NO. 29 JULY 2018 Introduction

Yes, He Can: Trump Provokes a Trade War A Clever EU Will Refrain from Further Tariffs but Hold Firm on WTO Rules Bettina Rudloff

The transatlantic trade dispute is escalating: After the United States (US) introduced additional tariffs on steel and aluminium, hectic negotiations began with the Euro- pean Union (EU). First, the EU obtained a temporary derogation before increasing tariffs on a long list of particularly symbolic and politically sensitive products, such as orange juice and Harley-Davidson motorcycles. At the same time, the EU, in con- cert with other states, made the first move in a possible World Trade Organization (WTO) dispute procedure against the US. The US, in the meantime, has signalled the next round by deciding to examine options for tariffs on cars. Existing multinational rules leave only a limited scope for tariff increases, all of which bear the risk of further escalation. It would therefore be wise for the EU not to exhaust this leeway but to keep cool and stay liberal in its approach to trade.

Following the experiences during the world Limited WTO scope for unilateral economic crisis of the 1930s – experiences increases in tariffs that were also fuelled by spiralling tariffs – the General Agreement on Tariffs and Trade Rules for increases in tariffs beyond the (GATT), a forerunner of today’s WTO, came bound tariffs and other trade restrictions into force in 1948. The participating states (Table 1, p. 2) can initially be differentiated agreed on reliable rules for undistorted according to the justification, that is, whether trade, for example by reducing national measures such as the recent American tariffs. Moreover, tariffs may only be raised tariffs on steel and aluminium are aimed at unilaterally up to an agreed tariff ceiling protecting against unfair trade practices of (“bound tariff”) without any further re- other countries or envisage other objectives. quirements. Increases beyond these ceilings There are also different procedural guidelines, follow different rules, depending on the such as deadlines. Reactive tariffs – used to underlying justification. compensate for disadvantages resulting from justified trade restrictions – are rarely possible. However, the complaint option is always open.

Table 1

WTO scope for unilateral trade restrictions and reaction

Basis Measure Justification, process Reaction by GATT article affected state

General objectives  Balance of payments Limitation to quantity or value Consultation after 1 year – (Art. XII GATT) of imports  Exceptions from Export- and import restrictions Special market situations for – elimination of quantitative agricultural and essential products restrictions (Art. XI GATT)  General exceptions “Necessary” measure List of objectives (e.g. human, – (Art. XX GATT) animal and plant health), justification by necessity  Safeguards Feasible measures, no voluntary Serious injury, provisional Reactive tariffs, (Art. XIX GATT) export restraints, automatic protection possible, time limit 3-year blocking tariffs for agriculture period in spe- cial conditions  Waiver Individual exceptions Majority rules for approvals by – WTO states  National security Information limitation, Military products, unspecified crisis – (Art. XXI GATT) any measure

Safeguards against states’ behaviour  Countervailing dumping Tariff Proof of damage and correlation, – and subsidies (“trade provisional protection possible, defence instruments”) time limit (Art. VI GATT)  Retaliation/penalty Tariff Enforcing a decision on a dispute – (Dispute Settlement Under- standing)

Dangerous rhetoric of retaliation plementing a dispute’s decision. The misuse and penalties of the terminology in the public debate suggests self-justice among states. This false The current transatlantic conflict is essen- impression weakens confidence in the tially about the question of whether the already weakened WTO. recent US tariffs on steel and aluminium are to be understood as market-based pro- Imminent risk in WTO rules of tective tariffs under Article XIX GATT or mixing tariffs and security policy as tariffs with national security objectives under Article XXI GATT. In any case, neither The national security argument has rarely the American nor the European reactive been used in the past to justify trade re- tariffs are “retaliatory” or “penalty tariffs”. strictions: The EU established tariffs against These terms are reserved solely for the WTO the former Yugoslavia in the early 1990s. In dispute system – as a final means of im- the 1980s, the US utilised this argument to

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justify a trade embargo against Nicaragua. 232 of the Trade Expansion Act of 1962, A GATT panel decision at that time did not which aims to protect the US from threats legally come into effect but stated that, as to its national security. It could therefore a commercial body, it could not rule on be in line with Article XXI GATT. If a panel security issues. In 1996, the Helms-Burton accepts the security argument, the EU tariff Act under then-President Bill Clinton used list would not be WTO-conforming any the security argument against Cuba, even longer. It is not clear whether the pending in relation to third countries trading with ruling in the case of Russia against Ukraine Cuba. A relaxation of the measures was will support America’s use of security achieved in the course of a WTO dispute reasons as justification. procedure initiated by the EU. A new panel (2) The established EU tariff list covers decision on the national security clause is similar products when compared to meas- expected at the end of 2018 in the case of ures against US steel tariffs in 2003. At Russia against Ukraine, which justifies that time, however, the administration of import bans under Article XXI GATT. The George W. Bush referred to an import glut, ruling could bring legal clarity on the inter- and thus clearly used Article XIX GATT to pretation of the national security trade justify the American tariffs. A WTO deci- argument for the first time. sion allowed the EU to impose retaliatory tariffs. They were not used in the end, as the US abolished its steel tariffs. The cur- EU choosing between plague rent EU tariff list includes nearly 400 – and cholera mainly symbolic – products from states governed by the Republican Party with an All EU response options presented below initial total value of €2.8 billion per year. are risky: not only for the EU, but also for A second stage for additional reactive duties global trade and other trading partners, is envisaged for three years from now, in and not least for confidence in the WTO. accordance with Article XIX GATT (Table 1). (1) The EU could start a WTO dispute. After Risk: The US could beat the EU with its the US tariff exemption for European steel own weapons. If the US disagrees that the and aluminium products ended, the EU EU is taking countermeasures and sees began formal WTO consultations with the these as safeguards only to protect its own US on 1 June. Canada, Mexico, and Norway market, the US can, in turn, react with followed soon afterwards. China and India countermeasures. The tariff spiral would had already begun consultations with the therefore turn even faster. Actually, the US US. If these consultations fail, these states very recently has chosen to challenge the may initiate a formal dispute. All complain- justification of the established reactive ing states doubt the rightful justification tariff lists of the EU, China, Canada, Mexico, by Article XIX GATT. Thus, they assume and Turkey in mid July by complaining to that the US is using market protection as a the WTO. Generally, reactive tariffs are also reason and not national security – this is detrimental to the implementing importer, the only way to justify tariff lists being such as the EU: Whether there will be drawn up as well by the EU as counter- subsequent price increases for consumers measure (Table 1). depends on supply alternatives, which Risk: The arbitration body of the WTO are hardly available for genuine American will no longer be able to act from autumn products such as Harley-Davidsons. 2019 onwards because the US is blocking (3) Any affected country may impose the replacement of the appellate judges. its own safeguards on aluminium and steel This means that no further decisions are under Article XIX GATT to compensate for possible after a panel decision. How this the damage caused by initiated safeguards. could turn out is still unclear. So far, the US The US tariffs can divert products that were has based its tariffs on the domestic section previously imported to the US into the EU

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instead. Actually, the EU just decided at the cannot be presented as a direct political end of July to define additional tariffs of 25 reaction to US behaviour. In addition, per cent on steel imports, with some excep- they too can be challenged or can lead to tions. They are following the rules for pro- a “standard escalation” comparable to that visional protection according to GATT XIX of tariffs. for a maximum of 200 days, depending on the actual increase in imports (Table 1). Risk: The US could challenge the import The smart move for the EU: injury. Moreover, the EU may lose strategi- No tit for tat cally important coalition partners in the © Stiftung Wissenschaft conflict with the US, such as China, Brazil, Past conflicts have often reached the limits und Politik, 2018 or Russia, due to the disadvantages it brings of formal rules when there were extreme All rights reserved to them with these tariffs being applicable differences in interests: For example, in to all steel-trading partners. These countries the hormone case between the EU and the This Comment reflects may react by their own tariff lists – so this US/Canada, the ruling allowed for retaliatory the author’s views. option could also further drive the escala- tariffs to be imposed on EU products. How- The online version of tion of tariffs. ever, this last means of the WTO dispute this publication contains (4) Compromises already emerged in the failed: For 10 years, the EU was subject to functioning links to other public debate during the phase of the ex- retaliation in the form of about $130 mil- SWP texts and other relevant ception being applied to European sup- lion per year in trade volume because, sources. pliers: Options discussed were voluntary despite the WTO ruling, it maintained the SWP Comments are subject export restraints, which are, however, ban on importing beef produced using to internal peer review, fact- excluded by Article XIX GATT. A “TTIP hormones. Ongoing negotiations finally checking and copy-editing. light”, that is, the reduction of EU tariffs brought a solution: The EU even main- For further information on for individual products such as cars, is also tained the ban on beef containing hor- our quality control pro- being considered. mones, but it offered tariff incentives for cedures, please visit the SWP website: https://www.swp- Risk: Any exemption for individual part- hormone-free meat. berlin.org/en/about-swp/ ners can be undermined and challenged With patience, solutions can sometimes quality-management-for- under the WTO’s basic idea of general trade be found. Also today, the EU should mini- swp-publications/ justice under the “most favoured nation” mise their exposure as much as possible approach. Exceptions can also offer black- and play for time while continually making SWP mail potential for new concessions. A com- offers for dialogue with Trump. Domestic Stiftung Wissenschaft und Politik plete zero-tariff policy for all products and reactions to US policy, such as Harley- German Institute for all countries would be possible and could Davidson’s relocation plan, can play into International and bring the offensively trade-pacifist EU off of the EU’s hands, as can new EU trade agree- Security Affairs every trade-related firing line. However, it ments, like the one with Japan, which has the disadvantage of limiting the scope isolates the US as trade partner. In playing Ludwigkirchplatz 3–4 10719 Berlin for future liberalisation negotiations. In for time, the EU should refrain from further Telephone +49 30 880 07-0 addition, interests also differ within the EU: countermeasures, even if the US imposes Fax +49 30 880 07-100 Although an offer for the industrial sector tariffs on foreign cars. This is the only way www.swp-berlin.org within the framework of a “TTIP light” is to end the already started escalation, which [email protected] conceivable for Germany, this does not also depends on the EU’s behaviour. Better

ISSN 1861-1761 seem to be an option for France. to withstand short-term losses than a loss 5) The EU could also use non-tariff meas- of confidence in the WTO’s rules. This could (Updated English version of ures, such as tightened labelling require- end in trade anarchy, which the world has SWP-Aktuell 36/2018) ments, to make it more difficult to import already experienced and led to the creation American products. of GATT. Risk: Although these measures are, in principle, more flexible than tariffs, they

Dr. Bettina Rudloff is a Senior Associate in the EU / Europe Division at SWP.

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