How Trump’s steel tariffs could break the WTO

In the wake of Trump’s announcement that a 25 percent tariff would be imposed on all steel imports, along with a 10 percent tariff on aluminum, several WTO members have already signaled they are getting countermeasures ready, leading to fears of a “trade war” that leads to rising tariffs and a crimp on the global economy.

But more fundamentally, Trump’s tariff plan have the potential to permanently change the international rules of trade, by cementing in place a new rationalization for trade barriers that other countries would likely imitate, according to trade experts.

The more countries lean on that new rationalization, the less valuable their commitments to liberalize trade would become and the less effective the WTO would be as a body that fights for free trade.

“It just completely opens up the floodgates for who knows what,” Tori K. Whiting, the Jay Van Andel trade economist at the Heritage Foundation, told the Washington Examiner.

The starting point for this possible chain of events is language in the WTO that allows countries to adopt trade measures to protect their national security. Trump’s proposed tariffs are built on that idea — he invoked Section 232 of U.S. trade law that allows limits on imports to protect vital industries.

Countries are afforded that possibility, pursuant to Article XXI of the General Agreement on Tariffs and Trade, which was folded into the agreement that created the WTO. That language holds that nothing in GATT can “prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests.”

But while that language exists, it has rarely been used to justify a trade restriction, and it’s never been litigated by a WTO dispute settlement panel. If Trump follows through on his threat, it would disrupt years of practice in which members of the GATT and the WTO have agreed to refrain from these types of barriers.

“This would be the first time in the history of the whole system where it was used against close allies and people we’re in close security arrangement,” National Foreign Trade Council President Rufus Yerxa told the Washington Examiner. Yerxa served as deputy director general of the WTO from 2002 to 2013.

But it would get even more complicated for the WTO if Trump were to shatter that percent. The next decision countries would face is whether to challenge the U.S. action.

Trade experts have said for decades that this is a lose-lose decision. Failure to challenge the U.S. would essentially signal to the world that these sorts of national security measures are acceptable.

But challenging it could be even worse, since a plain reading of Article XXI gives a country permission to take any step that “it considers necessary” to protect national security. If a challenge leads to a decision that the U.S. move is legal, other countries might quickly decide to justify their own trade barriers as permitted national security measures, even when they restrict trade beyond what they agreed to when joining the WTO.

For all the talk of how Trump’s tariffs are a blow to “free trade,” the truth is that the WTO permits thousands of high tariffs to remain in place to counteract dumped and subsidized imports. According to the Peterson Institute for International Economics, the U.S. alone has imposed more than 600 antidumping measures and nearly 300 anti-subsidy duties since 1980 — each of these is aimed at correcting what the U.S. government deemed to be unfair trade in some form.

But in that same time, only two U.S. restrictions have been imposed based on national security, and the last one was more than 30 years ago, before the GATT evolved into the WTO by creating a binding dispute settlement process. Those U.S. restrictions weren’t based on whether trade is fair, but instead on whether the U.S. needs to restrict trade in the name of security.

Trump’s tariffs would immediately force countries to decide whether to seek a binding decision on whether they are permissible and for the first time set in stone the limits, if any, of a national security designation.

As tough as it might be to win, Whiting and Yerxa think there’s a chance. Whiting believes there’s room to argue that Trump used an “overly broad definition of national security.”

She also said the Commerce Department made an absurd finding that the U.S. would have enough steel to win a Vietnam War-level conflict, but not a “conflict requiring the production increase seen during the Second World War.”

“What’s the probability of that?” she said, noting that modern wars don’t rely on nearly as much physical production.

Yerxa believes Trump’s own comments about his proposed plan show that he sees tariffs as a way to remedy “unfair” trade, instead of protecting national security. Trump tweeted on March 1 that the U.S. has been “decimated by decades of unfair trade and bad policy.”

Yerxa said it could be argued that Trump is incorrectly citing national security as a justification for tariffs when he should be citing unfair trade.

“That to me really undermines the argument that this was essential to your national security interests to do this,” he said.

Still, there’s no guaranteed victory for countries that challenge Trump’s tariffs. For that reason, Yerxa warned that heading down the path Trump has chosen is not just an academic exercise in whether to fundamentally alter the WTO — it’s one that could hurt the U.S. more than most.

“The U.S. more than any other country should be concerned about that,” he said. “We have $2 trillion of exports in all kinds of things, including a lot of technology.”