Media  Global Economy  2018.04.02

Is the Trump Administration Setting off a Global Trade War?: America's Claims Are Very Unreasonable. A True Friend Should Correct Their Friend's Mistakes

The article was originally posted on Webronza on March 7, 2018

President Trump said on March 1 that the U.S. would impose import tariffs of 25% on steel and 10% on aluminum. He took the unusual step of using presidential powers to restrict imports based on U.S. law (Section 232 of the Trade Expansion Act of 1962), citing a threat to national security. He argued that international prices of steel and aluminum, which are used to build fighter jets and warships, have declined because of surplus production by China, resulting in unfairly cheap imports from various countries. On March 2, it was announced that this measure would target not just China but imports from the entire world, including Japan.

While the argument that cheap imports threaten national security is difficult to understand, President Trump is claiming that if the U.S. steel industry deteriorates due to the influx of cheap imports from China and other countries, then it may become unable to supply steel and other materials to the defense industry.

However, even if the domestic steel industry disappears, if the U.S. can continue to import cheap steel, then supplies to the defense industry will not be cut off. Even if the U.S. goes to war with China, they can import from Japan, the EU, Canada and others. In fact, a study by the U.S. Department of Commerce found that the amount of steel necessary for national security is 3% of output of the domestic steel industry (according to the latest Commerce Department study; the figure was 0.03% in the 2001 study).

The Trump administration's argument is very unreasonable. Although the measure is ostensibly for national security, it is clear that the administration really wants to protect the steel industry and other industries in the Rust Belt ahead of the midterm elections in November.

A Measure That Is Difficult to Justify at the WTO

This measure is based on domestic law, but because the U.S. is a member of the World Trade Organization (WTO), they need to justify the measures under the rules of the WTO agreement. The sole justification of the U.S. is Article 21 (national security exemption) of General Agreement on Tariffs and Trade (GATT), which is part of the WTO agreement.

Under this provision, measures that meet the conditions are exempted from the various obligations of GATT (such as a ban on levying higher tariffs than promised - in the case of steel, the U.S. tariff is zero - and a ban on introducing import quotas). Specifically, the U.S. will be able to raise tariffs on steel despite having promised zero tariffs to the WTO.

Of the conditions, the one that will likely be cited for the measure is: "any action which it considers necessary for the protection of its essential security interests relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment." The U.S. will probably argue that steel and aluminum are "other goods and materials as is carried on indirectly."

However, even if that is true, the measure also needs to meet the condition of being "necessary for the protection of its essential security interests." This condition is strictly interpreted as in the absence of reasonably available less trade-restrictive alternative measure in GATT Article 20, which also provides for exemptions to obligations under GATT. Through this interpretation, the GATT or WTO has effectively prevented the easy application of exemptions.

As noted above, the U.S. can import from countries other than China, and they need to simply maintain 3% of output of the domestic steel industry to protect national security. Therefore, I find it highly improbable that this condition can be met. This measure will likely be found to be an excessive trade restriction that goes beyond the stated objective of protecting national security.

Based on common sense, it would be difficult to claim that not having a domestic industry substantially hurts essential national security interests. Other nations have made claims similar to the U.S. argument. In the era of GATT, the predecessor of the WTO, Sweden imposed an import restriction on certain footwear by arguing that the shoe industry is indispensable for the supply of military boots, but this case was brought before GATT and Sweden lost.

If such an argument is acceptable, then Japan can claim that its rice is "other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment," and it would be allowed to restrict rice imports because supplying food to the military is necessary. This would apply not just to rice, but all goods and materials could be argued to be necessary for national security. Therefore, this could lead to limitless import restrictions.

Furthermore, the U.S. has traditionally argued that whether GATT Article 21 applies or not should be determined by the country itself and not by GATT or the WTO. There have been no disputes over GATT Article 21 since the establishment of the WTO, but the WTO's dispute settlement body surely will not recognize that the latest claim and measures are consistent with WTO rules. Once a nation uses the "essential security interests" argument, it can implement measures that ignore WTO rules. This could lead to the WTO becoming a dead letter, both in terms of procedures and contents.

A Cornered U.S.

Why, then, did the U.S. pursue the measure by giving a threat to national security as their reason, when they would not be justified under WTO rules? Are there other ways for them to protect its steel and aluminum industries?

If the complaint is that China is exporting steel at unfairly low prices, then the U.S. can take anti-dumping measures against specific countries. Anti-dumping measures are actions taken when an exporting company exports at prices lower than normal. If companies in the importing country suffer actual harm, then the importing country can raise tariffs.

Until now, the U.S. frequently implemented anti-dumping measures to protect their domestic industry. At the same time, they have been accused of violating the WTO agreement with those measures. It would be difficult to prove that China is exporting at lower-than-normal prices. Moreover, the issue the U.S. is raising is not that China is exporting at lower than the world price, but that China's surplus production is depressing the world's steel prices.

In addition, China has exported steel and other products to the U.S. through other countries, such as Vietnam and Brazil, so as not to have anti-dumping measures taken against it by the U.S. China's share of U.S. steel imports is just 2.1% (compared to 5% for Japan). As a result, the effectiveness of anti-dumping measures would be limited.

Another measure is the safeguard, which can be implemented when there is a sharp increase in imports. A safeguard is the levying of high tariffs on imports from the entire world, and contrary to anti-dumping actions, it cannot target a specific nation. However, a safeguard can only be used when an investigation has shown that there has been injury to or a threat of injury to domestic industry, and a safeguard cannot be used again for a specific period after it has been used.

Furthermore, in order to compensate the partner country (exporting country) for the increasing of the concession (promised) tax rate through the safeguard, the importing country is required to maintain effectively the same level of concessions, and if the parties are unable to reach agreement, then the exporting country can freely suspend its own equivalent concessions (GATT Article 19-3 and Agreement on Safeguards Article 8-2).

In other words, the approach of GATT/WTO is to try to balance the interests, so if the U.S. raises their steel tariffs, then they would have to lower tariffs on other products imported not only from China but also Japan, the EU and others. In the case of Japan, if the U.S. lowers automobile tariffs, then they effectively sacrificed the auto industry for the steel industry. However, the U.S. auto industry would be opposed to lowering tariffs on Japanese autos.

If the U.S. does not do this, then China and Japan can retract promised tariffs that are equivalent to the measure adopted by the U.S. So, they can raise tariffs on soybeans and beef exported by the U.S. This would harm the U.S. agricultural industry. In other words, if the U.S. wants to protect their steel industry, then they need to offer or accept something in return. However, the Trump administration does not intend to make such trade-offs.

So, neither anti-dumping actions nor safeguards are available for the U.S. That is why they had to depend on the national security rule.

Beginning of a Trade War?

If the U.S. raises tariffs on steel and aluminum, that would weaken the competitiveness of the domestic auto and aerospace industries that use steel and aluminum, causing the entire U.S. economy to weaken. Furthermore, it is ultimately the American consumer that must shoulder the higher tariffs. Using an idiom that Americans like to use, the U.S. will have shot itself in the foot.

That is not all. In addition to China, other countries that export steel to the U.S., such as Japan, the EU, South Korea, Canada, Brazil and India, will also bring disputes to the WTO by claiming that the measure adopted by the U.S. violates WTO rules. The U.S. would have to fight a trade war against the rest of the world. If the U.S. loses those cases and fails to correct the measure, then the complainants will be able to take retaliatory measures such as raising tariffs on American products.

The EU is considering retaliatory measures on products such as Harley-Davidson motorcycles, Levi's jeans and bourbon. In response, President Trump has threatened to raise tariffs on autos imported from the EU. These actions would mark the start of a trade war, which would cause the world economy to shrink. The stock market's plunge following President Trump's remarks shows that the market recognized that risk.

What is the best course of action for Japanese Prime Minister Abe, who is close to President Trump? Mr. Seko, the Minister of Economy, Trade and Industry of Japan, said that he hoped that Japan would be exempted as a U.S. ally, but is that enough?

Looking at the reactions of countries around the world, the prime minister of Canada, the biggest exporter of steel to the U.S., has criticized President Trump's measure, joining the EU. Mr. Turnbull, the Prime Minister of Australia, another U.S. ally, has also rebuked President Trump strongly, even though the nation exports close to no steel to the U.S. He said, "You don't grow stronger by closing the door to other markets. Protectionism is a dead end. It is not a ladder to get you out of the low growth trap, it is a shovel to dig it much deeper."

This is an excellent argument based on principle and cause, and not about one's own country's interests. A true political leader is one who can advocate principles. In addition, a true friend is one who corrects the mistakes of a friend who is about to start a global trade war, even if he might get into the friend's bad graces temporarily, for the sake of maintaining the global free trade framework. This should be the desirable form of Japan-U.S. relations.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on March 7, 2018.)