Global Trade Has a Trump Problem

(Bloomberg Businessweek) -- Away from the cameras at the Group of Seven summit in Charlevoix, Quebec, Canadian Prime Minister Justin Trudeau was groping for ways to explain to U.S. President Donald Trump that trading with Canada is not a threat to U.S. national security. According to a Canadian official who spoke with the Toronto Star, Trudeau brought up the air base at Bagotville where Air Force One had landed. Trudeau told Trump, “Why is Bagotville there? Bagotville is there to protect aluminum smelters that were building American warplanes in the Second World War.”

Trudeau’s message clearly didn’t stick. Trump continued his pattern of being friendlier with America’s enemies than with its friends. He called Trudeau weak and dishonest on his way from Canada to a convivial meeting with the brutal North Korean leader Kim Jong Un.

A possible explanation for Trump’s behavior is that in his worldview, national security appears to encompass freedom of action. To him, a great nation is unencumbered. Trump seems to be energized by engaging with world-historical characters like Kim, Russian President Vladimir Putin, and Chinese President Xi Jinping. With them, he can paint in bold colors on a big canvas. He shows less enthusiasm for the quotidian work of maintaining alliances. The web of long-standing relationships with countries such as Canada, Mexico, Germany, France, and the United Kingdom hems him in.

This is a real problem, because no law forces sovereign nations to cooperate. They do it because they trust one another. By destroying trust, Trump could do lasting damage to the international order that supports shared prosperity.

There’s no better example of Trump’s dislike of encumbrances than the U.S. position in a trade case filed by Ukraine against Russia that’s wending its way through the World Trade Organization. Russia is invoking its “essential security” to argue that the WTO has no standing to intervene against it. Canada and the European Union, among others, are arguing that essential security should not be a carte blanche for Russia to act as it wishes against Ukraine.

Only one major nation has taken Russia’s side in this pivotal case, and it is—you guessed it—the U.S.

To exert pressure on Ukraine—which is battling a Moscow-backed separatist movement—Russia is preventing it from shipping goods to Kazakhstan, Kyrgyzstan, and other nations directly across Russian territory, insisting that they first pass through Belarus. Ukraine says this and other restrictions cause delays, “effectively ban” some commerce, and violate WTO rules guaranteeing freedom of transit for goods.

Lawyers for Russia cite WTO rules that exempt a defendant nation for “any action which it considers necessary for the protection of its essential security interests.” The WTO’s charter lists three types of actions that qualify for the exemption. The one Russia rests its case on is any action “taken in time of war or other emergency in international relations.”

It’s ludicrous, of course, to argue that Russia’s essential security is threatened by the transit of mundane goods such as malt extract, wallpaper, and steam turbines from Ukraine to Kazakhstan. But Russia says the WTO, according to its own charter, has no right to second-guess it.

You see the problem here. If Russia wins the case—a decision is expected later this year or in 2019—the WTO could become a dead letter. Countries would be able to engage in almost any kind of protectionism by asserting a claim of essential security that would be unchallengeable. “A lot of countries would feel fairly emboldened,” says Jennifer Hillman, a professor at Georgetown Law Center who was a member of the WTO’s seven-person Appellate Body.

In a filing, Canada argued that a country can’t invoke essential security and then simply stroll off as Russia wants to do: “A complete lack of substantiation would be grounds for finding that use of the Article is not justified.” The European Union went further, saying “the invoking Member bears the burden of proof” that its trade-limiting action was both necessary and applied in good faith.

In contrast, lawyers for the U.S. say Russia’s argument is airtight. “A dispute involving essential security is political in nature and, therefore, beyond the proper authority and competency of the WTO to assess,” they insist in their filing. The WTO panel asked the Americans if a country invoking essential security should at least have to explain itself. Not at all, the U.S. says: “There is nothing in the text of Article XXI that requires any elaboration on the part of the invoking Member.”

Why would the U.S. side with Russia? Obviously because the U.S. wants the same kind of freedom from irksome trade rules that Russia seeks. The U.S. has claimed essential security as a defense against trading partners’ complaints over its steel and aluminum tariffs. Its chance of winning will be hugely better if Russia wins its case.

The shame of this fight between allies is that it tarnishes the Trump administration’s legitimate concern that U.S. security is jeopardized by new technologies and geopolitical rivals. Daniel Coats, director of national intelligence, testified to the U.S. Senate Select Committee on Intelligence last year that Russia is “a full-scope cyber actor that will remain a major threat to U.S. government, military, diplomatic, commercial, and critical infrastructure.” China, he testified, “will continue actively targeting the U.S. government, its allies, and U.S. companies for cyber espionage.” Coats also cited terrorism, new nuclear weapons, space warfare, and transnational organized crime. And it’s not just the U.S. that’s at risk. Developing nations suffer far more violence from terrorism and organized crime than developed nations do.

But fighting threats to national security requires choosing targets wisely. It makes sense to cast a wary eye on Chinese attempts to acquire advanced U.S. technologies that could be weaponized. Also, punishing ZTE Corp., the Chinese telecom equipment company that violated sanctions on Iran and North Korea and then rewarded the executives involved, was a step in the right direction—until Trump unilaterally decided to lighten the punishment at the request of China’s Xi.

In contrast, putting tariffs on metal from reliable nations doesn’t fit the bill. Even Defense Secretary James Mattis wrote in a February memo that unfair trade practices weren’t harming the Pentagon’s ability to get the steel and aluminum it needed and opposed blanket tariffs that would have “a negative impact on our key allies.”

Advocates of protection for U.S. steel and aluminum producers warn of a World War III in which U.S. battleships and aircraft carriers are sunk and new ones can’t be built because the steel for them can’t be imported from Europe or Japan or South Korea, blocked by an unnamed enemy who controls the shipping lanes. As an aside, it’s hard to imagine that World War III would drag on long enough, without going nuclear, for the U.S. to have time to build replacement ships, tanks, and planes from freshly produced steel and aluminum. But even if that happened and the sea lanes were closed, the U.S. would be able to get metal from Canada and Mexico—making the national security case for tariffs on them hard to fathom. Even Scott Paul, president of the Alliance for American Manufacturing, which supports protection, says the administration “has made some missteps.” Says Paul: “Ultimately engaging Mexico and Canada in some sort of alternative arrangement is the right thing to do. I hope that’s where this lands, and I hope that it gets there quickly.”

To the hawkish advisers surrounding the president, such as Peter Navarro, director of the White House National Trade Council, “national security” has become the phrase that must win every argument. It’s what a bridge player would call a trump card: A lowly 2 of diamonds can defeat an ace of spades if diamonds are trump. Protectionists take advantage by picturing their industries as essential to the U.S. “industrial base.” When the U.S. Navy announced it was dropping woolen peacoats from sailors’ sea bags, switching to synthetic parkas, the House Armed Services Committee’s Readiness Subcommittee expressed concern that the Navy failed to consider “the impact to the nation’s domestic textile industrial base.” As the 18th century essayist Samuel Johnson said, “Patriotism is the last refuge of the scoundrel.”

After the disaster of the G-7 meeting in Charlevoix, trade experts are asking themselves how much worse things can get.Simon Lester, associate director of the Cato Institute’s Stiefel Center for Trade Policy Studies, says it’s possible that “the whole system unravels,” but says he considers that unlikely. The reason: It’s in no one’s interest. “Even if you’re Peter Navarro and you think tariffs work, you recognize that you can’t do this in every industry.”

Game theorists look at global trade as a system that can have multiple equilibriums. In a good equilibrium, trade barriers are low and the world benefits from lower prices and enhanced variety. Workers who lose their jobs because of imports are retrained or financially supported with some of the gains society gets from freer trade. In a bad one, tariff walls rise so high that each country is like Robinson Crusoe, making everything it needs in a costly and inefficient way.

The purpose of the WTO is to nudge the world toward a good equilibrium. A new book called The Republic of Beliefs, by Kaushik Basu, a Cornell University professor and former chief economist of the World Bank, explains how that can happen. Let’s say people are driving on both sides of the road and crashing; the government can make everyone better off simply by decreeing that everyone must stay to the right. (Or left.) The side that’s picked becomes a “focal point” that everyone believes everyone else will choose. It is this belief, not ink on paper, that makes the system work, Basu argues. He asserts that the “might” of the law is “rooted in nothing but a configuration of beliefs carried in the heads of people in society.”

Norms take hold slowly. Basu attributes a witticism to former British Prime Minister Gordon Brown: “In establishing the rule of law, the first five centuries are always the hardest.”

Likewise with trade. The WTO has no real enforcement power. It can only convene and guide and inspire nations to coordinate around a better equilibrium. In 1947, when the charter of a proposed International Trade Organization was being written, a Dutch delegate expressed concern that the essential security clause would become a pretext for protectionism. The chairman, Erik Colban of Norway, responded that “the atmosphere inside the ITO will be the only efficient guarantee against abuses of the kind to which the Netherlands Delegate has drawn our attention.” Atmosphere seems to be a thin substance on which to rely for protection of the global trading system. Ultimately, though, it is all we have.

©2018 Bloomberg L.P.

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