The Future of the WTO and American Trade

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In the wake of massive tariffs targeted at China, the European Union and Canada, the global rules-based trading system and its hallmark institution, the World Trade Organization, are under unprecedented strain as President Trump continues to escalate tension in his quest to eliminate US trade deficits. Regardless of whether his motives are sensible, the world is posed with the question of how trade will look over the next two years and Americans, in the midst of heated midterm races, have to consider how the country can maintain its status as a superpower under these circumstances.

 

From the outset of his campaign, Mr. Trump expressed disgust with the United States’ trade deficits and disdain toward “establishment” politicians for allowing these imbalances to grow as America’s share of global economic production shrunk in the decades following the Korean War. The President began to take action in early June by imposing $48bn of tariffs on steel and aluminum under the pretense that procuring these materials from foreign sources is a threat to national security. After further buildup, $34bn of tariffs on Chinese goods went into effect on July 6th with an additional $200bn added in response to Xi Jinping’s retaliatory measures. Mr. Trump had planned to add automobiles to the list, a measure that would have a significant impact on Japan and the EU, if not for the latter successfully persuading him to temporarily hold off on any additional escalation as they engage in dialogue surrounding a new agreement.

 

Beyond restructuring individual relationships with foreign nations, Mr. Trump has prompted a crisis that has jeopardized the existence of the World Trade Organization - the foundation of global trade rules that encompasses 164 member nations, all of whom have promised not to raise tariffs above agreed levels or discriminate between economic friends and foes. Most pressing is his decision to invoke national security concerns to justify tariffs on imported steel and aluminum. The organization must now decide whether it will back China and the EU, who claim the tariffs amount to illegal protectionism, or Mr. Trump, who believes that the United States is being taken advantage of by its partners. The primary issue with making such a decision is that it puts the WTO in an impossible position - the former being equivalent to telling the President of the United States what is and is not a legitimate American security interest while the latter would legitimize such a giant loophole in global trading rules that they would become nearly unenforceable. Another source of difficulty for the WTO has arisen from Mr. Trump's withholding of support for the appointment of new judges to its appellate body, the ultimate arbiter of international trade disputes. The appellate body has only four of its seven judges and will fall to three should Mr. Trump block the reappointment of a judge whose term ends in September, leaving it with the bare minimum that is needed to staff a panel. If he were to continue blocking appointments, the body would be too small to adjudicate any disputes by mid-2019. Given that over three-quarters of all panel rulings are appealed, that would mean the paralysis of the entire system for enforcing trade rules and renders the WTO nearly obsolete.

 

President Trump has certainly been clear that he is motivated to end current trade deficits but deciphering his words to find feasible underlying long-term goals has been somewhat difficult. Chinese officials are likely correct in thinking that he is deliberately trying to paralyze the WTO in order to pursue a unilateral agenda, as it ties in with his "America First!" campaign theme, although he has seemingly gone above and beyond anyone's expectations by seeking to personally persuade trading partners into voluntarily limiting their exports to the US. Because Mr. Trump drew so much support from blue collar voters in manufacturing and agriculture, it's likely that his highest priority is to appease them by eliminating competition from abroad. Note that similar logic was applied in shunning the promotion of renewable energy in favor of coal and oil. Unfortunately, this is likely to stymie working class areas’ economic modernization as it reduces workers' incentive to learn modern vocational skills while encouraging firms to pursue further automation in an effort to cut costs.

 

In an effort to deescalate tension, some countries have sought out opportunities to engage with Mr. Trump in the hope of finding remedies to persuade him to unblock the process of appointing appellate judges and take a more multilateral approach to resolving his issues with trade. On Wednesday, July 25th, European Commission President Jean-Claude Juncker visited the White House and successfully convinced the President to begin discussions on eliminating the tariffs and subsidies that hamper trade across the Atlantic, and to resolve the steel and aluminum tariffs the Trump Administration had imposed this year as well as the retaliatory tariffs the European Union imposed in response. As part of the verbal agreement between the two leaders, the EU will look to buy more Liquefied Natural Gas and soybeans from the US while both sides hold off on further tariffs - a nod to Mr. Trump’s threats to apply duties on imported cars. The proposed pact comes a day after his administration faced criticism on Capitol Hill for its use of tariffs as Republican lawmakers expressed interest in legislation to counter the President’s initiatives. The EU also has concerns about China and has indicated that it hopes to join forces with the US for a united front in addressing Chinese trade practices. The US and EU agreed to try to use the WTO to deal with issues of intellectual-property theft, government pressure on companies to transfer technology to local partners and excess capacity in a number of industries. This would mark a pleasant change in tactics for the White House, which has primarily relied on unilateral actions thus far.

 

With cooler tensions between the White House and European Union on the horizon, it's interesting to consider the future of a restructured global trade system in which multilateral solutions would again be the norm. In one scenario, the White House may back away from further negotiations with the EU and continue its siege of the WTO. This could lead to a retreat from neocolonialism as the country turns inward and raises additional barriers to imports but would leave China with more room to grow from regional power to global superpower as its abuses of its smaller East Asian neighbors would go unchecked. Alternatively, greater collaboration with the EU in pressuring the Chinese government to move toward Western-style leadership and values would lead to greater prosperity for firms seeking to enter the world’s most prominent emerging market while providing domestic consumers with affordable goods. Chinese resistance to their advances could potentially result in widespread tariffs that would drastically reduce its commercial access to the West, possibly culminating in a financial crisis of epic proportions and yet another failed communist regime. Regardless of the path the White House travels, what is sure is that Americans will soon see increased prices of consumer goods as a result of tariffs and with 78% of full-time workers living paycheck-to-paycheck, Mr. Trump may have sailed his party into the perfect storm just as an already contentious round of mid-term elections heats up.

 

As the nation looks ahead, whether it be to a thundering Pacific or cloudy Atlantic, its most pressing question is in regard to what it can do to remain prosperous and in a position of global leadership. As iconic as the image of West Virginian coal mines and midwestern factories are to the American psyche, it's important to realize that unskilled jobs will continue to be lost to automation and third world countries rife with cheap labor. With the nation at its highest rate of employment since 1969, it's time to assist the lower end of the workforce into the 21st century by incentivizing workers to pursue greater educational opportunities and motivating companies to expand apprenticeship programs as German firms like Daimler, Siemens and Bosch have. Yet doing so will be much more difficult if the Administration continues to try to revitalize industries that had a much better outlook in 1918 than they do in 2018. Furthermore, nearly 60 years after President Eisenhower warned of the dangers of the military industrial complex, the United States has not only increased its defense budget to over half of all federal discretionary spending but also elevated military leaders to the highest levels of diplomatic decision making. While military might is surely a necessity and a cornerstone of American power, Presidential Administrations of the past few decades have forgotten the potential of talented statesmen like Henry Kissinger, who successfully negotiated the withdrawal of US forces from Vietnam in 1973, and Dick Holbrooke, a career diplomat most famous for brokering a peace agreement amongst warring factions in Bosnia that led to the Dayton Peace Accords. Rather than sinking trillions into new fighter jets and naval destroyers, leadership should be looking to support the dedicated nonpartisan Foreign Service Officers of the State Department as they advance American interests abroad with much greater efficiency and effectiveness than any military invasion since 1945. In turn, it will be much easier to strike an appropriate balance of diplomats and general officers in future Cabinets, saving countless lives and dollars while strengthening the country’s ability to quietly shape the world around it.

 

As the dust begins to settle, albeit temporarily, millions of people, from farmers on the brink of foreclosure to corporate leaders plotting their strategies for market penetration in the Orient, have their eyes and ears turned to the White House’s while they await its next move. Interestingly, the best insight on the situation comes from another controversial Republican President - the late Richard Nixon: “Too often we look at problems in the world from the point of view of tactics. We take the short view...It is essential to look at the world not just in terms of immediate diplomatic battles and decisions but the great forces that move the world. Maybe we have some disagreements, but we know there will be changes...The world can be a better and more peaceful place.” Applied to the murky state of this trade war, the nation can only hope that Mr. Trump exercises uncharacteristic prudence and patience in making further moves and renegotiates deals with both American interests and a willingness to accept mutual benefits in mind as chaos looms.