At the beginning of March 2018, the US announced it would impose tariffs of 25% on imports of steel and 10% on imports of aluminium. The announcements were greeted with shrieks of pain from potentially affected countries and pronouncements about the risks of retaliation and even trade wars.
What is the reality behind the noise?
The World Trade Organization (WTO) is the international body that deals with rules of trade between nations. It is there to ensure that trade flows smoothly and to discourage the squeezing of rivals with unwarranted restrictions or sharp practice in the form of dumping and subsidy.
In common with a number of international bodies impacting trade, it operates like a club with members who sign up to a set of rules. These can govern products, services and intellectual property.
Two important principles are:
1. Most Favoured Nation. This is designed to ensure that concessionary tariffs offered to one nation are available to all.
2. National treatment. This seeks to ensure that once goods have entered a market (and customs duty is paid), they receive treatment consistent with domestic providers.
There is a range of exceptions permitted. An important one relates to Regional Trade Agreements. Others include security, balance of payments and temporary waivers. But even for these, there are checks and balances designed to discourage frivolous use.
There is a dispute process that is there to deal with situations where a nation ‘breaks club rules’. This is a structured and time-framed process that provides for consultation and mediation, the creation of a panel to consider a complaint, a report and an appeal leading to submission to a dispute settlement body. Once a finding is made, members should implement them and there is provision for a nation to take authorised retaliation if there is a delay. Albeit, the intention is that such a step is only a temporary ‘incentive’.
So are we in for a trade war?
As both a consensus and rule-based system, there is plenty of scope to play that system for temporary advantage or more. Even where there is a time-framed dispute process a lot of damage can be inflicted before a finding is implemented. Similarly, selective interpretations of exceptions can be used to justify the imposition of duties – as can be argued is the case with the US announcement. The net result is that nations doing this can apply pressure on rivals – precisely what the WTO is trying to prevent.
Pressured situations can give rise to nations operating within WTO rules, not operating within WTO rules, or claiming to operate within WTO rules but not actually doing so and getting away with it – at least for a while! However, the highest risk of a trade war is when 'tit for tat' action increasingly moves outside the rules, and the whole framework is undermined. So the time for increased concern is when we see an escalation of that happening.