US tariffs are recasting established rules and relationships, according to EU and international trade lawyer Eric White
What are the main lessons from ongoing trade uncertainty?
The main lesson is the world has changed and the rules of international trade will no longer be those that we have known in the past.
That is not only because the US Administration is not adhering to traditional rules of international trade – that negotiated tariffs are bound until renegotiated under WTO rules and should apply to all WTO members equally – but also because there is broad agreement on this approach in the US and because most other countries are accepting it.
Key takeaways
- Long-established trading norms are being recast
- The WTO's role has been greatly diminished
- US trading partners are succumbing to Trump Administration demands
- The EU's ability to deliver on deal terms relies on Member States
- Tariff responses may lead to emergence of new trading blocs
Apart from China, other countries feel unable to resist and are rushing to agree deals. Many are accepting US demands and granting preferential treatment to US goods and even agreeing to take measures against third parties. The next stage may well be that other countries around the world start to disregard the rules in the pursuit of their own interests and take measures against trade that they consider disadvantageous.
Apart from China, other countries feel unable to resist and are rushing to agree deals."
Eric White
What does this mean for consensus-based organisations such as the WTO?
It seems to me the World Trade Organization (WTO) is finished as an effective organisation. It will no doubt limp on, as international organisations tend to, but its role in the shaping of events will probably disappear. Why should any country agree to abide by inconvenient rules set by the WTO when others led by the US do not?
What have been the different approaches to trade negotiations?
Most countries have tried to avoid 'poking the bear'. That means accepting the justification of the US "reciprocal" and "national security" tariffs and negotiating a 'deal' whereby the severity of the US unilaterally proposed or imposed measures are mitigated and other US demands are met.
The UK was the first to do so. However, that deal is a non-binding "heads of agreement" or "memorandum of understanding" consisting of a few exchanges of gifts – promises of tariff rate quotas on beef, ethanol and cars – and expression of intent to develop co-operation in other areas.
Other agreements are notably not yet in written form at all. Vietnam, Indonesia, and the Philippines have apparently agreed to remove tariffs on US goods and suffer tariffs on their exports. Japan has resorted to paying for protection and promised a "half trillion" dollar fund for investments in the US.
What about the approach by the EU?
The EU has been in a particularly difficult position since it considers itself the greatest defender of the multilateral system and would be in a relatively strong position to resist US pressure if it wished to. However, its decision-making is complex, and it has also agreed to negotiate so as – it hopes – to protect the trading position of its important Member States.
To its credit, the EU saw this problem coming following the first Trump Administration and prepared itself with the necessary defensive rules. The most important is the Anti-Economic Coercion Regulation designed to allow the EU to resist and respond to exactly the kind of pressure that it is now coming under. However, this is being described as a "bazooka" and the EU appears afraid to use it. If it is not used against the current threats, one wonders when it would ever be used. Could it then be used against weaker countries?
In the end the EU succumbed and the Commission reached a deal with the US that appears similar to that of Japan. The terms are uncertain however and so is the Commission's ability to deliver on its commitments since it needs agreement of the Member States to reduce its duties and cannot control the purchase of energy supplies or direct investment to the US.
The only country to have resisted the US threats so far is China which has prepared its strategy of defence in advance and is deploying it. It has arguably been given the most advantageous deal of all countries so far given the size of its trade surplus with the US.
The diversity of measures taken by countries is likely to lead to a recasting of trading relationships or the emergence of trading blocs."
Eric White
Will we see a recasting of traditional trading relationships, such as closer ties between Europe and Asia?
The diversity of measures taken by countries is likely to lead to a recasting of trading relationships or the emergence of trading blocs.
The EU has signalled a desire to co-operate with the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) countries but not – so far – to join it. Joining the CPTPP would likely unbalance it and be resisted by the existing parties. China is not a party to the CPTPP but may forge its own special trading relationships with some countries.
How do you see the future of trade developing?
The future of trade is most uncertain. If the US succeeds in its mission to "rebalance" trade to its advantage, other countries are likely to want to take similar action, albeit on a lesser scale. That would lead to a certain amount of chaos as countries – and possibly competing trading blocs – jostle to improve their respective positions.
Overall, that would lead to a significant reduction in trade. And a reduction in trade means a reduction in prosperity for all.
However, the US is unlikely to be able to "rebalance" trade if that is really the objective. Economists tell us that a trade deficit is the necessary counterpart to a surplus in capital inflows. The US capital account inflows are driven by the US fiscal deficit and there is no sign of that being reduced.
So, I have no idea what will happen. That depends on economics and politics. The political mood has changed to be less favourable to trade and multilateral co-operation. However, moods change.
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