How Trump started the Second Trade War: the Political Economy of Trade Barriers.

The politicisation of trade is not a new phenomenon; and while the Trump administration’s ‘trade war’ continues to make headlines, the US has been quietly waging a guerrilla campaign against under-priced foreign imports for years.

In the 1970s the USA provoked a perfect storm of WTO dispute resolution appeals over its fuel-efficiency rules, which discriminated against foreign producers and favoured domestic fleets although they might be less fuel-efficient. In those days such discrimination was justified on environmental lines; today the justification is ‘national security’. Has anything changed?

President Trump made headlines trying to make the threat of Chinese imports undercutting US producers a ‘national security’ issue. While congress has introduced more checks and balances on his power to do this unilaterally, in the interim the ‘national security’ clause was used to erect a number of highly preferential trade barriers, which a coalition of countries has appealed to a WTO dispute resolution panel on grounds it contravenes the GATT treaty’s principles.

National Discrimination — in the National Interest

The national treatment rule, Article 3 in the General Agreement on Trade and Tariffs, holds that an importing nation cannot discriminate against foreign-produced goods by imposing different standards on them, once they have passed customs. This means that taxes or other financial penalties other than tariffs, quotas or other customs duties must not discriminate in a way which makes foreign goods less competitive.

In 1993 the EU requested convention of a GATT dispute settlement panel on the grounds the USA’s ‘ fuel efficiency’ laws, comprising the CAFE, the so-called ‘gas guzzler’ tax[1] and the 1985 excise tax on cars built for business, were biased toward foreign manufacturers of small fuel-efficient cars; and toward domestic manufacturers of both small and larger cars, as it made different allowances for US-manufactured fleets. That year the three taxes combined with CAFE penalties raised a total of $558million, of which $494million was by European manufacturers.

As the Kyoto Treaty had been signed and ratified in just 1992, industry commentators believed GATT would be lenient as it would not want to be seen as anti-environment.[2] The fuel-efficiency laws were introduced after the 1973 fuel shortage, when OPEC tightened the screw on oil supply in an attempt to drive oil prices in its favour. Conversely, the CAFE had the effect of encouraging drivers to clock up more mileage, as the tax on automobile producers was introduced as an alternative to a road tax, the route taken by most European countries; the US government feared political unpopularity if it revoked the fuel subsidies which kept the price down.

Friends of the Earth was aggressively against the EU’s appeal, saying, “the EC cannot claim to be concerned about the development of the trade and environment debate if it persists in attempting to define… whether or not the environmental laws of another country are simply disguised trade barriers.”[3]

However in the event GATT found that while taxes on gas guzzlers and luxury cars were consistent with US obligations under the GATT, the CAFE provision requiring separate calculations for domestic and imported vehicles was not; that actually it undermined domestic fuel conservation because it prevented manufacturers of large domestic cars from meeting the CAFE requirement for their domestic fleet by adding it to small foreign cars. And that the legislation biased against foreign manufacturers of large cars and favoured those such as the Japanese whose vehicles were designed to be more fuel-efficient.

So despite the social and political impetus underlying US trade barriers, the WTO rules in the interest of fair play were upheld despite an attempt by the US administration to justify the fuel-efficiency rules as necessary to protect essential natural resources.

Made in China — from a Blueprint Incorporated in America

There are clear parallels with the ‘national security’ debate being framed by the Trump administration today, where legitimate security concerns about Chinese industrial spying on US companies’ proprietary information such as their IP and confidential information like their financial and trading positions, have led the US government to impose a series of escalating tariffs on Chinese imports.

China claims that it has been unfairly singled out and targeted with tariffs that are inconsistent with the provisions of the WTO’s General Agreement on Tariffs and Trade (GATT, 1994); in that they apply exclusively to products of Chinese origin and exceed the United States’ bound duty rates. The additional tariffs, applied to $16billion in annual Chinese imports, have been framed by the Trump administration in the context of a ‘trade war.’

It therefore justifies these exclusive trade barriers on the grounds of ‘national security’, a claim which is substantiated by a 50-page report on Chinese trade practices issued from the office of US Trade Representative Robert Lighthizer, outlining reports of cybertheft, espionage and pressure from the Chinese government.

One example cited is the highly targeted investment in US technology, focused on Silicon Valley, while overall Chinese FDI is declining. Another example of government policy pressure are new fuel-efficiency requirements which are biased against foreign electric car makers without a Chinese JV partner, which would have more difficulty gaining a foothold there.

There is also evidence in a joint study by the U.S. Naval War College and Tel Aviv University that one of China’s three main state-owned telecoms enterprises, China Telecom, may be using Points of Presence (PoP) servers to hijack internet traffic and direct it through Mainland Chinese servers for possible collection and analysis.

“According to these experts, China Telecom maintains PoP control in ten locations in North America, which it has used to hijack internet traffic in the United States and Canada and divert it through China where it could be copied.”

These experts say the intent behind redirecting the internet traffic through such a long detour could only be the result of “malicious intent, precisely because of their unusual transit characteristics.”

In addition the activity of Chinese entity APT10, — which consensus from several cyber security groups holds was founded with the purpose of cyber espionage, — has seen increased incidence of cyber theft in 2018, according to the US Department of Homeland Security. The DHS issued a warning in October 2018, over “ongoing APT actor activity attempting to infiltrate the networks of global managed service providers (MSPs)” (October 2018 Alert). The activity by APT10 observed by the DHS aligns with activity that cybersecurity firms have attributed to APT actors, which it is believed is targeted toward industries which might help meet China’s domestic innovation goals, as part of its technology policies for the 13th five-year planning period (2016–2020).

A Litany of Plaintiffs

Plenty of other countries are jostling for their turn to table a WTO dispute resolution panel. Each nation appeals to a higher authority that the tariffs someone else enacted are not fair. The US requests dispute resolution over tariffs enacted in retaliation to its duties on steel and aluminum, from China, the EU, Canada and Mexico. But simultaneously Canada, Mexico and China have said they want a panel to examine US tariffs. Norway said in a statement it and the EU would also submit to a WTO ruling on the subject, thereby bringing the European trading block in as a plaintiff too.

The US would probably win the award for most WTO trade disputes involved in, and the Trump administration even faces internal legal challenges, notably over the 25% tariff on imported steel. The wide-ranging executive powers enabled under Section 232 of the Trade Expansion Act 1962 are being questioned on the basis the statute “lacks the intelligible principle that decisions of the United States Supreme Court have required for a law not to constitute a delegation of legislative authority,” accordingc to the American Institute for International Steel (AIIS); the chief plaintiff in the claim.

Both the Institute and two of its members, SIM-TEX (LP, Texas) and KURT ORBAN PARTNERS, LLC (California), have filed a suit in the US Court of International Trade, NYC disputing the constitutionality of Trump’s powers under Section 232, which gives the executive extensive license to impose tariffs or create other trade barriers at his discretion if he feels necessary, that “imports will not threaten to impair the national security’, which is very widely defined.

The legal precedent that would have to be overturned or at minimum qualified is a unanimous Supreme Court decision of 1976 (Fed. Energy Administration vs Algonquin), in which the court upheld the actions of Presidents Richard Nixon and Gerald Ford in trading oil import quotas for oil import license fees. The court found that “the standards that [Section 232] provides the President in its implementation are clearly sufficient to meet any delegation doctrine attack.” However, Nixon and Ford were adapting a long-standing pre-existing statute; the legal precedent could be qualified on the grounds that President Trump’s actions were sui generis, or spun out of thin air.

Bibliography

https://www.lawfareblog.com/new-challenge-trumps-national-security-tariffs-and-executive-power

[1] Levied on passenger vehicles whose fuel economy is less than 22.5mpg (based on the fuel economy of specific models vs the corporate average)

[2] p.107, David Vogel, ‘Social Regulations as Trade Barriers’ in Comparative Disadvantages: Social Regulations and the Global Economy, Brookings Institution Press, Washington DC, 1997

[3] Cites OECD, “Control and Management of Government Regulation,” PUMA(95)9, Public Management Service, Paris, 1995, pp. 26–27

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