Trump and the WTO - the Ultimate Game of Chicken?
July 4, 2018
6 Min Read
This week we experienced yet another plot twist in the trade tariff saga. Axios reported that it had obtained a leaked draft of a Trump administration bill, ordered by the president, that would pull the U.S. out of the World Trade Organisation (WTO) and give Trump the power to bypass congress and implement any tariffs he likes, at will.To understand the importance of this, it's a good idea to look back at the events that have unfolded so far.Back in May, the Trump administration launched an investigation into whether automobile imports were harming US national security. The investigation by the Commerce Department was to cover: cars, SUVs, vans, light trucks and automotive parts. The national security law was created during the Cold War, with the intention of being used to ensure the state is not overly dependant on imports for defence needs, with a primary focus on countries that cannot be trusted. This exception only applies in cases related to trade in nuclear materials, arms or ammunition, and only during times of war or international emergency. Therefore, any proposed tariffs by President Trump on cars and many other products, do not fit these criteria. Particularly since the proposed tariffs involved the EU, Canada, Japan and other main allies.Jennifer Hillman, a former US trade negotiator and WTO judge said “If you do this then everybody else in the world is going to go down the same road,” sparking fears of major retaliatory tariffs.Since the announcement of the trade policies, Alabama (a deep Republican state and the third largest state for U.S. auto exports) has been trying to raise awareness and educate the administration about the potential damage these tariffs would cause to the state and the industry. The state’s Secretary of Commerce, Greg Canfield, is already extremely concerned since a number of auto manufacturers have already put their investment plans on hold. Canfield added that the tariffs will act as a tax that would suppress demand and expose them to retaliatory actions. Canfield said, “Uncertainty equates to risk, and risk is a very chilling factor when it comes to investing your money. You either invest it somewhere else or you hold on to it until the situation becomes more certain,”. The American International Automobile Dealers Association is also extremely concerned about the unfolding events, saying "To treat auto imports like a national security threat would be a self-inflicted economic disaster for American consumers, dealers, and dealership employees,". The association, which represents brands such as Toyota and Volkswagen, also said that the tariffs would push up car prices for Americans. The Alliance of Automobile Manufacturers have also weighed-in, filing written warnings to the administration that the increase on passenger vehicles would cost Americans $45 billion annually or $5,800 per vehicle, effectively cancelling out the tax cut.Chairman of the Senate Finance Committee, Orrin Hatch, has also said “For most Americans, cars are the second largest purchase they make, after their homes. Taxing cars, trucks and auto parts coming into the country would directly hit American families who need a dependable vehicle, whether they choose a domestic or a global brand,”. This week, the U.S. Chamber of Commence joined the debate, with the Chamber president stating “The administration is threatening to undermine the economic progress it worked so hard to achieve, we should seek free and fair trade, but this is just not the way to do it.” The chamber, which supported the tax cuts, are now turning against President Trump and his trade policies. A number of brands have expressed concerns including: Honda, BMW, Jaguar Land Rover, Hyundai, Kia, Subaru, Toyota, Volvo, Ford, Chrysler and General Motors. The foreign brands are asking how they could possibly be a threat to national security. They have also stated that it would hurt their investment and employment within the U.S. Brands that are headquartered in America are trying to explain how the higher costs and depressed sales will damage business. Essentially, it seems nobody wants these tariffs, other than President Trump and a few trade hardliners within the administration. The U.S. will face billions of dollars in retaliatory tariffs, including $3.9 billion targeting Texas, $3 billion targeting South Carolina and $1.4 billion targeting Tennessee. This shows that foreign governments are turning the screws on Republican states, to apply more pressure to the government.That brings us onto the leaked bill that we mentioned at the start of the post. The bill would give Trump the power to bypass congress and implement tariffs at his will. The good news is, this bill would be very unlikely to pass through congress and the tariffs on tens of thousands of new products would not be implementable at the border.However, this is where things get interesting...President Trump requested this bill and was briefed on it in late May. Most of his advisers already knew the bill was unworkable and unrealistic. In roughly the same period of time, on May 24, Trump announced the potential tariffs on auto imports. If Trump invokes national security over vehicles, then there is a chance that he may blow up the WTO by forcing a test of a decades-old exception that allows countries to apply tariffs and other trade barriers in times of war. If the United States can justify tariffs on cars as being a threat to national security, then every country in the world will be able to justify restrictions on almost any product by using a similar claim.It looks like America could be about to play the ultimate game of chicken. Except if Trump loses this time, it won't be something that can be fixed by a Russian-funded loan or a debt 'restructuring'. John Veroneau, former Senior Trade Official for the George W. Bush administration, expects the administration to ultimately hit the brakes on this move. He said, "it would unleash retaliation and me-too protectionism around the world and because US consumers will rise up".However, as we know by now - we can't put anything past Trump. If any of his staff explicitly disagree with him, they will simply be the next contestant to be voted out of the White House.