Written by Dan Steinbock, Difference Group
US Tariffs vs China, EU, NAFTA – and the Rest of the World?
After months of trade war with China, US subjected its EU and NAFTA partners to steel and aluminum tariffs. EU leaders missed a year seeking appeasement with Trump’s protectionism. It’s time to defend the multilateral trading regime.
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Unsurprisingly, the European Union (EU), Canada and Mexico have lambasted the US steel and aluminum tariffs. European Commission (EC) President Jean-Claude Juncker criticized Trump’s tariffs and pledged retaliation in due time. French President Emmanuel Macron and German government spokesman called the move unlawful. In Britain, the Brexit proponents and opposition quickly blamed each other for the tariffs. Canadian Prime Minister Justin Trudeau said the tariffs would “harm industries and workers on both sides of the Canada-US border.”
However, when President Trump initiated steel and aluminum tariffs against China months ago, the EU leaders and the NAFTA partners struggled separately for temporary or permanent bilateral exemptions leaving Beijing alone to defend the international multilateral rules they now say have been violated.
It is time to walk the talk and defend the multilateral international trading regime.
The rise and erosion of NAFTA
For months, Canada and Mexico have been hedging their bets against a potential collapse of the North American Free Trade Agreement by pushing for deals with new partners, particularly with China and other Asian countries.
NAFTA is America’s post-Cold War blueprint for other free traded agreements (FTAs). It came into force amid the globalization boom in 1994. While it was initially promoted as a receipt for regional success in the US, Canada, and Mexico, its record has proved mixed. The agreement has benefited consumers in the three countries, but also contributed to investment outflows, unemployment and offshoring.
Canada and Mexico have been hedging their bets
In relative terms, US is more important to Canada and Mexico as an export destination and source of foreign investment than vice versa. So the outcome of the NAFTA talks is far more important to Canada and Mexico than to the US.
If the US withdraws from NAFTA, that would start a six-month legal process before official termination. While the Trump administration has seen this as a negotiating tool to force Canada and Mexico to accept its demands, the latter have used the time to complete trade talks with Brazil and the EU.
Canada and Mexico are hedging their bets against a potential NAFTA collapse by pushing for deals with new partners, particularly with China and some other Asian countries. Ironically, Trump’s tariff war against its EU and NAFTA partners is solidifying European, Mexican and Canadian trade ties with China.
the outcome of the NAFTA talks is far more important to Canada and Mexico than to the US.
Trump’s tariffs continue to pour oil on the simmering fire. In Mexico, US protectionism has further solidified the impressive lead of the popular center-left presidential candidate Andres Manuel Lopez Obrador, who is now supported by more than 53 percent of voters. In Canada, Trump’s aggressive tariffs could undermine Trudeau’s fragile lead in the impending 2019 elections.
The rise and demise of TTIP
Not so long ago, optimists still saw the Transatlantic Trade and Investment Partnership (TTIP) as a “done deal.” The US-EU free trade agreement (FTA) talks were announced in February 2013. The two account for nearly half of world gross domestic product and 30 percent of global trade, and have investments of more than $3.7 trillion in each other’s economies.
The TTIP aimed to enhance market access through the elimination of barriers to trade and investment in goods, services, and agriculture. But it was also expected to serve a number of strategic, including geopolitical US policy goals. Yet, potential controversial issues soon surfaced, including differing views to regulations and standards, financial services, labor and the environment, and digital trade. Moreover, differing approaches to data privacy and the diplomatic fallout from the Snowden case complicated the talks.
For all practical purposes, the steel and aluminum the tariff debacle was ignited already in April 2017, when President Trump issued a presidential memorandum directing US Commerce Secretary Wilbur Ross to investigate the effects of steel imports on national security on the basis of the Trade Expansion Act of 1962. It was a shrewd way to exploit an old Kennedy-era Act, which initially was created to expand trade and not for trade shrinkage.
If Ross would determine – as he did in early 2018 – that steel “is being imported into the US in such quantities or under such circumstances as to threaten to impair national security“, Trump would be authorized to take action – as he did in early 2018 – “to adjust the imports of the article and its derivatives so that such imports will not threaten to impair national security“.
As steel imports were termed an issue of “national security”, even US Defense Secretary James Mattis was dragged into the debacle. By mid-June 2017, Europe’s NATO leaders joined in as well. They launched an extraordinary lobbying campaign against the anticipated US crackdown on steel imports, which, they argued, would hit US allies more than China.
The multilateral international trading regime was not born automatically. It was preceded by two world wars, Great Depression and a series of genocides.
Last March, Trump signaled he was willing to reopen negotiations with the EU over the TTIP agreement. As Commerce Secretary Wilbur Ross put it, Trump “terminated the trans-Pacific deal; he didn’t terminate TTIP.” So the EU, in exchange for the permanent exemption, offered to talk about improving reciprocal market access for the US for industrial products, cars, public procurement, and energy. But Trump wanted far more – an America-First deal.
Time to defend the multilateral trading regime
EU trade commissioner Cecilia Malmstroem said recently:
“We will now trigger a dispute settlement case at the WTO, since these US measures clearly go against agreed international rules.”
However, Washington’s purposeful blocking of appointments to fill the empty seats in the WTO’s appellate body, tasked with managing disagreements between trading nations, could slow settlement talks.
Furthermore, precious time has been lost. The values and interests that once united the transatlantic partners are diverging. Consequently, efforts to simply buy time and appease trade aggression are a dead end.
What is really needed is a broad front of major advanced economies and large emerging economies against illicit tariff wars.
The multilateral international trading regime was not born automatically. It was preceded by two world wars, Great Depression and a series of genocides.
Nor can a multilateral trading regime be sustained without decisive international cooperation.
This article was adapted from Dr Steinbock’s recent keynote on the global trading regime and the new tariff wars.
