U.S. Trump administration and WTO －Trump administration is about to run a grandiose experiment in economics on which is more important, free trade or protectionism.－

Trump administration puts forward its position to ignore WTO decisions

In the annual report to Congress outlining the president's trade policy agenda, the Trump administration made it clear that the United States will not be bound by, or, stated differently, will ignore, any adverse decisions made by the World Trade Organization (WTO) against the United States.

Allow me to explain a little bit.

The tariffs by item, promised by the United States to the WTO, have been kept low (e.g. 2.5 percent on cars), with only rare exceptions of tariffs that are as high as 45 percent. If the United States imposes a 45 percent across-the-board tariff on only Chinese goods, as Trump had advocated during the US Presidential election, it would obviously be in violation of Article I (the principle of most-favoured-nation treatment requiring every country to be treated equally) and Article II (binding against raising promised tariff rates) of the General Agreement on Tariffs and Trade (GATT), which regulates trade in goods, of the WTO agreements.

If China files a WTO complaint against the measures taken by the United States, China will win without a doubt. The WTO will recommend corrective actions to the United States. In its most recent U.S. annual report, it is stated that the United States will not be subject to any rulings of the WTO; in other words, the United States will not withdraw, but will maintain this 45 percent across-the-board tariff. The tariff itself is considered excusable by the WTO. Even if it is in violation, there is no need for correction. Instead, the WTO grants authorization to the complainant to take countermeasures. China will be allowed to steeply raise the tariffs on goods imported from the United States.

Taking a look at a past case...

In the past, there was the following case. In 2001, before China's entry into the WTO, Japan had used safeguard measures to steeply raise the tariffs on agricultural imports of leeks, shiitake mushrooms, and others from China, due to their increasing number of imports. In retaliation, China imposed a 100 percent tariff on automobiles, mobile phones, and air conditioners imported from Japan, leaving Japan no choice but to withdraw the safeguard measures.

Japan at the time could not withstand China's additional 100 percent tariff on Japanese cars, etc. and thus withdrew the safeguard measures, but what actions would the United States take under Trump?

If the United States withdrew the proposed 45 percent tariff against China, there would be no grounds for China to impose retaliatory tariffs under the WTO. As a result, the high tariffs of both countries would be withdrawn, and things would be restored to their former state before the United States adopted the 45 percent tariff.

But, it is clearly stated in the most recent U.S. annual report that the United States would not make such a withdrawal, and judging by Trump's character, it can hardly be expected that the United States would back off on account of China's retaliation. In this regard, however, unlike much of the media coverage, the tit-for-tat trade war between the two countries would not develop further under the current WTO framework.

The meaning of the most recent U.S. annual report

As a matter of fact, there are many cases (the U.S.-EU beef hormone dispute, the Brazil-United States cotton dispute, the United States - certain country of origin labelling requirements, etc.) in which the United States and other countries have not taken corrective actions in exchange for accepting retaliatory measures. In this context, the matters stated in the most recent U.S. annual report can be said to be legally correct and have just approved past actions taken by the United States.

However, if the high tariffs of both the United States and China remain unchanged, a significant shrinkage in trade between both countries will become a reality. The effects will not stop there, for free economic activities seek to evade high tariffs to achieve goals.

If there are consumers and industries in either the United States or China that need the other country's products, trade would be conducted in the form of bypassing the high tariffs. Chinese companies would only need to re-export goods to the United States via a third country. American companies would probably do the same thing. As a result, the economic damage the policy intended to create would be controlled and suppressed by free economic activities.

What will happen if loopholes are not permitted?

Problems would arise when the United States under Trump does not permit such bypassing measures or loopholes. Countries like Japan that impose little or no tariffs would be most suitable as stopping points in such cases. If Chinese goods are exported to the United States via Japan, the United States would probably impose the same high level of tariffs on Japan as it does on China. Should this be the case, Japan would file a WTO complaint against the United States, causing similar high tariffs to be imposed between Japan and the United State to those that would be between the United States and China.

If this should lead to the next knock-on effect in the economy, tariffs would be raised between the United States and countries all over the world. What would this mean?

For the United States, it would mean that high tariffs would be imposed on both U.S. imports and exports. Needless to say, bilateral trade between other countries (e.g. between Japan and China) would continue as before, with the application of low tariffs as promised under the WTO. While countries around the world would conduct free trade with low tariffs, the United States alone would be in isolation conducting protective trade. American products would become unsellable, and American consumers would have to pay higher prices.

Will America be sick again?

In the past, Dr. Paul Samuelson, the Nobel laureate in economics, had likened tariffs and trade barriers to digging oneself a hole in the road. He said that it is to purposely bring the country and its economy to ruin by preventing the transfer of goods.

Even without the knowledge of economics, if the above situation should occur, one could understand that the United States would suffer the most. In economics, it has been said that experiments cannot be run.

Which is more desirable for the country's economy, free trade or protectionism?

The United States under Trump is about to run a grandiose experiment in economics. Worse still, the experiment will probably end up "making America sick again" instead of "making America great again" as Trump advocates.

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(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on March 8, 2017.)