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Why Trump’s Trade Policy is no Friend of Brexit

Why Trump’s Trade Policy is no Friend of Brexit

Charlotte Sieber-Gasser (DCU Brexit Institute)

 

The escalation in the numerous trade disputes initiated by the US government and the fact that the World Trade Organization (WTO) is unlikely to maintain a fully operational dispute settlement system beyond 2019 must be taken into consideration in any Brexit-scenario; especially, in a scenario that requires “leaving on WTO terms”.

 

Escalation of Trade Disputes

It must be fairly well-known by now that the current US government continues to engage in an increasing number of trade disputes worldwide. As US President Trump announced in 2016: he intends to “rewrite the global trade rules” and to “end the trade war against the American worker”, which was unleashed “by terrible trade deals”. To name just a few, since his election, the US left the Transpacific Partnership (TPP), unilaterally increased tariffs on Aluminum and Steel, increased tariffs for Chinese products massively, banned Huawei, and threatened to unilaterally increase tariffs on autos, as well as to introduce retaliatory tariffs against the EU.

These US measures not only led to numerous complaints before the WTO, but they also resulted in retaliatory tariffs by China, and – among others – in re-balancing tariffs by the EU and in safeguarding measures in steel by the EU. And while the EU re-balancing tariffs only apply to US goods, the EU safeguard measures apply to all steel imports to the EU/EEC market, including imports from Switzerland.

 

The inability of WTO to Put an End to Escalation

The global trading system relies on a fine balance of rules and rights, ensuring a minimum standard in all trade relations. Up until 2017, the transatlantic alliance played a key role in promoting and strengthening this rules-based trading system, not the least by complying with its dispute settlement proceedings.

Since then, the trade alliance between Europe and the US has suffered. Disagreement over the interpretation of WTO law and the role of the dispute settlement body intensified. Most critically, the US government continues to veto the reappointment of judges to the WTO Appellate Body, the court of appeal in the WTO dispute settlement system. It is expected that the body will cease to function by the end of this year when of the three remaining judges (out of 7), the terms of two more judges will expire.

 

WTO Dispute Settlement Without Appellate Court

The dispute settlement system of the WTO therewith risks falling prey to its own success: while efficient and successful in enforcing compliance with WTO law, the Appellate Body has been criticized for quite some time. According to some WTO members – including the US – the Appellate Body consistently over-stepped its authority by, for instance, interpreting domestic laws or creating new obligations. Blocking the reappointment of judges therewith is a simple, but effective way to end the court’s rulings.

Hence, chances that the WTO system is able to end tariff escalation in the on-going trade disputes are low. Starting in 2020, the WTO Dispute Settlement Understanding will refer to a court of appeal, which will no longer exist. As a result, any losing party will be able to prevent the adoption of the first instance panel report by appealing before a non-existent Appellate Body. Effectively, the dispute settlement mechanism of the WTO will therewith be turned into a non-binding system, which will likely lead to an increased number of safeguard measures in reaction to measures in violation of WTO law.

 

Outdated WTO Trade Protection Measures

For the prevention of serious injury to the domestic industry, WTO law provides for contingent trade protection measures. These measures typically consist of the suspension of market access concessions, quotas or additional tariffs. What they have in common is the fact that they typically aim at reducing imports. The underlying regulatory logic derives from the GATT 1947; a trade agreement negotiated in the years following World War II, when the global market was just about to be rebuilt and countries primarily traded in end-products or commodities.

Over 60% of global trade today consists of intermediate goods as part of global value chains. Measures aiming at the limitation of imports therefore likely hurt domestic consumers and the domestic industry as well. However, countries with a trade deficit – such as the US with regard to goods trade – are affected by the suspension of market access concessions to a comparatively limited extent.

The trade protection measures provided by WTO law therewith become 1) inefficient in forcing countries with a trade deficit to comply with WTO law, and 2) economically harmful for the domestic industry in countries which are highly integrated into global value chains and therefore depend on imports of intermediate goods and commodities.

 

Brexit – “Leaving on WTO Terms”

The breach of the transatlantic trade alliance de-stabilized the rules-based trading system substantially. “Leaving on WTO Terms” therewith means to rely on a system in crisis (see for reference the farewell speech of Appellate Body member Peter Van den Bossche). It means to rely on a system which is likely to be paralyzed for some time, in particular with regard to enforcement of WTO law, the very basis of “leaving on WTO terms”.

“Leaving on WTO Terms” also means that the UK is likely to suffer from unilateral safeguard measures and tariffs both from the US and the EU. Take Switzerland as an illustrative example: Switzerland currently has to deal not only with US tariffs on steel and aluminum but also with EU safeguard measures on steel. Not being a member of the EU or the EEC, Switzerland is unlikely to be exempted from any potential future EU safeguard measures either. Thus, the situation could get worse, should the US government decide to implement tariffs on autos after all.

Furthermore, Switzerland cannot reasonably expect the US to comply with a potential finding of a violation in its pending complaint before the WTO, given the US government’s trade policy these days. The EU safeguard measures, on the other hand, are considered to be WTO compliant; hence, a complaint before the WTO is considered unreasonable.

The safeguard measures are, however, possibly incompatible with the Free Trade Agreement (FTA) Switzerland has with the EU. Unfortunately, this FTA does not provide for alternative dispute settlement proceedings, hence, Switzerland cannot take legal action against the EU safeguard measures on steel on the basis of the FTA either.

Finally, because of economic reasons (dependence on imports of intermediate goods and commodities) among others, Switzerland is quite unwilling to implement any of the WTO trade protection measures, even though legally that could be an option.

Three options come to mind which could remedy the situation: 1) joining a larger trading bloc to avoid additional safeguard measures/tariffs, 2) concluding a substantial trade agreement (incl. separate dispute settlement proceedings), and 3) restoring the rules-based trading system. Given current events, relying on WTO law and on the WTO dispute settlement body alone ultimately appears less and less advisable.

 

Charlotte Sieber-Gasser is a PostDoc Research Fellow at the DCU Brexit Institute.

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