Explainer: Where is the Trump trade war heading and what’s the alternative?

July 25, 2018: The US Trump administration is escalating its America First strategy of using its power as the world’s strongest economy to get more benefits for US corporations from individual trading partners, in the hope of domestic political advantage in the mid-term Congressional elections due in November 2018. But there are long-term consequences for the global economy and the global trading system.

The biggest exporters in the world – Europe, China, Japan – are alarmed at the escalation of tariffs and threats of more tariffs by the US, and they are prepared to hit back with their own higher tariffs. So the trade war has now begun.

So far, the tariffs – taxes on imports - are relatively small in scope, but this is definitely only the beginning. Australia has so far avoided any direct impact, but the weakening Australian dollar is an indirect impact.

On June 1, the US imposed a 25 per cent tariff on Chinese steel and a 10 per cent tariff on Chinese aluminium imports. Then on July 6, the US imposed a 25 per cent tariff on a wider range of Chinese exports, from farming ploughs to semiconductors and airplane parts. In response China imposed a 25 per cent tariff on US$34 billion of soybeans, pork and other imports from the USA.

On June 1, the US imposed similar tariffs on the €6.4 billion of steel and aluminium from the European Union, and in response on June 22 the EU imposed tariffs on €2.8 billion worth of U.S. goods, including steel and aluminium products, farm produce such as sweetcorn and peanuts, bourbon, jeans and motor-bikes.

Canada and Mexico were also hit by the US steel and aluminium tariffs on June 1. Mexico retaliated on June 6, with tariffs on US$ 3 billion worth of US steel, pork, apples, potatoes, bourbon and cheeses. On July 1, Canada imposed tariffs up to 25 per cent on US$12.5 billion of steel, aluminium and agricultural imports from the USA.

Japan has been hit with the US steel and aluminium tariffs. It has suggested retaliation with tariffs on US$450 million of US imports, but they have not so far been applied.

The US is preparing to escalate tariffs further on US$200 billion in trade with China, in response to the Chinese counter-tariffs. On top of that, President Trump has said he is prepared to impose tariffs on all Chinese imports – worth about US$500 billion.

Trump has also floated a proposal for a 20 or 25 per cent tariff on European automobiles and auto parts, and in response the EU has suggested it could hit US$300 billion of US auto imports with a 25 per cent tariff.

At the G20 meeting in Argentina, the International Monetary Fund warned that the currently applied tariffs would shrink global trade and reduce global economic growth by 0.5 per cent of US$450 billion, by 2020, and that the impact of the additional threatened tariffs would be far greater.

US Treasury Secretary Steve Mnuchin told the Europeans at the G20 meeting: "If Europe believes in free trade, we're ready to sign a free trade agreement with no tariffs, no non-tariff barriers and no subsidies. It has to be all three," said Mnuchin.

Ironically, the formula of no tariffs, no non-tariff barriers and no subsidies is the fundamentalist neo-liberal free trade program, urged on others but seldom completely applied by industrialised economies in practice.  The US has never applied all of these rules to its own economy. For example, the US continues to pay extensive agricultural subsidies to individual farm businesses and has many non-tariff regulations at the Federal and state government level, for local industry development. These range from government procurement policies that favour local firms to the use of locally-built and staffed ships for coastal trade. Australia has been one of the few economies to apply most of the fundamentalist agenda, at the expense of manufacturing industry and a more diverse economy.

The Trump tariffs appear to be a negotiating gambit aimed at a re-balancing of global trading patterns. As indicated in Mnuchin’s statement about a free trade deal with Europe, the goal is to enhance the US economy at the expense of major trading partners, after which the tariffs would be withdrawn.

China, Japan, India, Canada and the European Union have lodged formal disputes with the US in the World Trade Organisation, over the steel and aluminium tariffs. The US has made the preposterous claim that the tariffs are justified by national security concerns. Trump has also hinted that the US could withdraw from the WTO.

The WTO is the global trade institution with 164 members, which was intended in theory to develop a rules-based trading system that places some restraints on the power of the largest industrialised economies and allows participation by medium-sized economies like Australia and smaller developing economies. The WTO has a disputes and appeals process which is intended to prevent trade wars. The Trump administration has undermined the disputes process by blocking the appointment of members of its appeals panel.

In practice, the WTO has been dominated historically by the most powerful industrialised players, the US, the EU and Japan. More recently, emerging economies like Brazil, Russia, India, China and South Africa (the BRICS) have exerted more bargaining power. They and less-developed economies have rejected fundamentalist policies and demanded flexibilities that allow them more room for development.

This has led to a stalemate in WTO negotiations with very few agreements reached since 2003. Instead of trying to negotiate with all WTO members, the industrialised countries have developed bilateral and regional agreements in which they have greater bargaining power, like NAFTA and the TPP, and sectoral agreements like the Trade in Services Agreement (TiSA). Trump is moving away from these deals in favour of a more naked exercise of US bilateral bargaining power.

We need fair trade rules as an alternative to both neoliberal fundamentalism and Trump-style unilateralism. Such rules should apply to all countries and potentially restrain the market domination of the most powerful players. The WTO in its current form is not playing this role.

Trade can improve peoples’ lives if it is part of an economic policy that delivers employment and higher living standards in an environmentally sustainable society that rejects discrimination and respects human rights. This need not mean a return to high tariffs, but should enable expanded trade combined with active industry policies that deliver a range of jobs in manufacturing, services, agriculture and other sectors, supported by high quality education, health and other services.

Trade rules should be negotiated openly and democratically in a system that includes all governments and provides for the specific needs of developing countries. Trade agreements should not prevent governments from regulating in the public interest. They should not strengthen monopolies on medicines nor give additional legal rights like ISDS to global corporations that already have enormous market power. Finally trade agreements should be based on internationally agreed upon and fully enforceable labour rights and environmental standards to counter the global race to the bottom on these standards.