Trade Retaliation in the Time of Trump

A week ago the Editor-in-Chief of this Journal published a piece titled Black Lies, White Lies and Some Uncomfortable Truths in and of the International Trading System. Prof. Weiler’s argument can be summarised in two-steps: the steel tariffs imposed by the US arguing national security reasons were a gross violation of the WTO system — the black lie. The EU response establishing countermeasures did not follow the letter — or the spirit — of WTO Dispute Settlement System (Article 23). This may seem like a minor political issue, but, from a legal point of view, it undermines the system that the EU is declaring to uphold — the white lie.

Prof. Weiler — who I hold in utmost respect and appreciation as an academic and a person — does an excellent job in explaining the limitations of the WTO Dispute Settlements Understanding (DSU) to provide an adequate response to these cases. He cites the Internet Gambling saga and explains how the party violating the agreement has all the incentives to continue the violation until told by the final voice within the DSU (the Appellate Body) to cease in its conduct. In my view, this is an accurate description of a well-known problem within international trade law, since, pretty much, the creation of the WTO in 1994.

On paper, I would have nothing to add to his excellent editorial. In practice, there are a few elements that, I believe, could enrich the readers understanding of what is at stake here and how a system can organically evolve to address some of these shortcomings.

Let’s look at the situation as of today. We have seen the unthinkable at the time of the editorial — a trade truce! We can assume that the truce was not reached through the goodwill of the parties but based on the recognition of a situation in which both parties had a lot to lose. Due to the involvement of other States (Canada, Mexico, China) in the trade-skirmish — calling it a trade-war would be a notch hyperbolic — we can assume that the legality of the US tariffs on steel and aluminium and the EU countermeasures will be discussed in front of a dispute settlement body at some point. I analyse below these two points and suggest what I think might happen. I finally explain how, in my view, the process has helped to reinforce the Dispute Settlement (DS) system.

A disclaimer is due first. I have seen Mr Junker at a negotiating table, puffing his cigarette under a do-not smoke sign and knowing perfectly when to push and when to hold back. In my time served at the EU (Commission and Council) and as a Spanish diplomat, I doubt I have crossed paths with a more skilled leader in last-hour negotiations. As a problem solver, he is (was at least) someone not afraid to bend the rules as much as necessary when a satisfactory solution was within sight. In that respect, I was not surprised of the outcome. Kindly allow me to speculate how we could have arrived there.

Mr Trump entered this trade-battle with two vulnerabilities, first the financial interest of his donors, associates, friends, family… and himself. Second, his electoral base. Mr Juncker’s weak point was the criticism he may receive back in Brussels from national leaders whose domestic interests were directly affected.

From the EU perspective, the main bargaining chip was to let the US President know that if he was actually aiming at European car imports in the next skirmish, this would open the door to a new round of countermeasures that could be as targeted as desired by the EU. Prof. Weiler piece focuses on Article 23, what I would call here “the normal procedure” and he only hints at the extremely powerful tool within the WTO system to target certain products not necessarily connected to the original sin: Article VI of GATT on antidumping and the agreements on the Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (antidumping) and on Subsidies and Countervailing Measures (ASCM).

So far we have seen little evidence that the US decision against foreign steel and aluminium could be seriously justified on national security grounds. If anything, the public statements by the US President have hinted at other reasons. There is a strong likelihood that a panel would take note of that. Following Prof. Weiler’s reasoning, we can also deduce who would benefit from this decision: the owners of steel and aluminium production plants in the US and, potentially, its workers. Perhaps also the US Treasury if the new customs duties and the taxes on the profits of those companies increase the overall collection of revenue linked to steel and aluminium. Not the consumers of these goods, who are likely to pay more for them, and not the overall economy. The same would happen with the threatened duties on European cars.

Who would suffer the consequences of a European retaliation? As I mentioned before, the current understanding of Art. VI and the abovementioned agreements provide a broad degree of freedom with regard to the provisional duties imposed on goods. However, as Mercurio noted, whether the retaliatory phase of the process is designed to rebalance concessions, coerce compliance, or simply punish respondents is not clearly addressed in the DSU. We move then to the boundaries of the WTO system. In this piece we are not discussing who is right in an honest disagreement about trade law; here we discuss “retaliation in the time of Trump” (with my apologies to the readers of García Márquez).

In my view, the easier argument for the EU to make would be that the illegal duties imposed on certain European products are tantamount to a subsidy and, hence, countervailing measures are considered appropriate. This is a big legal jump, but not a crazy one. The basis would involve analogous reasoning to the arguments used by the GATT panel to find against Italy in Italian Discrimination against Imported Agricultural Machinery and, according to Simon Lester, later enshrined in the WTO SCM Agreement, which places import substitution subsidies — ‘subsidies contingent … upon the use of domestic over imported goods’ — into the category of prohibited subsidies.

One of the requirements to impose this type of provisional measure is to put forward a complete description of the allegedly subsidized product, the identity of each known exporter or foreign producer and a list of known persons importing the product in question (Art. 11.2(ii) of the ASCM). What can the EU do with this?

As Suits-character Harvey Specter says, when someone points a gun at your face, “you take the gun, or you pull out a bigger one. Or, you call their bluff. Or, you do any one of a hundred and forty-six other things.” Mr Juncker could use the particularities of the US system and target with those measures the personal financial interests of Mr. T., or his cabinet, or his most valued donors, or close friends and declared supporters, or the constituencies in the US that are key to the US President and its party.

Would this be WTO-conform? Most likely not, but the mere existence of a possibility of provisional self-enforcement of “countermeasures” within the system is a tool, which, at the very least, has as much legitimacy as the national security exception.

Finally, coming back to my initial point, how can I contend that both actions are illegal under WTO rules and say that this trade-skirmish could strengthen the global trade system? First this goes back to the many-times-discussed-over issue of the legal character of International Public Law. If we design a system that relies on the good-faith of the parties and they want to bend it to its limits to justify their actions, this is a recognition that they feel bound by the system.

Further — and finally — I believe that, the WTO as a system — if not the concrete rules — has been legitimised as an equilibrium of wills. A system which is a good as it gets for the time being. The current system is pareto-optimal for its members in terms of fairness, gains and costs, proving that no country is big enough to win a trade war. This has falsified through experience the Kennan and Riezman hypothesis that believed that one country with enough power could force the others to give concessions. Exiting the system has always been an option, but a very costly one. In the dichotomy between voice and exit — loyalty never seemed to be an option here — voice seems to be the winner.