Does Trade War loom? Nerves of Steel.

by | Mar 7, 2018 | Trade Working Blog

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Stephanie Honey comments on the latest threat to the world trading system. 
On the eve of the signing of the CPTPP, among the biggest FTAs in the world, the global temperature on trade has rapidly moved towards “trade war” setting. On 1 March, President Trump announced that he intended to impose sweeping new tariffs on imports of steel and aluminum, likely to be formalised this week.

Against a chorus of international consternation and condemnation (including from New Zealand) and talk of the breakout of hostilities, the President tweeted that “trade wars are good and easy to win”. Even some of President Trump’s own advisors and many Republican lawmakers are trying to convince him to hold off; the tariffs are unlikely to do much to support the struggling 200,000-worker US steel industry, but will certainly have an adverse impact on the 6.5 million jobs in US manufacturing that use (imported) steel intensively.

Hardest-hit trading partners are likely to include the EU, Korea and Canada, despite NAFTA (which of course is currently under difficult re-negotiation). New Zealand’s own exports to the US are relatively small, at $39 million in steel and a further $14 million in steel products, and $23 million in aluminium.   China, the ostensible target of the measures, in fact supplies a mere 2 percent of US steel imports, although it is a relatively large aluminium supplier.

Declarations of outrage aside, trading partners are largely waiting for the formal imposition of tariffs before taking any action. China has been quoted in media as saying that it “does not want a trade war”.   The EU has indicated that following the formal announcement this week, it will consider imposing €2.8 billion of its own tariffs on imports, including not just steel but also agriculture and iconic US products such as Harley Davidson motorbikes; these measures are due to be formally considered by European member states on Thursday NZ time.  In response, President Trump has threatened tariffs on European car imports.

New Zealand will likely face impacts in our own and in other steel and aluminium markets, of course, particularly if prices collapse as displaced supply goes looking for a new home. While this is clearly far from ideal, the more serious risk lies in the threat to the global trading system. The ‘wild west’ of tit-for-tat trade measures is not a comfortable place for a small player such as New Zealand, nor for the integrity of the broader rules framework. There are questions over the WTO consistency of applying retaliatory tariffs without due process.

Equally, others may take the precedent signalled by the US – of basing its action on “national security” grounds, under the little-known and rarely-used Section 232 of the Trade Expansion Act of 1962 – to use a similar rationale to justify protectionism on other products.   The national security element is one that under any circumstances the WTO would likely have difficulty adjudicating – but worryingly, the WTO’s Dispute Settlement system has for some time been close to paralysis as a result of US refusal to allow the appointment of Appellate Body judges to proceed.   Meantime the potential downward spiral could have a serious destabilising and recessionary impact on the global economy.

We stand on the brink of precipice – whether the United States and the global trade community decide to go down that path will require some steely resolve to prevent.

This post was prepared by Stephanie Honey, Associate Director of the NZ International Business Forum.

More from NZIBF on this issue:

Stephen Jacobi, Executive Director of New Zealand International Business Forum has also appeared on NBR Radio, CNBC, Radio New Zealand, New Zealand Herald and Stuff to discuss this issue.

  • Speaking to Radio New Zealand, Stephen comments, “If this action leads to a weakening of world trading organisation and the rules, then New Zealand could well get caught in the crossfire, it will reduce confidence globally.”
  • Lending his thoughts to the New Zealand Herald, he explains how the big issue that could do lasting damage for New Zealand is the extent to which the US could undermine the World Trade Organisation (WTO) dispute resolution processes, in light of these proposed tariffs.
  • In a Stuff.co.nz story, Stephen explains how New Zealand producers could also face increased competition in other markets if producers shut out of the US looked for other places to sell their goods.
  • On CNBC Stephen remarks that the signs are “worrying” and he hopes the United States administration and trading partners will “collectively take a deep breath” and remember the benefits open trade can bring to integrated economies.
  • On NBR Radio, Stephen comments that while the global economy is growing these signs of a trade war threatens to “rain on this parade” and sap the confidence out of global trading systems. Referring to President Bush’s earlier (and unsuccessful) tariff changes, he says “It was found that 200,000 jobs were lost in American manufacturing industries, and I would expect the same thing would happen in this foolhardy round of tariff hikes.”

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