The rules-based system is in grave danger
As yet it is unclear exactly what Mr Trump will do (see Briefing). But the omens are bad. Unlike his predecessors, Mr Trump is a long-standing sceptic of free trade. He has sneered at the multilateral trading system, which he sees as a bad deal for America. His administration is chaotic, and Gary Cohn’s ominous decision on March 6th to resign as the president’s chief economic adviser deprives the White House of a rare free-trader, signalling that it has fallen into protectionist hands. Not since its inception at the end of the second world war has the global trading system faced such danger.
This danger has several dimensions. One is the risk of tit-for-tat escalation. After the EU said it would retaliate with sanctions on American goods, including bourbon and Harley-Davidson motorbikes, Mr Trump threatened exports of European cars.
The second danger springs from Mr Trump’s rationale. The tariffs are based on a little-used law that lets a president protect industry on grounds of national security. That excuse is self-evidently spurious. Most of America’s imports of steel come from Canada, the European Union, Mexico and South Korea, America’s allies. Canada and Mexico look set to be temporarily excluded—but only because Mr Trump wants leverage in his renegotiation of the North American Free-Trade Agreement, which has nothing to do with national security. Mr Trump is setting a precedent that other countries are sure to exploit to protect their own producers, just as spuriously.
It is not clear whether other countries can respond legally when national security is invoked in this way. This puts the World Trade Organisation (WTO) into a rat trap. Either Mr Trump will provoke a free-for-all of recrimination and retaliation that the WTO’s courts cannot adjudicate, or the courts will second-guess America’s national-security needs, in which case Mr Trump may storm out of the organisation altogether.
The WTO is already under strain. The collapse of the Doha round of trade talks in 2015, after 14 fruitless years, put needed reforms on hold indefinitely. Disputes that might have been swept into a new trade round have fallen to the WTO’s dispute-resolution machinery, which is too slow and too frail to carry the burden. The WTO has not kept pace with economic change. Investment is increasingly tied up in intangibles, such as patents and copyright, rather than physical assets, such as steel mills. Rules drafted for rich, market-led economies cannot always police state capitalism. The implicit subsidies China gives its producers were a cause of global gluts in industrial metals. No wonder that the world’s second-biggest economy has been the focus of so much anger.
Whatever the WTO’s problems, it would be a tragedy to undermine it. If America pursues a mercantilist trade policy in defiance of the global trading system, other countries are bound to follow. That might not lead to an immediate collapse of the WTO, but it would gradually erode one of the foundations of the globalised economy.