The recent surge in US protectionism constitutes a serious challenge to the global trade regime. The EU and China are likely to retaliate against American tariffs of 25 on steel imports and 10 on imported aluminium. The implications of the looming global trade war for Brexit Britain are severe, warns Robert Basedow (LSE)

Basedow, Robert

LSE Research Online

While	a	global	trade	war	is	looming,	the	UK	faces	ananarchic	world	economyThe	recent	surge	in	US	protectionism	constitutes	a	serious	challenge	to	the	global	trade	regime.	TheEU	and	China	are	likely	to	retaliate	against	American	tariffs	of	25%	on	steel	imports	and	10%	onimported	aluminium.	The	implications	of	the	looming	global	trade	war	for	Brexit	Britain	aresevere,	warns	Robert	Basedow	(LSE).The	protectionist	agenda	of	the	Trump	administration	has	been	gaining	momentum	over	the	lastweeks.	Several	signs	underpin	this	assessment.	First,	Trump’s	recent	announcement	to	impose	hightariffs	on	steel	and	aluminium	imports	seems	to	become	reality.	Nothing	suggests	that	the	US	government	mayreverse	its	course.	Second,	the	recent	shake-up	in	Trump’s	team	suggests	that	the	protectionist	camp	in	the	USadministration	is	gaining	in	influence.	Trump’s	economic	advisor,	Garry	Cohn,	and	secretary	of	state,	Rex	Tillerson,have	stepped	down	this	week.	Both	were	critical	of	Trump’s	protectionist	rhetoric	and	agenda.	Instead,	Larry	Kudlowand	Mike	Pompeo	take	over,	who	reportedly	support	Trump’s	protectionist	agenda.	Finally,	the	US	government	hasfurther	spelt	out	its	demands	to	China	on	how	to	rebalance	their	trade	relationship.	The	new	US	demands	are	likelyto	amplify	tensions	over	trade	between	the	two	powers.The	risk	of	tariff	retaliations	spiralling	out	of	controlThe	surge	in	US	protectionism	constitutes	a	serious	challenge	to	the	global	trade	regime.	The	announced	increasesin	tariffs	on	steel	and	aluminium	are	likely	to	primarily	hurt	US	firms	and	consumers.	Prices	for	steel	and	aluminiumare	likely	to	increase	in	the	USA.	The	tariffs	are,	however,	unlikely	to	have	a	significant	negative	effect	on	theEuropean	or	Chinese	economies.	So	while	the	economic	effects	of	the	tariff	increases	may	be	marginal,	they	are	ofsignificant	political	importance.	The	EU	and	China	are	under	pressure	to	retaliate	against	US	exports.	They	mustsignal	to	the	USA	and	the	global	community	that	protectionism	is	not	acceptable	and	does	not	pay	off.	The	EU,	Chinaand	other	countries	are	thus	likely	to	introduce	safeguard	measures	to	retaliate	against	the	USA,	which	may	trigger	aspiral	of	retaliatory	tariff	increases.	A	classic	trade	war	would	occur.A	WTO	dispute	settlement	case	with	the	potential	to	blow	up	the	global	trade	regimeThe	EU,	China	and	other	affected	countries	are	moreover	under	pressure	to	launch	a	case	against	the	USA	beforethe	dispute	settlement	body	of	the	World	Trade	Organisation	(WTO).	The	looming	WTO	case	has	the	potential	to	dosignificant	long-term	damage	to	the	global	trade	regime	and	world	economy.	The	Trump	administration	justifies	theincrease	in	tariffs	on	steel	and	aluminium	imports	as	a	measure	to	protect	national	security.	It	is	argued	that	afunctioning	domestic	steel	and	aluminium	industry	are	necessary	to	maintain	the	country’s	defence	capacity.	Thisargument	is	not	very	convincing.	Most	experts	agree	that	the	tariff	increases	have	the	sole	purpose	of	marketprotection.	Yet,	the	US’	reasoning	implies	that	the	WTO’s	dispute	settlement	body	will	have	to	assess	whether	theincreased	steel	and	aluminium	tariffs	indeed	constitute	an	appropriate	measure	to	protect	national	security	underWTO	law.	WTO	members	and	the	WTO’s	dispute	settlement	body	have	always	tried	to	stay	away	from	disputestouching	on	national	security	safeguards.	The	question	was	always	deemed	too	politically	sensitive.	The	currentdevelopments	may	leave	the	EU,	China	and	other	countries	no	other	choice	than	to	press	ahead	and	launch	aproceeding	against	the	USA.The	dispute	settlement	body	will	be	put	between	a	rock	and	a	hard	place.	The	dispute	settlement	body	may	rule	thatthe	US	measures	comply	with	WTO	rules	and	open	the	floodgates	for	other	countries	to	follow	suit	and	use	thenational	security	safeguard	to	engage	in	hidden	protectionism.	Significant	damage	to	the	rules-based	global	traderegime	would	be	done.	On	the	other	hand,	the	dispute	settlement	body	may	rule	that	the	US	measures	cannotreasonably	be	construed	as	measures	to	protect	national	security	and	are	thus	illegal	under	WTO	rules.	This	rulingwould	increase	tensions	between	the	USA	and	the	WTO.	The	USA	and	WTO	are,	however,	already	on	very	badterms.	Trump	has	repeatedly	criticised	the	WTO	as	a	bad,	‘broken’,	organisation	and	has	sought	to	weaken	and	toparalyse	the	WTO.	If	the	dispute	settlement	body	was	to	qualify	the	US	tariff	increases	as	illegal	under	WTO	rules,	itmay	give	the	Trump	administration	the	political	ammunition	to	take	more	determined	action	and	to	leave	the	WTOaltogether.	The	rules-based	global	trade	regime,	which	constituted	an	anchor	of	stability	for	the	world	economy	sincethe	end	of	World	War	II,	would	cease	to	exist.LSE Brexit: While a global trade war is looming, the UK faces an anarchic world economy Page 1 of 3		Date originally posted: 2018-03-19Permalink: http://blogs.lse.ac.uk/brexit/2018/03/19/the-implications-of-the-looming-global-trade-war-for-brexit-britain-are-severe/Blog homepage: http://blogs.lse.ac.uk/brexit/Public	DomainImplications	for	the	UK	after	BrexitA	weakening	or	collapse	of	the	WTO	and	the	rules-based	global	trade	regime	would	constitute	an	economic	threat	tothe	entire	world.	All	countries	would	face	considerable	economic	uncertainty	and	reduced	prosperity.	The	UnitedKingdom,	however,	would	be	more	affected	by	these	developments	than	most	other	countries.	Why	is	that?	First,	theUnited	Kingdom	–	after	Brexit	–	must	be	considered	as	a	small	open	economy.	The	prosperity	of	small	openeconomies	relies	more	on	international	trade	than	the	prosperity	of	large	economies.	Large	economies	are	typicallymore	self-sufficient.	A	fall	in	global	trade	activity	and	rise	in	protectionism	would	thus	harm	the	UK	more	than	theUSA,	EU,	China	and	others.	Second,	the	UK	will	not	have	any	bilateral	trade	deals	in	place	to	substitute	forcontested	WTO	rules	once	it	leaves	the	EU.	For	the	first	couple	of	years,	the	UK	will	fully	rely	on	WTO	rules	to	tradewith	other	countries.	If	respect	for	WTO	rules	and	jurisprudence	vanishes,	the	UK	may	face	an	anarchic	worldeconomy.What	can	the	UK	do	to	avoid	a	worst-case	scenario?All	countries	should	strive	to	avoid	this	scenario.	But	what	can	the	UK	–	as	a	country	particularly	at	risk	–	undertaketo	prevent	such	a	worst-case	scenario?	The	UK	may	use	its	‘special	relationship’	with	the	US	to	ease	theprotectionist	tendencies	in	the	Trump	administration.	Certainly	not	an	easy	task.	The	UK	may	moreover	use	forasuch	as	the	upcoming	G20	meetings	to	encourage	discussions	on	a	common	problem	definition.	All	major	tradingpowers	agree	that	the	current	global	trade	regime	is	flawed	and	needs	reform.	They	disagree,	however,	over	theactual	problems	and	consequently	reform	options.The	US’	turn	toward	protectionism	must	be	seen	as	an	attempt	to	turn	up	the	heat	and	get	other	trading	powers	–such	as	China	and	the	EU	–	to	recognise	US	reform	demands.	The	UK	may	want	to	play	a	mediating	role	and	try	tofoster	a	common	problem	definition.	Third,	the	UK	may	need	to	put	much	greater	emphasis	on	signing	a	transitiondeal	to	at	least	keep	secure	access	to	the	Single	Market.	It	should	furthermore	step	up	efforts	to	negotiate	bilateraltrade	agreements.	Liam	Fox’	plan	to	negotiate	one	of	the	first	bilateral	trade	agreements	with	the	USA	may	be	thewrong	way	forward.	The	USA	is	among	the	toughest	negotiating	partners	in	trade	deals	and	the	UK	should	first	gainsome	experience	with	trade	negotiations	before	taking	on	the	USA.	Finally,	the	UK	may	want	to	reconsider	the	Brexitdecision	all	along.	The	emerging	multipolar	world	of	the	21st	century	is	a	much	less	stable	and	secure	place	than	theuni-	or	bipolar	world	of	the	late	20th	century.To	sum	up,	the	USA	seems	determined	to	push	forward	with	its	protectionist	agenda.	US	actions	seriously	endangerthe	future	of	the	rules-based	global	trade	regime	of	the	WTO.	Weakened	global	trade	regime	will	harm	all	countriesbut	in	particular	the	UK.	The	British	government	must	make	the	fight	against	protectionism	a	priority	of	British	foreignpolicy	post-Brexit.LSE Brexit: While a global trade war is looming, the UK faces an anarchic world economy Page 2 of 3		Date originally posted: 2018-03-19Permalink: http://blogs.lse.ac.uk/brexit/2018/03/19/the-implications-of-the-looming-global-trade-war-for-brexit-britain-are-severe/Blog homepage: http://blogs.lse.ac.uk/brexit/The	post	gives	the	views	of	the	author,	not	the	position	of	LSE	Brexit	or	the	London	School	of	Economics.Robert	Basedow	is	Assistant	Professor	in	International	Political	Economy	at	the	LSE’s	European	Institute.LSE Brexit: While a global trade war is looming, the UK faces an anarchic world economy Page 3 of 3		Date originally posted: 2018-03-19Permalink: http://blogs.lse.ac.uk/brexit/2018/03/19/the-implications-of-the-looming-global-trade-war-for-brexit-britain-are-severe/Blog homepage: http://blogs.lse.ac.uk/brexit/

While a global trade war is looming, the UK faces an anarchic world economy

http://eprints.lse.ac.uk/88929/1/brexit-2018-03-19-the-implications-of-the-looming-global-trade-war.pdf

While a global trade war is looming, the UK faces an anarchic world economy

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