Free trade is about more than just about low tariffs. It is also about predictability, and the EU must not allow Trump to introduce arbitrary tariffs at will.
Over the past weeks, talk about a possible global trade war has become louder. After U.S. trade secretary Wilbur Ross proposed a tariff on steel imports of 24 percent, the Chinese government announced that it would retaliate should the U.S. move forward. Now the EU looks to be getting in on the action.
This week, German newspapers reported that the European Commission is already drawing a list of possible U.S. targets for retaliation, picking products from states which have voted for Donald Trump or mainly produced by companies located in constituencies which might have vulnerable Republican Congressmen running for re-election in November.
This might be shocking for some. After all, since Donald Trump has come to power, economists have repeatedly urged European policy makers not to escalate a trade war. They fear that a retaliation by the EU might lead to new counter-measures from the U.S. and that this tit-for-tat will leave global trade significantly more restricted than it has been in the past.
However, upon closer inspection, the Commission’s strategy of preparing for possible retaliation is sound. To defend a global, rule-based order of (relatively) free trade, the EU must not allow Trump to introduce arbitrary tariffs at will.
Free global trade is about more than just about low tariffs. It is also about the predictability of tariffs. Global value chains which today account for a large share of the benefits of globalisation are built on the premise that they can be relied upon. The arbitrary introduction of a 20-percent tariff here and a 30-percent tariff here jeopardize such value chains. If corporations learn that they cannot rely on the rule of world trade regulation, they will produce increasingly at home, with higher prices for consumers and lower productivity.
The U.S. has committed under the framework of the World Trade Organisation not to increase its tariffs above a certain tariff rate, the so-called “bound tariff”. This tariff differs a bit for different goods, but on average for iron and steel products, the bound tariff for the U.S. is only 0.3 percent. There is hence very little doubt that the proposal to put a global tariff on steel imports of 24 percent is violating the U.S.’s commitments, even if Donald Trump claims “national security” as a motivation.
The problem with WTO rules is that the organisation cannot enforce the rules by itself. For a perpetrator to be brought to justice, first, another country has to bring a complaint before the WTO dispute settlement system. Second, this country must be willing to retaliate against the country having violated the rules: winning a WTO dispute only gives one the right to retaliation.
These requirements mean that only a large and powerful trading party can successfully challenge the United States. To win a WTO dispute requires significant resources to file and argue a case. And in order for the retaliation to hurt the U.S., the opposing party needs to be a significant market. If Liberia were to put tariffs on U.S. imports, American companies would hardly notice.
As far as we know, the EU Commission is not planning to violate any WTO rules. Instead it is planning to use the WTO’s framework to retaliate against the U.S. This might include bringing a dispute before the WTO (which would likely result in a ruling that the EU is allowed to retaliate with certain tariffs), or following the example of South Korea, retaliating based on a right won in former disputes but not yet applied, or applying certain safeguard measures which can be enacted at short notice if its industries are faced with material damage.
Going down this road might look like escalating an irrational trade war. Yet in fact the EU is merely enforcing global trade rules. In the past, bringing cases before the WTO by large trading partners has pushed countries to obey more closely the spirit and letters of the rule-based, free trade system. Without the U.S. having brought the famous “Banana” case before the WTO, for example, the EU might today still be running its old absurd multi-tier quota system for banana imports. Retaliating against U.S. steel tariffs is hence contributing to the global public good of a rule-based, liberal trading system.
Picking vulnerable US companies, including those located in important swing states or states having supported Republicans in the last elections, also makes complete sense: Here, the point is to sway certain members of Congress to question Trump’s trade policies.
It is not clear whether the information about which U.S. products will potentially be targeted has been leaked to the press, or whether the EU Commission did not intend it to become public. However, such a leak would be part of a rational and effective retaliation strategy: Without actually creating damage to consumers and companies, the specific threat to individual companies and constituencies could already put pressure on U.S. politicians ahead of the midterm elections in November – which in fact might cut short the life-span of Donald Trump’s tariffs and thereby minimize the overall damage of a trade conflict.
The EU Commission has been repeatedly criticized for mistakes in its trade policies. This time, it should be applauded for its conduct so far.