Weaker Trade Arbiters Pave Way for Conflict

By Greg Ip Features Dow Jones Newswires

Before a war begins, the antagonists remove the peacekeepers. Trade wars start the same way.

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President Donald Trump is trying to remake or withdraw from the North American Free Trade Agreement, and his administration is also weakening the World Trade Organization. Sidelining the peacekeepers that enforce the rules of global trade would free up the U.S. to impose tariffs without fear of an arbiter contradicting its decision. The administration's punitive 299% preliminary tariff against aircraft built by Canada's Bombardier Inc. might be an early glimpse of this.

This may deliver short-term victories to Mr. Trump, but at what cost? Roberto Azevedo, the WTO's chief, told a Council on Foreign Relations conference this week that a world without multilateral arbitration is one "ruled by unilateral actions, which is basically a euphemism for trade wars, and...we'd all be, without exception, worse off than we are now."

The U.S. has long been an enthusiastic trade warrior. Since 1995, it has brought nearly 900 antidumping cases (against firms selling in the U.S. below cost or what they charge at home), countervailing cases (for illegal government subsidies) or safeguard cases (to protect against surges of imports), according to the WTO, more than any other country.

One of Nafta's primary appeals to Canada and Mexico was protection from some of these U.S. enforcement actions, and the ability to ask a binational panel to rule if they were in accordance with U.S. law. "It's the dispute resolution process, not low tariffs, that is the jewel in the Nafta crown," said CIBC, a Canadian bank, in a recent report. Elimination of that process is a key U.S. demand.

When the WTO replaced the General Agreement on Tariffs and Trade in 1995, it brought into force a dispute-settlement mechanism under which member countries could appeal another's trade action to a panel, and if necessary appeal that panel's findings to a seven-member appellate body. The Trump administration is now blocking appointments to fill several vacancies on that appellate body, imperiling its work, over how it interprets U.S. antidumping authority. Yet the administration's complaints go deeper: It thinks the mechanism infringes on American sovereignty.

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While the panels haven't prevented trade disputes, they have kept them from spiraling out of control, and their mere existence may also have discouraged more dubious cases.

That may no longer be true. Wilbur Ross, Mr. Trump's commerce secretary, has made increased enforcement a priority. Antidumping and countervail investigations are up 48% from a year ago. Mr. Ross has dusted off long-disused trade remedies to impose tariffs on Chinese solar panels and Korean washing machines and explore curbing steel imports for national-security reasons.

The White House's newly aggressive stance is encouraging companies to file complaints, and to expect more favorable treatment of those complaints. In theory, officials at both the Commerce Department, which decides whether dumping or subsidies exist, and the United States International Trade Commission, which determines if duty is justified, follow objective, legal criteria. In practice, they are influenced by the political winds and the president who appoints them.

Bombardier decried its 299% tariff as "egregious overreach." Canadian Foreign Minister Chrystia Freeland called it "baseless and absurdly high." Nonetheless, faced with heavy debt, sluggish orders and potentially years of litigation to overturn the tariff, Bombardier said it would partner with Airbus SE and that the two would build some jets in Mobile, Ala., putting high-paying manufacturing jobs in the U.S.

This looks like a short-term win for Mr. Trump's trade unilateralism. But is it a long-run win? Mr. Trump's trade policy is based on two questionable premises. One is that deficits show the U.S. has been a loser on trade. Almost no economist agrees, arguing trade deficits reflect a more fundamental imbalance between national saving and investment. If U.S. protectionism hurts Mexico, its economy and currency will weaken, reducing demand for U.S. exports and undercutting any narrowing in the trade deficit.

The second premise is that the U.S. has all the leverage because other countries prize access to its markets. Yet both Mexico and Canada have indicated they would sooner let Nafta die than accept some of Mr. Trump's conditions. In part, they believe the three economies are so integrated that many trade relationships would persist even without the pact. And in part it's because accepting an inferior deal could exact a steep economic and political price, especially in Mexico, which holds a presidential election near year. "It is better to have no Nafta than a Frankenstein Nafta," says Guillermo Ortiz, who was Mexico's finance minister as Nafta took effect in the 1990s.

For similar reasons, America's partners may feel compelled to retaliate against U.S. protectionism if Nafta or the WTO aren't available as relief valves -- the trade wars Mr. Azevedo warns of. That need not be the end of the world: It wasn't in the 1980s. The difference is that Ronald Reagan was president then. He indulged protectionist pressures while remaining at heart a free trader and laying the groundwork for a remarkable liberalization of trade over the next two decades. Mr. Trump has a different path in mind.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

October 18, 2017 11:43 ET (15:43 GMT)