Tag: trade retaliation

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Trump, the WTO and Brexit

Donald Trump has threatened to pull out of the World Trade Organization. ‘If they don’t shape up, I would withdraw from the WTO,’ he said. He argues that the USA is being treated very badly by the WTO and that the organisation needs to ‘change its ways’.

Historically, the USA has done relatively well compared with other countries in trade disputes brought to the WTO. However, President Trump does not like being bound by an international organisation which prohibits the unilateral imposition of tariffs that are not in direct retaliation against a trade violation by other countries. Such tariffs have been imposed by the Trump administration on steel and aluminium imports. This has led to retaliatory tariffs on US imports by the EU, China and Canada – something that is permitted under WTO rules.

Whether or not the USA does withdraw from the WTO, Trump’s threats bring into question the power of the WTO and other countries’ compliance with WTO rules. With the rise in protectionist sentiments around the world, the power of the WTO would seem to be on the wane.

Even if the USA does not withdraw from the WTO, it is succeeding in weakening the organisation. Appeals cases have to be heard by an ‘appellate body’, consisting of at least three judges drawn from a list of seven, each elected for four years. But the USA has the power to block new appointees – and has done so. As Larry Elliott states in the first article below:

The list of judges is already down to four and will be down to the minimum of three when the Mauritian member, Shree Baboo Chekitan Servansing, retires at the end of September. Two more members will go by the end of next year, at which point the appeals process will come to a halt.

This raises the question of the implication of a ‘no-deal’ Brexit – something that seems more likely as the UK struggles to reach a trade agreement with the EU. Leaving without a deal would mean ‘reverting to WTO rules’. But if these rules are being ignored by powerful countries such as the USA and possibly China, and if the appeals procedure has ground to a halt, this could leave the UK without the safety net of international trade rules. Outside the EU – the world’s most powerful trade bloc – the UK could find itself having to accept poor trade terms with the USA and other large countries.

Articles

Information

Questions

  1. Explain the WTO’s ‘Most-favoured-nation (MFN)’ clause. How would this affect trade deals between the UK and the EU?
  2. Would the trade deals that the EU has negotiated with other countries, such as Japan, be available to the UK after leaving the EU?
  3. Demonstrate how, according to the law of comparative advantage, all countries can gain from trade.
  4. In what ways is the USA likely to gain and lose from the imposition of tariffs on steel and aluminium?
  5. How could a country that supports free trade ever support the imposition of tariffs?
  6. Why are tariffs not the most serious restriction on trade?
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Heart of Steel: the economics of trade wars

The President of the United States, Donald Trump, announced recently that he will be pushing ahead with plans to impose a 25% tariff on imports of steel and a 10% tariff on aluminium. This announcement has raised concerns among the USA’s largest trading partners – including the EU, Canada and Mexico, which, according to recent calculations, expect to lose more than $5 billion in steel exports and over $1 billion in aluminium exports.

Source: Bown (2018), Figure 1

A number of economists and policymakers are worried that such policies restrict trade and are likely to provoke retaliation by the affected trade partners. In recent statements, the EU has pledged to take counter-measures if the bloc is affected by these policies. In a recent press conference, the Commissioner for Trade, Cecilia Malmstrom, stated that:

We have made it clear that a move that hurts the EU and puts thousands of European jobs in jeopardy will be met with a firm and proportionate response.

She added that, ‘I truly hope that this will not happen. A trade war has no winners.’

Why is everyone so worried about trade wars then? Trade wars, by definition, result in trade diversion which can hurt employment, wealth creation and overall economic performance in the affected countries. As affected states are almost certain to retaliate, these losses are likely to be felt by all parties that are involved in a trade war – including the one that instigated it. This results in a net welfare loss, the size of which depends on a number of factors, including the relative size of the countries that take part in the trade war, the importance of the affected industries to the local economy and others.

A number of studies have attempted to estimate the effect of trade restrictions and tariff wars on welfare: see for instance Anderson and Wincoop (2001), Syropoulos (2002), Fellbermayr et al. (2013). The results vary widely, depending on the case. However, there seems to be consensus that the more similar (in terms of size and industry composition) the adversaries are, the more mutually damaging a trade war is likely to be (and, therefore, less likely to happen).

As Miyagiwa et al (2016, p43) explain:

A country initiates contingent protection policy against a trading partner only if the latter has a considerably smaller domestic market than its own, while avoiding confrontation with a country having a substantially larger domestic market than its own.

As both Canada and the EU are very large advanced market economies, it remains to be seen how much risk (and potential damage to the local and global economy) US trade policymakers are willing to take.

Articles and Academic Papers

Questions

  1. Explain how trade diversion works and why it relates to economic prosperity.
  2. What are the key advantages of international trade?
  3. What are the key disadvantages of international trade?