Diary from Trumpland

New equations

Print edition : September 28, 2018

U.S President Donald Trump with European Commission President Jean-Claude Juncker at the White House on July 25. Photo: JOSHUA ROBERTS/REUTERS

A worker handles red hot steel cables at a steel factory in Qingdao, China. Tariffs on steel are a matter of contention between China and the U.S. Photo: AP

As Trump, with an eye on the next presidential election, tries to renegotiate trade treaties with neighbours and tinker with the WTO, it is in the interests of China and the E.U. to come together.

ALL eyes are on United States President Donald Trump’s Twitter feed. It is often there that he announces the next salvo in his global trade war. Trepidation remains on both sides of the U.S. border with Mexico and Canada. Will the North American Free Trade Agreement (NAFTA) be renegotiated or rejected? How will the Europeans react to Trump’s sniffle that the European Union (E.U.) is “‘almost as bad as” China? What, indeed, will China do in retaliation against more and more tariffs and threats of tariffs from the Trump administration? Finally, what is one to expect from Trump’s decisive statement that the U.S. has been treated “very badly” by the World Trade Organisation, and that if the WTO “does not shape up, I could withdraw us from the WTO”? Questions swirl around amongst trade negotiators, heads of large firms and investment bankers. Such uncertainty comes at a time when the currency in “emerging markets”, from Argentina to Turkey, from India to South Africa, is plummeting against the U.S. dollar. Predictions are a hard business. Even harder in the midst of such turbulence.

Reference to the WTO should not raise any eyebrows. Turkey went to the WTO with complaints about the U.S. tariffs on steel, making the case that the U.S. law used by Trump’s administration was against WTO rules. The WTO secretariat has circulated the Turkish complaint among member countries. It is likely that the complaint will be taken seriously by trade bureaucrats, who are eager to push back against the near chaos set in motion by Trump against the liberal world order. Following Turkey, China has also filed its own complaint. This is not the first time China has taken the U.S. to the WTO for its tariffs on steel. In 2003, the Chinese complained formally about George W. Bush’s steel tariffs, which earned the Chinese a favourable ruling from the WTO. In view of that precedent, it is likely that the WTO will rule on behalf of both China and Turkey against the U.S. The confrontation between Trump and the WTO will only intensify as the U.S. nears its next presidential election in 2020. It is clear that Trump is going to make the trade battle the centrepiece of his re-election campaign. He will have little else in his arsenal.

Little discussion has taken place about one key direction where the Trump administration has been moving without caution—to collapse all dispute settlement mechanisms. When two countries disagree about trade policy, or when one country seems to be violating trade agreements, then a dispute settlement mechanism exists, either through regional trade processes or in the WTO. Over the past two years, the U.S. government has tried to destroy the WTO’s dispute settlement mechanism. This is an area that does not often draw scrutiny, largely because it seems boring or is so difficult to understand.

The WTO has a Dispute Settlement Body (DSB), which has an appellate section made up, when it is full, of seven elected officials who are nominated by their countries. The minimum number on the appellate body is three. When the term of Shree Baboo Chekitan Servansing (Mauritius) ended, the U.S. did not allow his seat to be filled. This dropped the number on the body to the minimum of three (it had only four officials at that point of time). In December, the terms of two of the three remaining members will end—Ujal Singh Bhatia of India and Thomas Graham of the U.S. It is likely that the U.S. will block the seating of replacements, leaving Hong Zhao of China as the only person remaining on the panel. This appellate body will then become silent. There will then be no use in going to the WTO to settle disputes.

NAFTA

Renegotiation of NAFTA should have been a fairly mundane exercise. The treaty was signed in 1994 between Canada, Mexico and the U.S. Elements of the treaty certainly needed to be updated. Mexico, whose neoliberal government was voted out of office this year, hastened to cut a deal with the Trump administration before the new, more left-leaning, government took office. The new deal draws on the Trans-Pacific Partnership (TPP), which Trump rejected early into his term, but goes beyond it. It sets aside two institutional features that advantaged big corporations over workers and over, in particular, the environment. There is a push to increase the percentage of higher wage produced content in automobiles to a level that is four times that of Mexican workers (whether this will lead to more manufacturing in the U.S. or to an increase in Mexican autoworkers’ pay is unclear). Furthermore, the Investor-State Dispute Settlement (ISDS), which allowed large firms to sue states over violation of their rights, is now gone. Typically, the ISDS was used by large firms to loot countries on the basis of fallacious lawsuits against environmental and health rules. Nothing here is outrageous. The outline of the deal with Mexico is within the same neoliberal paradigm that created NAFTA and the TPP, with some moderate potential improvements for U.S. autoworkers if the auto firms move their manufacturing to the U.S.

The sticking point with Canada, which will likely be resolved, is not about these matters. It is about how to arbitrate disagreements, the mirror image of how the U.S. is killing off the settlement dispute mechanisms in the WTO. In the debate over NAFTA in the 1980s, the Canadian government insisted that there should be an independent dispute mechanism for disagreements rather than allow firms and states to take recourse to their own national courts. In 1987, Canada withdrew from negotiations because this independent dispute mechanism had been removed from the negotiation draft. By the time NAFTA was signed, the mechanism returned to the final text as Chapter 19. Trump now wants to remove this, citing a long-standing U.S. nationalist view of the sovereignty of its own courts. Canada is insistent that the mechanism should remain, partly because this is the main item that Canada was able to win in the first NAFTA discussions.

China

It is impossible to imagine that these trade wars would escalate into more dangerous territory. China’s President Xi Jinping has said that he would do his utmost to preserve the trade regime as best as possible. In early September, standing beside United Nations Secretary- General António Guterres in Beijing, Xi referred to “unilateralism and protectionism rearing its head”. These comments came after China and the U.S. ended talks to cease a trade war that has already resulted in $16 billion worth of tariffs on $50 billion worth of goods. Guterres was in Beijing for the China-Africa summit, one of the key meetings for China’s pivot away from the U.S. market. China has sought to craft four new areas to export its goods: its internal market, Central Asia, Africa and Latin America. These are to substitute for China being captive to selling its massive output to the U.S. But, these are long-term projects. China cannot afford to alienate the U.S. in the short term. That is why China continues its bilateral negotiations and why it has turned to the WTO.

Trump set aside the E.U’s proposal on automobile tariffs. His comment on Twitter was clear: “The EU is almost as bad as China, just smaller.” Differences exist between China and the E.U. on technology transfer and on industry standards, but within the WTO there is evidence that these two large blocs will start to come together against Trump’s attempt to scuttle the institution. Will they come together to preserve the few institutional spaces for dispute settlement? There is, as yet, no evidence of any pushback from these countries.

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