Donald Trump’s double threat to global free trade

Sitting grandly on the banks of Switzerland’s Lake Geneva is the headquarters of the World Trade Organization (WTO), a free trade factory.

Here the world’s nations meet to hammer out trade deals and reduce tariffs – taxes charged on imported goods.

But the system, which has been working in various guises since the 1940s, is under threat from two sides.

The USA has announced tariffs on imports of foreign steel and aluminium on the grounds of national security, and it is refusing to appoint new members to the WTO’s appellate body that settles disputes.

These developments come as the WTO is of increasing importance to the UK. At the moment it is represented by the EU, but after Brexit the UK will negotiate on its own account. This should give the UK the ability to negotiate deals more specifically designed to suit it.

The downside is that the UK will no longer belong to the biggest single trading economy in the world – the EU.

Brexit consequences

The first job of the newly increased UK team at the WTO will be to negotiate a “schedule”, an extensive list of goods, and the tariffs to be paid on them; ranging from avocados to zips.

The UK assumed it could just inherit the EU’s schedule. The trouble is that this requires the consent of other countries, and some of them have said no.

Take New Zealand, for instance. At the moment it can sell 228,000 tonnes of lamb and mutton to the EU every year, with no tariffs. The UK and the EU decided to split that quota between them, but New Zealand objected.

David Walker, is New Zealand’s ambassador to the WTO: “Yes, we and a range of other WTO members made clear that a simple quota split like that is not acceptable to us.”

The reason is simple. At the moment New Zealand can sell that lamb anywhere in the EU, so it loses flexibility if it has to sell some in the UK and the rest of the EU.

The UK can probably get round such problems, by offering countries like New Zealand a better deal. But there are other clouds on the horizon. For a start, the WTO hasn’t managed to negotiate a global cut in tariffs for decades for one simple reason – every single country has a veto.

Ieva Barsauskaite, from the Lithuanian delegation to the WTO, warns me that getting all 164 countries on board is not easy.

“Get 164 friends of yours to one place, decide on a dinner, decide on one dish for all, and include the single mothers, the teenagers, retired veterans and everyone with a dog, and people with allergies – that’s how the trade deals are being made here,” she says.

For the UK, which is hoping to breathe new life into the WTO, that is not very encouraging. But there are bigger problems.

Trade war threat

Donald Trump’s decision to impose tariffs on steel and aluminium is a game changer, not because this hasn’t been done before – it has. But because he has done so on “national security” grounds – the one WTO rule that cannot be challenged.

All countries can take actions to guarantee their national security, but are only expected to do so at times of real crisis, like a real war.

But now in peacetime, President Trump has cited national security as a reason for tariffs. If others follow suit the escalation could be impossible to stop or reverse.

The risk is that a trade war could trigger an economic recession, says WTO boss Roberto Azevedo
No wonder that Roberto Azevedo, the WTO’s director-general, is worried: “Just the threat of a trade war is already damaging,” he told the BBC.

“But if this escalation goes on, and on, and on, you may have something very, very damaging – even the possibility of a recession. And if you look back in history, you know, in the 1930s, that’s exactly where it led.

“That is why I have been saying, ‘stick to the rules, do things according to the rules’, because if others don’t like it, there are mechanisms to take care of that,” he says.

No appeal court

But those mechanisms themselves are also now under threat. The WTO’s appellate body has been solving problems for more than 20 years, and its decisions have to be accepted by all members of the WTO. There is no veto.

But the appellate body is rapidly running out of members, as the US is blocking new appointments in an argument over their role. It needs a bare minimum of three members, though six or seven would be much better – at the moment it has just four.

“For over a year, it’s not been possible to get a consensus amongst members to initiate the process for filling vacancies,” says the WTO’s director of legal affairs, John Adank.

“So, if this impasse continues, the risk is that the appellate body won’t be in a position to function, because if it gets down to three or fewer members, it could be difficult to hear appeals.”


 

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WTO warns over tit-for-tat trade wars

Global trade has seen its most rapid growth in six years, says the World Trade Organization’s annual analysis.

But the positive news could be put at risk by tit-for-tat tariff wars that have broken out, according to the head of the WTO, Roberto Azevedo.

Broader global tensions could also see trade suffer.

Last month, President Donald Trump unveiled plans for a 25% tariff on US steel imports from countries such as China and a 10% tariff on aluminium.

That followed an announcement earlier in the year for tariffs – import taxes – on washing machines and solar panels.

The president said that battles on trade were good and “easy to win”.

China responded by imposing its own tariffs on US goods and has complained to the WTO and threatened legal action, claiming unfair treatment.

‘Unmanageable escalation’

“The strong trade growth that we are seeing today will be vital for continued economic growth and recovery and to support job creation,” said Mr Azevedo, the WTO director-general.

“However, this important progress could be quickly undermined if governments resort to restrictive trade policies, especially in a tit-for-tat process that could lead to an unmanageable escalation.

“A cycle of retaliation is the last thing the world economy needs.”

He said that countries should show restraint and settle their differences “through dialogue” and collective action.

China has already announced retaliatory action against the US move, announcing tariffs of up to 25% on US imports such as pork, fruit, nuts and wine.

Despite growing fears over a global trade war between the world’s two largest economies, trade volume growth in 2017 hit 4.7%, the highest level since 2011.

Stronger world growth and increasing levels of consumption have driven the rise, which has helped, for example, the UK economy, where exports are valued at more than £600bn a year.

Tariff uncertainty

WTO economists said that 2018 should see trade growth expansion of about 4.4%, well above the post financial crisis average of 3%, though still below the 4.8% average seen in the 1990s.

The WTO annual trade report said risks were now “tilted to the downside” because of the uncertainty over tariff policy, which could affect business investment and that trade growth would slow to about 4% in 2019.

It also cautioned that central banks were looking to tighten monetary policy – for example, by raising interest rates – at a faster pace.

The Bank of England has already said that interest rates are set to rise more quickly than previously thought, with the next rise expected by the markets as early as next month.


 

Here at Dollar Destruction, we endeavour to bring to you the latest, most important news from around the globe. We scan the web looking for the most valuable content and dish it right up for you! The content of this article was provided by the source referenced. Dollar Destruction does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. As always, we encourage you to perform your own research!

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Author Kamal Ahmed 

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