Such a protectionist turn poses serious threats to the very foundations of international trade: the WTO.
Have you ever found yourself clashing with a fervent communist over which overarching system should govern economic relations? Too often the exchange ends up resembling a brawl around the evils of our world, and the infeasibility of forcing any other alternative onto societies. Debates as these always miss a crucial point, namely that the current economic system for better or worse ought not to be taken for granted.
In the last two years, Biden’s administration has passed three laws worth approximately $2Trn of government spending on infrastructure, semiconductors, and green industries. On paper they aim to reduce excessive dependence on Xi’s China while reviving America’s manufacturing and ensuring the country will lead global efforts to reach carbon neutrality. Importantly, more than a third will be spent to subsidize semiconductors and green technologies like electric vehicles, or EVs. A dirigiste turn that will have “toxic” effects on other economies warns EU Commissioner Margrethe Vestager, whose duty is to ensure fair competition within the bloc and vis-à-vis external trading partners.
Nonetheless, Biden’s plan will most likely appeal to new generations which while rightly concerned with fixing the flawed “system” that has produced global warming show little appreciation for the good that comes with it nevertheless. Such an inflow of public money will give American-based firms an unfair hedge over others that compete in the same market. For instance, American buyers will receive in full a $7.500 subsidy so long as their preferred EV and its battery have been manufactured or assembled in North America.
Underneath the effort to accelerate the path toward American carbon neutrality lies the desire to redirect critical supply chains and raw materials to the homeland. The European Union, which accounts for over a quarter of global EVs production, will be hit the hardest if America does not address the caveats its plan comes with, for example by letting European cars access subsidies too. Furthermore, Biden has so far failed to acknowledge that the cost the world must pay for American strategic goals will by far outweigh the benefits of a greener, less polluting US.
Free trade for free
It is nor fair nor should it be legal but increasingly the rules of the World Trade Organization (WTO) are being bent, jeopardizing the credibility of the most precious of intergovernmental institutions. In 1947, signatories of the General Agreement on Tariffs and Trade (GATT), later incorporated in the WTO, had agreed to engage in “reciprocal and mutually advantageous” relationships aimed at a gradual reduction of trade barriers of any kind, and to eliminate “discriminatory treatment in international commerce”.
It is estimated that on average joining GATT and/or the WTO increases trade between members by a stunning 171%. Due to cheaper imports used in production and livelier competition the cost of finished goods and services decreases. Overall, specializing in sectors they hold a comparative advantage over countries experiencing a raise in income level.
Furthermore, upon joining the WTO governments undertake a legal obligation to give equal treatment to all trading partners. Crucially, if disputes cannot be resolved through negotiation WTO’s permanent Appellate Body will adjudicate the matter. Funnily enough, the US should bear in mind that the benefits of free trade do not come for free, and that free riding comes at a painful price for fellow WTO members.
The WTO in crisis
Historically, because WTO’s rulings can be enforced by sanctioning incompliance, in the form of increased tariffs and/or trade compensation, defections were kept under control. Since Trump this has become less and less the case. On the one hand, the US is deliberately vetoing the appointment of new judges to the 7-member Appellate Body which after five retirements has lost the legal capacity to operate. On the other, trade barriers justified exploiting legal loopholes are proliferating at an accelerating speed.
In 2018, Trump’s administration unilaterally raised tariffs on all steel and aluminum imports citing national security concerns, a policy for which China was to blame but everybody had to pay the cost for. Indeed, under GATT exceptions to trade rules can be justified on the grounds of “essential” national security concerns yet after seven decades of self-restraint they are becoming the norm.
As a matter of fact, in response to American tariffs, the WTO has recently ruled against the US, arguing the move did not come “at a time of war or other emergency”. Surprisingly, Biden has demonstrated to be even more hawkish than his predecessor as he shows no intention to take the tariffs back, nor to appeal as the Appellate Body is currently stalled by the US itself. Instead, Biden has sought to repair relations with the European Union, Japan, and the UK by signing discriminatory bilateral agreements.
Having it both ways
Biden has made his position on the national security exception crystal clear as his administration contends that “the WTO has no authority to second guess the ability of a WTO member to respond to a wide range of threats to its security,” and that it only reinforces “the need to fundamentally reform the WTO dispute settlement system”. Unfortunately, there exists a trade-off between national security and mutually advantageous trading relationships. Under current rules having unlimited discretion on what counts as national security should not even be an option.
It remains to be seen whether the US is willing to deploy substantial diplomatic capital to deeply reform the organization, namely to strike a deal between 164 veto players with often conflicting interests at stake. Alternatively, as the latest surge in government subsidies in the past years seem to suggest, these are just worthless words. A more compelling hypothesis is that the US is buying time to take the lead only to then tell the world how quickly it reached carbon neutrality and reduced dependency from unreliable China.
If the US pulls the plug on the WTO, we should expect others to follow suit. For one, competition chief Vestager has already announced that is willing to relax state aid rules to avoid capital being sucked across the Atlantic but “without jeopardizing the level playing field” within the single market. This will require yet another European fund to smooth out the heterogeneity in members’ spending capacity.
A false start
Hopefully, under the Indian presidency members of the G20 will manage to find a much-needed global solution for the WTO crisis which risks otherwise spiraling into a Hobbesian erosion of trust no state stands to benefit from.
Trade may become an ever-greater source of geopolitical tension as reducing dependency from China will insulate America from the risk of economic disruption that would follow an invasion of Taiwan by Chinese forces.
Biden’s plan for America will force the EU, which has so far juggled its way between the US and China keeping a compromising posture with both, to finally choose a side. The current Commission has already hinted at the direction the bloc will take and in absence of a fiscal union for the foreseeable future siding with the US may be the only option available.
There is no easy answer to the crisis global trade is being faced with as we head toward uncharted territory. Certainly, for younger generations prospects will get worryingly grimmer in so far as international trade is being taken for granted. The US has made a false start, and since there is no referee to make it comply with the rules of the game, the crowd watching should make its voice heard to preserve the good bits of the world we live in.