Are import restrictions and high tariffs a threat to world trade?

By Jagath Savanadasa

Is there a looming trade war between large nations? The global scenario on trade that is dominated by the large countries seems increasingly poised to battle it out if a trade war breaks out. 

Though the international media runs many stories on this tense topic that will also engulf poorer countries like Sri Lanka, this writer was in particular impressed by a critical lead article in this regard in an international magazine.

The ‘Economist’ in the issue of 10-16 March claims that President Donald Trump though appears to be the first US President to hit the road to protectionism, he was not.

Protectionist at least in the context of imposing tariffs on imports, Trump was super-ceded by other US Presidents in the somewhat distant past. The Economist mentions that President Jimmy Carter was to an extent initially protectionist. During the Carter regime, the product that was subject to high import tariff was steel. This time too it is steel.

The current US administration plans to impose a 25% tariff on steel and 10% on aluminium imports respectively. The two tariffs alone will not lead to debilitating damage to the US economy. But they may trigger a potential disaster for both the US and the world economy. 

Let us examine the fearsome situation projected closely.

Incidentally in 2016 steel and aluminium imports to the US accounted for only 2% of all imports to the US. Last year imports to US amounted to $ 3 trillion.

Free trade and President Trump

The ‘Economist’ observes that ever since Trump assumed office he has been sneering at free trade, besides the existent multi-lateral trading system. According to the US administration this system is detrimental to its interests. On the other hand, the international media in general feels that the US administration is in a chaotic state. To make matters worse, Trump’s Chief Economic Advisor who was widely considered a rare advocate of free trade within the establishment, recently resigned from his post and that was believed to be a major setback for the US.

It now looks as if that there is an ill-wind about to blow against the long held belief of a liberal international trade environment and within that trade environment a main proponent had been the United States. It is now the US which is a conscious opponent of a free trade regime. 

A multidimensional danger

The imposition of high tariff to curb imports by the world’s largest economy may lead to a retaliatory effect. It is the US that will first face the counter import sanctions imposed by those nations affected. The US to cite an example is thinking in turn of imposing high tariffs on import of cars from Europe. In retaliation it is reported by the foreign media that products like bourbon and motor cycles (Harley Davidson) exported by the US will face sanctions

And why should the US build a tariff wall in respect of steel imports on the basis of such exports are a security risk. Observers on trade state that the security factor cited is spurious since these products exported to the US are mainly by Canada, Mexico and South Korea, firm allies of the US.

The real truth is reportedly different. It is to gain leverage to the planned re-negotiation of NAFTA, the (North American Free Trade Agreement). Over a period of time Trump had been highly critical of NAFTA. His criticism had gone viral and this gave indications that President Trump is thinking of a protectionist approach to exports into US and that he is considering a revisionist attitude to NAFTA.

Emerging picture 

cloudy and complex

The emerging picture of the much talked of high tariff and retaliatory effect remains complex and unclear. To begin with observers of the current scenario wonder whether the imposition of tariff on grounds of security of a nation could be challenged legally.

WTO enters the picture

The lead article in the Economist has queried whether the WTO will react positively to this situation. But the WTO, it is contended has long been troubled by the failure of the Doha Round in 2015.

The additional burden of counteracting action by the powerful US will add to it woes or entrap it further. All this of course is speculation and as yet there in nothing definite.

What should however be most worrisome is the WTO’s inability to secure a consensus on much needed reforms to the current trading system. As a result of the action required to initiate a new trade round has led to the transfer of the much needed reforms to dispute resolution machinery of the WTO. Such machinery is reportedly too weak. The prevailing belief is that WTO is not strong enough and also irresolute. As a result trade disputes that could have been dealt with in a new trade round effectively have instead been pushed into its dispute resolution machinery. 

It is said to be the experience of many nations that the dispute resolution mechanism is too burdensome to the WTO. Given this situation, if the US issue of high import tariff on steel due to security factor is transferred to the US for resolution through adjudication how will the WTO tackle it, in the face of its awesome current burden? (According to the latest information in the Chinese news the issue is said to be already placed before the WTO)

On the other hand, as pointed out by the ‘Economist’ if the WTO courts cannot adjudicate or if it has second thoughts about the security factor that US has advanced on steel imports, President Trump may even decide to quit the WTO.

The Economist’ observes that a severely overburdened WTO after 15 years of fruitless search which led to the collapse of the Doha Round will have to confront a much graver situation if the US leaves the WTO.

The ‘Economist’ is of the view that the WTO has been slow and had not been able to keep abreast of economic change that has transformed the international trade scene. 

The magazine is further of the view that the WTO is increasingly involved in intangibles like patents and copy rights, whereas it should in reality consider physical assets like steel mills. Also, the earlier rules it drafted in respect of rich market economies cannot be applied to state directed and controlled capitalism The ‘Economist’ cites the example of implicit subsidies afforded by China to its producers of industrial metals. This had led to a glut of such metals and it is not a surprise that China is looked at by some nations thereby affected with dislike.

Tragedy to undermine WTO

In the midst of all these recent developments inimical to the interests of the WTO and whatever its failings had been there are many who state that it will be a tragedy to undermine the WTO.

This could happen if the US adopts a contra mercantilist policy that runs counter to the existent global trading system. If this happens many other nations would follow suit, thereby destroying, despite flaws largely an orderly and regulated international trade regime. The Economist towards the conclusion of their study on this critical subject state that this may not lead to an imminent collapse of the WTO, it is likely to break the very structure of globalisation.

Despite purists who are inclined to cast aspersions on globalisation, this writer is of the view that globalisation has opened vast new frontiers of trading and Asia as a whole had been a big beneficiary. One just has to look at the economic transformation of China India and the smaller Asian countries. Of course critics will cite the case of continuous trade imbalances partly brought by globalisation. On the other hand globalisation has opened the doors of opportunity to many a poor nation through technology transfers and investments, as also through the application of modern supply chain techniques.

The WTO has had a definitive role to play especially in terms of developing countries not only through a regulatory framework but also other .modes of trade promotion. 

We are inclined to agree with the ‘Economist the vast improvements to living standards in an impoverished world as it were after the Second World War which reduced the barriers of trade were clearly due to the eight trade rounds.

Imports should in most cases be welcome since they benefit the consumer and drive manufacturers towards innovation and new products.

Even without the WTO, cross border trading is bound to continue though subject to less governance and regulation. We are also inclined to agree that international trade in such a case will be without norms and procedures.

An environment sans these basic elements of control will give way to runaway mercantilism. Trade policy will then enter the domain of special interest groups.

What is more military power as pointed out by the ‘Economist’ will come into play and fair play will disappear.

One area in particular that helps global economic growth transnational investment will suffer the most. One could be almost certain that if such an adverse development follows, given the present climate of uncertainty it is The US that will be hit the most so the ‘Economist’ contends.

The US has been the most important power in the system of post- war trade whether you like it or not. 

If the US does not realise this inevitable fact of life other key nations need to keep their heads calm. On the other hand a tit for tat attitude will plunge other nations too into a state of disaster.

It is vitally important in this context to give all backing possible to trade. Such a backing globally will help to fix WTO all its members should agree on a plan of concerted action. This includes considering Trump’s tariffs which will strengthen the WTO though it will be tough for it to solve the issue. 

Rule based global economy will then receive a boost and free traders will then be required to recognise that the WTO could play a role against the protectionist lobby. This will however not be easy since the man in the Oval office appears to be the biggest enemy currently of free trade.

(The writer is the Secretary General of the Business Chamber of Commerce, Chairman, Sri Lanka Business Council and Co-founder, Institute of Shipping and Logistics established in 1982, which is a pioneer in conducting courses on these two key topics. The article is written in the writer’s personal capacity.)