DIRECTOR GENERAL ADJUNTO ALAN WM. WOLFF
History lessons — How does the current set of trade wars compare to similar periods in history?
Other than President Jefferson's self-destructive embargo on trade with France and Great Britain at the beginning of the 19th century — and that was not seen by the President as an act of war but an act of neutrality in pursuit of peace — the various U.S. tariff peaks throughout U.S. history up until 1930 were not generally considered by those crafting U.S. trade policies, as far as I know, as declarations of war.
Modern trade policy dates back to 1930. Some historians have referred to the 1930 trade measures as economic warfare. This is in part because high tariffs were imposed, reciprocated by other countries. For example, in November 1931, the UK enacted the Abnormal Importations Act which allowed the Board of Trade to impose tariffs of up to 100% ad valorem on manufactured goods from outside the Empire, and tariffs of 50% were immediately imposed on many of these. Canada had raised its tariffs as well.
I never viewed the broad high tariff measures of the 1930s as an act of war. It was a period when the U.S. Congress tried to stimulate domestic demand by largely shutting out imports. It was not aimed at any country in particular. Others did much the same. The motive was to grant domestic industries protection.
It may be just a matter of semantics, but war has always connoted in my view having an objective to obtain a more strategic result than simply protectionism. Trade has been used, for example, to deprive a country of its freedom to conduct its own foreign policy, to aid in the process of seizing some of its territory or bring about a major change in its policies. It is a more drastic set of aims and measures than protecting domestic industry.
In 2018 when steel and aluminum tariffs were imposed by the United States, and a number of its trading partners reciprocated with tariffs on U.S. goods, these measures and countermeasures did not rise to a level, in my lexicon, of being correctly termed a “war”. Steel is often subject to trade restrictions by the United States and other countries, but it was described in the media as a “trade war.”
It is unclear to me exactly how all the trade actions being taken or threatened to be taken are part of a single war. The lead story in the Financial Time last weekend was that the United States had extended its trade war to Mexico. For a while there was a 25% tariff on Canadian shipments of aluminum slab into the United States for national security reasons, and now there is not. There is arguably some linkage of metal tariffs to the China-US trade conflict (as there is a global market for these metals), but no logical linkage with the current threat made against Mexico for incremental 5% monthly increases in tariffs linked to illegal immigration of people from Central America. The word “war” in this case is again used in a highly imprecise fashion.
I have had some, albeit minor, involvement in economic warfare. My first assignment in the U.S. government, for which I had no choice, was economic warfare during what was a one-month assignment to the Office of Foreign Assets Control in the U.S. Treasury. At the time it was engaged in depriving Vietnam of any hard currency during that war, and actions of a similar kind against the PRC. I was given the task of denying entry into the United States of anything that looked “Chinese” that could not be proved to have left China before October 1, 1949, the time when the PRC was founded. This was during the Vietnam War and the Cold War. Those two hostilities were certainly wars by any definition — wars accompanied by economic sanctions.
The term “war” is assigned to any number of trade actions. In 1965, the European Communities (now called the European Union) as part of its formation, drastically limited imports of chickens from the United States. In return, under negotiating rights it had under GATT, the U.S. increased tariffs on dextrine, potato starch, brandy and light trucks. This was made part of the U.S. permanent tariff schedule, which applies on a most-favored-nation basis. The 25% tariff on light trucks is still with us, but not aimed particularly at trade with the EU.
The U.S. imposition of a 10% additional import duty on August 15, 1971 (known in Japan as the “Nixon Shoku”) was a balance of payments measure but was of a kind not then allowed by the international rules under the GATT. It lasted four months and enabled reaching the Smithsonian Agreement on December 18, 1971, which permitted the U.S. to break the tie of the US dollar to gold and a devaluation of the dollar. In scope, it was far broader than the initial U.S. tariff measures imposed on China, as it applied to imports from all countries. May be judged to have served a good purpose did not it save it from being condemned by a GATT Working Party by almost all members (the U.S. and one other country). It was an aggressive and technically a GATT-inconsistent trade measure.
The trade “frictions” as they were called between the United States and Japan, from the late 1960s to the mid 1990s were not termed a “war”. Japan was an ally. Tools used were quotas (e.g. on color TVs — a safeguard action ), numberless anti-dumping actions and voluntary restraint agreements by Japan (most prominently on autos), and the first U.S. use of section 301 to retaliate against Japan for what the U.S. held was a violation of a bilateral antidumping and market access agreement covering semiconductors. Neither government termed this period one of warfare.
The closest historical parallel to the current US-China trade conflict is the three-decade period of US Japan trade frictions. Japan’s economy in many areas did not allow free import competition nor allow market forces to determine competitive outcomes for a vast swath of imported products. There are parallels and there are differences from what took place then with respect to Japan and what is described as problems by various Chambers of Commerce and companies with respect to China. One serious difference between the rise of Japan and the rise of China is the West expressing concern over the apparent direction of Chinese policy as leading away from convergence.
There are a number of differences between the organization of the current Chinese economy and most of the other trading economies. The idea has been expressed by the scholar Andrew Lang that the WTO leaves to individual WTO members the organization of their domestic economies. This is true to a large extent. The question is one of degree, whether the differences in a particular case undermine the fulfillment of WTO obligations or render the tools of the WTO inadequate to the task of managing any divergencies. A fundamental question is the size of the WTO tent, whether if economies differ too greatly, the WTO can encompass co-existence rather than convergence. That is an academic question, not one that is being addressed in the WTO. At present the only question is whether existing WTO obligations are being met.
As to whether there is a "trade war" between two members, that is not a WTO question. It is a question for the particular Members involved to address — if they care to. The WTO and its Members have a mission to maintain and enhance the multilateral trading system. The fewer trade restrictions that exist, the better.
The WTO does not prevent wars, but it does help maintain peace. It was founded in its original form as part of the Bretton Woods Agreements to stabilize and allow for the expansion of the world economy and reduce the risks of another world war. The WTO is available for this duty on a continuing basis, and in fact, many conflict-affected countries seeking now to accede to WTO membership seek to do so to improve the prospects for maintaining peace that in many instances is all too fragile. For them, the term war is not a distant memory, and they see enhanced trade as part of the solution.
Has the political economy of trade liberalization and protectionism changed recently? How and what do such changes tell us about whether we are at or near a major inflection point in trade policy?
The decline of manufacturing employment in a number of Western countries (from causes predominantly outside of trade), rising populism, nationalism, nativism, the movement of a substantial amount of manufacturing to Asia, the rise of income inequality, turbulence in employment markets due to the introduction of new technologies, are not conditions conducive to trade liberalization. The U.S, the traditional driving force of multilateralism has under the current Administration made WTO reform — not multilateral trade liberalization – a key objective. Others have joined in this effort, but WTO Members have not taken on the role that the United States is no longer playing with respect to trade liberalization.
Is this an inflection point in the history of trade policy? To be sure, it is a low point in trade liberalization, replaced by efforts at reform. That said, and on the positive side, history may judge the Trade Facilitation Agreement agreed to in 2013 at Bali, and effective in 2017 and the Joint Initiatives launched at the 2017 Buenos Aires WTO Ministerial as inflection point. In this regard, the attempt to negotiate new rules for E-commerce may later be regarded as an inflection point.
We do not know whether the pause in attempts at further liberalization for goods (e.g. the Environmental Goods Agreement and further expansions of the Information Technology Agreement) is going to last forever. I do not think that will be the case. I think that history like a great river will resume its course. This is based on my calculation of the economic interests of the WTO’s current and future Members. But no one can peer into the future with any guarantee of certainty.
I believe that the multilateral trading system will endure and ultimately be strengthened.
US v. China — If the friction today relates to different economic and political models in China vis a vis the United States, how have such divergences been dealt with in the past, what's different now, and what can be done to ensure that the global economic order is equipped to address the differences?
The economy of Japan differed markedly from that of its major trading partners for decades. The large-scale retail store law (daitenho), the premiums law, the non-administration of competition law when it came to the keiretsu and other combinations of Japanese business, the ban on inward foreign direct investment, discriminatory product and sanitary and phytosanitary standards and a host of other in-depth defenses – were all together for many years a very effective defense-in-depth against competition from imports. The policies that led to extremely rapid economic growth and were to make the 21st century the century of Japan, however, led eventually to economic stagnation. The GATT and WTO rules were of close to no help in resolving differences. There was one bilateral negotiating initiative after another between Japan and the United States, with more often than not, meagre results in each. But over time Japan changed its policies.
No two countries are alike. The trajectory of one, in this case Japan, is not a predictor for the trajectory of another, in this case China. Endless engagement in discussions between trade teams from the two countries (the U.S. and Japan), and changes in Japanese policies, led to what has been a generally and genuinely harmonious current economic relationship.
Japan, the EU and the U.S. are considering changes in the rules of the system to deal with current realities through options for managing areas they presumably believe are not sufficiently covered by the existing rules. The subjects announced by the EU, Japan and the US include industrial subsidies which may lead to overcapacity, the participation of state-owned enterprises in commercial competition, transparency, and technology transfer. There will undoubtedly be conversations with China on any proposals that the three trading partners come up with. What the four largest trading entities (the US, China, the EU, and Japan), can agree to is unknown. The chances of adoption by the WTO would be greatly enhanced by an agreement among the four.
New trade linkages — How should we address the degree to which the trade wars are linked to larger issues such as technology and national security? Has this linkage changed the dynamics of the current trade wars or their potential resolution?
It is hazardous to try to outsource national security decisions generally to WTO dispute settlement panels, and care ought to be exercised in attempting to do so.
In the drafting of the national security provision of the WTO/GATT, there was a debate as to the balance to be drawn between nations not interfering in trade and allowing some freedom to take trade-restrictive actions in furtherance of national security interests, especially when there was a military conflict taking place or likely to ensue. For forty years, GATT and then WTO Members decided not to settle differences on the subject through litigation under the GATT provisions, until the Ukraine-Russia case. In the end, there was a decision on the part of the complainant not to pursue through an appeal the issue after the panel’s decision on the facts involved was rendered in favor of the responding country (Russia).
Ultimately, it is unlikely that WTO Members will be willing in all cases to allow the WTO to determine what is appropriate in defense of a Member's national security interests in all cases. Each case will differ, from the Ukraine- Russia set of facts, to those involved in steel and aluminum, and potentially with respect to automobiles
To my knowledge, there has been no decisive WTO debate among Members in recent decades with respect on the appropriate bounds of national security trade actions under the WTO’s rules. There are two levels for consideration. One is whether a particular commodity poses a threat to essential security interests. A separate question entirely is whether two countries are engaged is a Cold War or a shooting one. For the WTO, a sector-specific action is already a delicate matter – in which political as well as pure factual analysis will determine when a country will invoke national security as a reason for its action. At one end of the spectrum is a measure that is predominantly designed to afford domestic protection. That is what the WTO, and GATT before it, presumably hoped to address (for example, national security import restrictions imposed by Sweden ages ago against imported footwear for the use of its soldiers). In an era of cybersecurity concerns, the issues are far more complex, and the outcomes less predictable.
I have not researched it, but I do not recall the WTO and GATT as playing a central or even peripheral roles in the last Cold War (save perhaps for the bilateral resolution of the Helms-Burton law concerning extraterritorial application of U.S. Cuba sanctions to EU companies). I do not foresee the WTO taking on the function of determining national security interests very often. It is speculative to conclude now how the system will be tested in the future, and even more speculative to estimate how the issue would be resolved, should one occur.
Technology has irreversibly changed the evaluation of national security interests, whether considering the building of internet infrastructure of the uses of social media for political purposes. The WTO is unlikely to resolve problems in this field that domestic policies have only begun to address.
The moderator intends to set the stage by outlining the US 232 tariffs on steel and aluminum and the fact that some countries responded by both filing WTO challenges and taking immediately retaliation. Was such a response the right thing to do and if not, what should those countries have done instead?
Others will respond. A WTO official is not in a position to address the appropriateness of WTO Members' trade measures. The issues involved can be brought into the WTO for discussion, consultation, mediation, or litigation under the Dispute Settlement understanding. Members make their policy choices and understand or at least know of a range of potential consequences.
Specific Responses to the Causes, Consequences and How to Respond to "Trade Wars"
It is not my role as a representative of the WTO to classify any trade measure as consisting of or being part of a "trade war". Current events that are considered by most or some commentators as being parts of, in in the press, a "trade war", and since not all are bilateral not clearly what war, are (roughly in descending order):
- Current and threatened measures affecting US-China economic relations. These include:
- Imposition of across-the board tariffs by each against the other.
- U.S. export control regulations generally as they affect China, and recently measures taken with respect to Huawei, and related import restrictions.
- US approaches to other countries to adhere to Huawei restrictions.
- Reports of Chinese countermeasures against foreign corporations doing business in China, including through investments.
- Reports of China considering restricting exports of rare earths.
- Holding personally responsible a senior executive of Huawei for alleged violations of Iran sanctions.
- Reserving the option of designating a country as a "currency manipulator"
- US invocation of national security to impose restrictions on imports of steel and aluminum (imports at present from all but NAFTA sources).
- Other WTO members' retaliatory measures based on claims that U.S. import restrictions were in fact safeguard actions.
- U.S. threats of national security import restrictions on automobiles.
- U.S. blocking of appointments to the WTO Appellate Body on the ground that in its view the AB has exceeded its mandate.
- U.S. threat of imposition of escalating tariffs on Mexican goods in response to illegal immigrants transiting Mexico as a path into the United States.
These lists are representative and may not be complete. They do not include the broad tariff measures, as these constitute reactions not causes of trade hostilities.
- Allegations against China (denied by China)
- Interference with inward foreign direct investment.
- Excessive industrial subsidies for traditional industries and industries of the future.
- Inappropriate acquisition of foreign technologies.
- Creation of excess capacity in various industries.
- Unfair competition from state-owned enterprises.
- Market access curtailed by state-capitalism.
- Lack of transparency.
- Misuse of SPS requirements, etc.
- Discriminatory application of domestic laws, such as the Antimonopoly Law.
- Allegations against the US (denied by the US)
- Excessive and inappropriate use of trade remedies (antidumping and countervailing duties).
- Continuation of use of non-market methodology for antidumping calculations
- Excessive and inappropriate use of export controls.
- Inappropriate blocking of appointments of Appellate Body members.
- U.S. seeking trade rebalancing
- US frustration over fifteen or more years of complaints over excess capacity in metals and talks addressing same as having little or no effect.
- US frustration over fifteen or more years of its complaints over the conduct of the Appellate Body as having little or no effect.
- This is taking place during a period of rising populism, anti-multilateralism, resistance to further international economic integration – e.g. the Brexit example).
- Divisions over paths forward in the WTO (not confined to the U.S.)
- Waning US support for multilateralism.
- Dislocations and harms caused by nontrade factors (technological change, income inequality, etc.) insufficiently addressed by national programs including domestic policies that need to support adjustment to changes.
- Advances in technology increase the areas of potential conflict but may also provide solutions. (During the Cold War, nuclear arms assured a balance that undergirded greater stability. This can occur in cyber warfare as well. Neither side of any conflict should wish to bring down the electrical grid of the other, as retaliation in kind would be catastrophic.) Advances in technology always affect warfare – from the substitution of iron for bronze, the longbow, gunpowder, iron clads, air power, nuclear weapons, to name a few. Cyber weapons and defenses are far more complex, in part due to the existence of non-state actors, so discerning where attack is from can be more difficult.
- Declining growth in world trade and global GDP (although there are macroeconomic factors as well, slower growth in China and Europe).
- Greater business uncertainty
- The G-20 call for WTO reform
- Trilateral – proposals expected
- AB proposals
- Transparency proposal
- Joint initiatives
On the positive side:
How to respond
- No international agreement can prevent two parties from resorting to war, whether military or economic.
- Those matters that can be resolved by dispute settlement are being and should be channeled in that direction.
- Bilateral US-China discussions leading to a modus vivendi (temporary equilibria) are being encouraged, but the possibilities and the pace are wholly within the control of those directly involved.
- The G20 leaders have endorsed the value of WTO and called for its reform.
- Trilateral effort: The U.S., Japan and EU seeking new rules that can diffuse tensions by contributing to resolutions of some contentious issues.
- Members are moving ahead where they can do so, with open plurilateral agreements through the joint Initiatives (these can be areas for potential cooperation between the US and China). (Not all are joining).
- Pursue closing the gap in differences over the Appellate Body (not a US-China issue as such but can ultimately help).
- The stronger the WTO as an institution and set of rules, the more likely it can play positive role in providing a response to trade conflicts.
- Encourage all Members that may be able to contribute positively to strengthen the WTO to act. Those who are engaged should increase and broaden their efforts. Those who are not should be urged to do so.
- Urge CEOs of businesses engaged in international trade, to rededicate themselves to work for preservation and enhancement of the multilateral trading system. The system provides the predictability on which their international activities depends. They need to make their voices heard with the view to restrain rounds of mutual retaliatory measures.
- Enlist nongovernmental organizations, including unions, to support the WTO because it promotes fairness.