition of steel and aluminium tariffs on national security grounds could also be seen as worrying given that many of the countries included were NATO allies.
Since the steel tariffs were announced their impact has been greatly reduced through negotiation. Japan was still included which may hasten the revision of its pacifist constitution. Japan relies informally on the US and its NATO partnership for defence. The US has military bases in Japan. Yet if the US considers aluminium and steel tariffs a national security necessity then Japan should surely be reconsidering whether its own security arrangements are robust.
Whilst announcing the finalised set of steel tariffs President Trump was already announcing a second set of measures under section 301 of the US trade act. This was a specific sanction against China seeking reparations for the Chinese insistence upon intellectual property being transferred to Chinese firms when US firms invest in China.
Section 301 now compels him to seek the removal of that barrier.
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