Trade wars: understanding the weapons

Over the last 12 months, a lot of attention has been given to trade wars between the US and a range of its trading partners, and their potential impact on the global economy. Before a 1 March 2019 deadline for the implementation of yet further tariffs by the US, the US and China are currently meeting in an effort to reach some kind of truce.

While skirmishing on the international trade battlefield remains constant, what has been different over the last year (and has brought us to the present impasse) is the trade weaponry used by the US. Dusted off from deep within the US armoury, these weapons have been deployed in a way that may tend to sideline the World Trade Organisation (WTO), and lead to blunt retaliations from its trading partners. 

From the time of his election, President Trump had threatened to take unilateral action to rectify what he – and those who his share his viewpoint on the treatment of the US in the field of international trade – consider to be unfairness and imbalance in US trading relationships globally, to the detriment of US industry.

In support of the President’s agenda, the US commenced a number of investigations in 2017 which had the potential to lead to trade measures being imposed on a range of products exported to the US from its trading partners.

This alone is not unusual. The most frequent ‘unfair trade’ complaints made under the WTO regime concern dumping and subsidies.[1] Anti-dumping and subsidy investigations in the US and elsewhere (including Australia) are pretty run of the mill. For instance, in 2017, a total of 37 anti-dumping investigations and 16 subsidy investigations potentially leading to new trade measures were initiated by the US.

What was unusual about the US investigations initiated under President Trump in 2017 was that the powers the US was considering using:

• have been exercised far more rarely;
• aren’t focussed on a single country or product;
• depend on more subjective assessments; and
• are typically more difficult to challenge in the WTO.

Weapon 1: Safeguard measures

The first of the weapons used by President Trump was what is known as a ‘safeguard measure’.

Safeguard measures are allowed under WTO rules.[2] They are emergency actions, designed to buy time for structural adjustment in a domestic industry which is suffering or at imminent risk of serious injury because of significant and unexpected increases in imports. They don’t depend on any ‘unfair’ trade practices, and are initially allowed for no longer than four years, with only one extension permitted. They must be progressively liberalised before their removal, and affected countries can generally seek compensation for them.

In June 2017, the US commenced investigations into the possible imposition of safeguard measures on imports of solar panels and washing machines, pursuant to section 201 of the Trade Act of 1974. The investigations were triggered by complaints from US producers of washing machines and solar panels.

At the conclusion of the investigations, in January 2018, the US decided to impose safeguard measures consisting of a 30% tariff on solar panels exported to the US from anywhere except Canada, and a 20% tariff on washing machines sourced anywhere outside the US.

Safeguard measures are comparatively rare, and, generally, politically sensitive. In the ten years to 2017 there were only 83 safeguard measures imposed globally, and most of those were imposed by developing countries. During that period there were no safeguard measures imposed at all by the US or the EU, and only one set of measures imposed by China.[3] In comparison, over the same period, 1504 new anti-dumping measures were imposed globally, including 177 by the US, 83 by the EU and 83 by China.

While safeguard measures are allowed under the WTO rules, they don’t really have a theoretical free-trade underpinning to justify them. One commentator has described them as being “temporary protection when commitments to liberal trade impose unexpectedly severe political burdens” on domestic trade officials.[4] In other words, they are meant to buy a government some short-term domestic political cover in the event of a crisis in a particular industry.

Compared to investigations into dumping or subsidies, the tests for whether safeguard measures are justified are far less quantitative, and more subjective.

While countries and exporters affected by proposed safeguard measures can usually participate in a safeguard investigation, the prospect that they can persuade the importing country to refrain from imposing measures (if it is politically expedient to do so) is significantly lower than in a typical dumping or subsidy investigation.

While relatively cold comfort for individual exporters who are affected by safeguard measures, the measures can be challenged by countries through WTO dispute resolution processes. In practice, though, those processes may not reach a conclusion until close to the date of expiry of the measures.

The safeguard measures imposed by the US are being challenged in the WTO by both China and Korea.[5]

Weapon 2: National security protections

While the use of safeguard measures seems like a rather inimical approach to free trade, it at least has the benefit of some WTO rules around it, which render it capable of challenge in the WTO. This is in stark contrast to trade measures taken for reasons of “national security” – which forms the second weapon pulled from the US trade arsenal under President Trump.

In April 2017, the US commenced an investigation into whether unfair steel imports posed a national security threat to the US under section 232 of the Trade Expansion Act of 1962. Broadly, that provision authorises the President to take any actions he deems necessary in relation to products being imported into the US in circumstances that he considers threaten to impair national security.

In response to that investigation, the US imposed a 25% tariff on steel imports and a 10% tariff on all aluminium imports in March 2018, with only a handful of countries exempted.

The US said the tariffs were consistent with its WTO obligations because they were allowed under the WTO's national security exemption, which permits a government to take ‘any action which it considers necessary for the protection of its essential security interests’.[6] While most observers seem to doubt the impact of steel and aluminium exports from (largely) the US’ allies on its national security, the idea is that if the US considers it to be so, the measure should be immune from challenge in the WTO.

Investigations leading to measures under this power are even rarer than safeguard investigations. Before 2017, the most recent investigation into the possible use of this power by the US had taken place in 2001 – and that investigation didn’t lead to the imposition of any measures.

While arguments have been posited to the contrary, there is real doubt that the WTO has jurisdiction to review a country’s invocation of the national security exemption.

The US has flagged that it is planning to argue that the WTO dispute resolution process has no place in assessment of these measures. And while the tariffs have been challenged in the WTO by several different countries,[7] none of these have flagged that they intend to say the measures should be assessed by the WTO against the national security exemption.

Instead, in an effort to ensure that the WTO has jurisdiction, they are arguing that in substance the tariffs are safeguard measures – and should be judged as such – rather than measures permitted for national security purposes. The EU, Norway and others have also argued that the US law relied on to impose the measures itself goes beyond what the General Agreement on Tariffs and Trade (GATT) national security exemption allows.

The other practical response (by at least Canada, China, the EU, Mexico and Turkey) has been to retaliate by imposing additional tariffs on US products on the basis that the US measures are not permitted, and so retaliation is justified under the WTO rules. In turn, the US has challenged that retaliation in the WTO.

Weapon 3: Section 301– unjustifiable burden on US commerce

The third of the weapons the US has dragged out of its arsenal for this trade war is a statutory power that pre-dates the WTO, and doesn’t form part of the WTO agreements – namely section 301 of the Trade Act of 1974. Among other things, this power permits the President to raise tariffs on imports when a practice of a foreign country unjustifiably burdens or restricts US commerce.

Until President Trump took office, this power had not been used to increase tariffs this century (though there had been one investigation initiated under it in 2010). Instead, the types of issues that might have been dealt with under the power were litigated as disputes before the WTO, even if they could also be investigated under section 301.

In August 2017, however, the US commenced a section 301 investigation into whether Chinese laws, policies or practices might be harming American intellectual property rights, innovation or technology development. In March 2018, the US determined that a number of Chinese actions were unreasonable or discriminatory and burdened or restricted US commerce.

After a series of high level trade meetings with China failed to give the US satisfaction that it would change the practices about which the US had expressed concern, in July and August 2018 the US imposed or increased tariffs by 25% on approximately $50 billion of Chinese imports.

China responded to that action between June and September 2018 by increasing duties by 25% on approximately $50 billion of US exports to China. The US countered in September 2018 by imposing additional tariffs of 10% on a further $200 billion of imports from China, to which China also retaliated with increased tariffs on $60 billion of exports from the US.

By this stage, the increased US tariffs were reported to apply to approximately 47% of all Chinese exports to the US, and approximately 65% of all US exports to China.[8] So much for free trade!

President Trump is threatening more tariffs if China does not make concessions on disputed intellectual property issues by 1 March 2019.

China has challenged the US action in the WTO, arguing that it is inconsistent with the obligations of the US under WTO agreements, and that if the concerns raised by the US were legitimate then they should have been dealt with as a dispute in the WTO rather than by unilateral action by the US. The US has responded by making the same allegation against China in so far as its retaliatory action is concerned.

While the US has faced fairly widespread criticism from trading partners for its unilateral action against China, the US Permanent Representative to the WTO explained its approach in the following terms:

“Strip away the jargon, and here is China’s argument: China will force technology transfer, and outright steal it when it sees fit, to become the preeminent producer, particularly in strategic industries. China will subsidize and maintain excess capacity in multiple industries, forcing producers in other economies to shut down. China will dump its products on our markets, claiming that all is okay because our consumers pay a little less. If the United States musters a response, we are abusing our power and acting irresponsibly. Rather, we should resign ourselves to nursing the wounds inflicted on our citizens”. [9]

When the smoke clears

The trade wars initiated by the US since 2018 have so far given rise to 15 claims against the US in the WTO, and five brought by the US against its trading partners for retaliatory measures. At this stage, none of those disputes has progressed far towards determination. The most that has been achieved is the appointment of a panel to hear the dispute.

It remains to be seen whether negotiated outcomes can be reached, which produce compromises that see the various unilateral actions and retaliations reversed, or modified, and the complaints about them withdrawn.

Without a negotiated outcome, it’s hard to see these trade wars ending particularly well for the WTO or free trade in general.

If the WTO rules that the actions taken by the US were legitimate, it will provide a green light for the US and other states to exercise similar powers again in the future, at will.

If the WTO rules against the US, and the US hasn’t achieved the endgame it was seeking, it is difficult to imagine an about-face which is domestically palatable for the President, and which involves the US accepting a WTO requirement to live with the status quo with China.

This may lead to the US following through on threats to withdraw from the WTO, or perhaps pressing for significant reforms to trade rules. While this might indeed be a necessary step, it’s unlikely to be able to be achieved quickly or easily given the number of stakeholders and their varying interests, and so seems likely to lead to a long period of uncertainty.

^{[2] Article XIX of the GATT 1994, and the Agreement on Safeguards.}

^{[3] Corrs acted for the Australian industry in the investigation by the Chinese Government which preceded those measures.}

^{[4] Sykes, A.O., “The Safeguards Mess: A critique of WTO jurisprudence”, (John M. Olin Program in Law and Economics Working Paper No. 187, 2003).}