The international trade community first attempted to organize and regulate the area of the then proliferating international trade and services when the General Agreement on Tariffs and Trade (GATT) was replaced by the World Trade Organization (WTO) in 1995. The first conference of the WTO was held in Singapore in December 1996 and attended by 128 member states.
China, unlike the United States (U.S.), is not one of the Founding Members of the WTO largely due to the country’s protectionist regime. While support was constantly sought to expand the global economy through regular spadework and advanced efforts, the structure of trade in Chinese domestic markets only permitted sparse liberalization. Today, China and the U.S. are ensnared in an aggressive trade war and looking at its consequences, the experts contend it as one of the most disruptive peacetime events.[1]
What happened?
The U.S. and China are regarded as the world’s two largest economies presently. The U.S. President Donald Trump has sought to wage a trade war against not only China, but also Canada,[2] Europe,[3] and Mexico in the recent past. The U.S. blames these countries for the economic misfortunes in the form of the increasing trade deficit faced by its own economy. However, as amongst these countries,
The European Commission chief Jean-Claude Juncker decided to step back and revive the trade relations between the U.S. and the European Union.
Canada hit back resolutely by imposing retaliatory tariffs.[4] The damage in trade relations, however, led to a larger loss for Canada than for the U.S. since the latter has a greater leverage on international markets owing to its trade policies which are able to influence international prices on a daily basis.[5]
Mexico, akin to Canada, immediately announced punitive measures declaring it as a step towards achieving economic justice.[6]
After a disruptive move of the U.S., why did the WTO not step forward?
Article XXVII of the GATT promotes reciprocal and mutually advantageous negotiations periodically directed at the substantial reduction in the general level of tariffs and Article II of GATT ensures that all the members must adhere to these tariff bindings by not imposing customs duties in excess of those set forth in each country’s schedule.[7]
However, in a case where any contracting party breaches the agreement, the aggrieved party, pursuant to the process of consultation, shall take up the matter with the WTO under the Dispute Settlement Understanding (DSU).[8]
Tensions between the two world powers have been growing since the inception of their trade relation, but, only recently, the blame game has sped up despite holding a range of regular high-level trade dialogues, the first one being in 2003.[9] On one hand, the U.S. alleges that China has repeatedly violated WTO’s free trade economy policies and regulations. It further alleges that the Chinese state-owned enterprises and other significant domestic companies attempting to move up the economic value chain are the primary beneficiaries of China’s trade policy.[10] However, it is unclear whether such allegations are reliable after the U.S. had made false allegations against China for pegging its currency against the U.S. dollar in 2003.[11] However, on the other hand, it is significant to point out that in China the contribution of Foreign Invested Enterprises (FIEs) has notably plunged with an increase in the rapid expansion of the operation of the local firms.[12] China, on the other hand, alleges that the U.S. has, over the years, acquired abundant power to manipulate the trading mechanism all over the world by exercising excessive control over different factors which also affects Chinese exporters negatively.
As mentioned above, prompted by the WTO’s DSU, the aggrieved countries have taken up this matter with the WTO to put an end to the unwarranted actions of the U.S. At this juncture, it is feared that the ability of the WTO to arbitrate these trade disputes is diluted due to the grounds raised by the U.S. President to justify this tariff war. The WTO permits the contracting partiesto impose such trade tariffs on invocation of certain national security grounds.[13] This provision was, up till now, construed in a narrow sense in a suitable backdrop to prevent its possible misuse. However, the Trump administration has invoked this provision to justify the imposition of tariffs on Steel and Aluminum above the ceiling permitted under the WTO rules, despite no evident and immediate need to do so. In an attempt to retaliate, China undertook countermeasures to fight external pressure from the foreign government. Since the WTO Agreement requires the retaliatory measures to be in proportion to the initial tariff increase, Chinese imports from the U.S. faced a 0.4% increase in average tariffs as compared to the U.S.’s 0.47%.[14]
How is it significant for India as a member of WTO?
Whether the act of Trump is a façade to fuel his country’s growing protectionist regime or to shun China’s protectionist policy is an altogether different discussion not touched upon in this article. However, in this trade conflict scenario, the changing policies shall have general equilibrium effects on the other countries, including India and its economy. The failure of the WTO to act firmly in this matter could ultimately result in a changed economic order where the developed countries thrust their economic choices and modified tariffs and quotas to dominate the international trade for their own benefit. The integrity with which this organization was built and sustained is threatened by the unchecked actions of the current U.S. President. India has, indeed, began to face the consequences of the hike in steel and aluminium tariffs itself. Moreover, this may lead to a crack in the established and accepted arrangement amongst the WTO members. As a result, so many environmental and sustainability concerns that require our immediate attention will steadily be disregarded. Nonetheless, each coin has two sides. To be clear, India does not export any notable amount of aluminium or steel products to the U.S. and therefore, the chance of it being the front-runner for its Steel/ Aluminium trade is, undoubtedly, low. Nevertheless, this situation births certain prospective benefits that India should be prepared to derive from the U.S./China bilateral trade (dis)connection. China, in all probability, will begin to look for prospective technological trade partners to replace the U.S. companies. If India desires, it may up its game in the area of software trade to balance its own trade deficit with China. If India is successful in maintaining impartial ties with both countries, it will immensely help to widen its economic clout.
This post has been authored by Jyotsna Punshi, a student at National University of Advanced Legal Studies, Kochi.
[1] C. Fred Bergsten, Let’s avoid a Trade War, 24 Foreign Policy, No. 23, 1976, at 24, 31.
[2]Trump and EU’s Juncker pull back from all-out trade war, BBC News, (Jul. 26, 2018), https://www.bbc.com/news/world-us-canada-44961560).
[3]See id.
[4]BBC News, supra.note 2.
[5] Alessandro Nicita, Nobody really wins a Trade War, UNCTAD, (Apr. 25, 2018), http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=1740 (last visited Aug. 28, 2018).
[6]Shannon K. O’Neil, Mexico Knows How to Fight a Trade War, Council of Foreign Relations (Jun. 4, 2018, 9:40 AM),https://www.cfr.org/blog/mexico-knows-how-fight-trade-war (last visited Aug. 30, 2018).
[7]Michael J. Trebilcock, Advanced Introduction to International Trade Law, 22 (2011)
[8]Understanding on Rules and Procedures Governing the Settlement of Disputes art. 1, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 1869 U.N.T.S. 401 [hereinafter DSU].
[9]World Trade Organization, Report of the United States Representative Jan. 2018, 3 (2017) [hereinafter Compliance Report of China].
[10]Id.
[11]Neil C. Hughes, A Trade War with China, 84 Foreign Policy,No. 4, 2005, at 2, 4.
[12] Lardy 2014.
[13]GATT article XXI, Oct. 30, 1947 33 I.L.M. 1153.
[14] Johannes Bollen& Hugo Rojas-Romagosa,Trade Wars: Economic Impacts of US Tariff Increases and Retaliations an International Perspective, Bureau for Economic Policy Analysis, 10 (Jun., 2018), https://www.cpb.nl/sites/default/files/omnidownload/CPB-Background-Document-June2018-Trade-Wars.pdf (last visited 29 Aug. 2018).
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