In the fast-escalating U.S.-China trade skirmish, perhaps the most alarming step so far came in China’s retaliatory tariffs announced this week. The retaliation wasn’t the biggest action in the battle, nor was it the most unreasonable. But it might have been the most reckless – for what it signals for the entire global trading order.
And the problem isn’t that China retaliated against the U.S. tariffs on steel and aluminum imports; few observers expected the Chinese would just sit silently and take it. The problem was the way China chose to retaliate – by skipping the World Trade Organization’s dispute-resolution process entirely. The world’s biggest exporter effectively ignored a crucial pillar on which the entire system of global rules-based trade stands.
Yes, the trade conflict itself is increasingly concerning, but a little context about its scale is in order.
The United States and China traded US$636-billion in goods last year. So far, the two countries have imposed tit-for-tat tariffs on each other totalling US$6-billion, or less than 1 per cent of the total. They have their respective fingers on the trigger for another US$100-billion. So now we’re talking about 17 per cent of their two-way trade – which is certainly getting serious, but it’s still well short of an all-out war on each other’s exports.
Now, consider the weight of the tariffs the two sides are talking about. They range from 10 per cent to 25 per cent. In the world of trade actions, that’s peanuts. (Remember that the United States hit Bombardier Inc.’s C Series aircraft with import duties of nearly 300 per cent last year.) The tariffs are certainly punishing, but they’re not prohibitive.
At this stage, these are two schoolyard heavyweights taking turns shoving each other. Although, granted, the shoves are getting harder and more threatening with each turn.
During this shoving match, many missed the moment when China crossed a meaningful line. China’s retaliation, while pretty small potatoes in terms of trade value, quite consciously skipped the WTO’s recognized process for adjudicating trade disputes. That is a troubling precedent – not just for the two countries embroiled in this squabble, but for the entire global trading order.
If the WTO as an institution embodies the rule of law in international trade, then its dispute-resolution mechanism is the justice system that enforces those laws. Without an agreed-upon system of enforcement, the rules become toothless very quickly. China, one of the WTO’s most important and powerful trading citizens, just went vigilante.
China argued that it was well within its rights to impose the tariffs, without the WTO’s formal blessing, under the organization’s so-called “safeguard” provisions. Those apply in cases in which a country applies tariffs or other import restrictions on products to protect a domestic industry that is threatened by a temporary surge in imports. That country is supposed to compensate the countries from which the imports originate financially; if the trading partners can’t negotiate a compensation agreement, then the exporting countries are allowed to impose tariffs of their own as compensation.
It’s a legal argument about as thin as the paper China wrote it on. The U.S. tariffs were not imposed under WTO safeguard provisions, but in the name of protecting “national security” – another area in which WTO rules do allow a country to impose trade restrictions. Unlike safeguard actions, the U.S. tariffs don’t appear to be temporary, and they don’t treat all importers of the goods equally (several key trading partners, including Canada, have been exempted).
In fairness, China was responding to a U.S. legal argument that is also pretty thin. What it calls “national security” boils down to “China and other people have become better at making steel and aluminum than us, they’re making a lot of it, and that’s hurting our industry.” It does sound closer to a safeguard action than a genuine national-security issue. It’s certainly playing on the edge of WTO rules.
But the Chinese action is potentially a much bigger deal. It could have, probably should have, challenged the U.S. action before the WTO. It chose to act outside the law – or even to redefine the law in a way that, if others follow suit, declares open season on a wide range of unilateral retaliations.
“I think we should be worried about the legal argument that China is making, which is a dangerous one,” said New York University law professor Robert Howse, an expert on international trade law. “It’s a slippery-slope argument that could really do damage to the WTO rule of law.”
While in theory the WTO is an equal partnership among all its member countries, the reality is that it is very much dependent on the ongoing support of the biggest members of that club to have the legitimacy it needs to maintain a stable and prosperous global trading system. If the two biggest signatories to the WTO start throwing haymakers at each other outside the WTO process, the entire rules-based global trading structure is in trouble.