Trade tensions will mount, but a destructive trade war can still be averted.
[...] The promise to label China a currency manipulator has not been repeated. An optimistic interpretation is that Mr Trump has realised that the promise was based on an “alternative” fact. China is no longer squashing its currency to gain a competitive edge, but is instead propping it up. A pessimistic one is that Steven Mnuchin, his treasury secretary, who would do the labelling, is not yet confirmed by the Senate.
Mr Trump certainly has the power to wreak trade havoc. A big blanket tariff would slice through supply chains, hurt American consumers and fly in the face of the global system of trade rules overseen by the World Trade Organisation (WTO). But, rather than blow up the world’s trading system, Mr Trump may yet decide to take on China within it. The White House website, without naming China, promises “to use every tool at the federal government’s disposal” to end trade abuses.
In the process of being confirmed as Mr Trump’s commerce secretary, Wilbur Ross somewhat reassuringly said that he had learned the lessons of the Smoot-Hawley Tariff Act, which raised thousands of tariffs in the 1930s. (It “didn’t work very well, and it very likely wouldn’t work now”.) His own policy includes a threat to “punish” countries not playing by the rules. He suggested his department might start its own actions against foreign dumping, rather than leaving them to industry. Robert Lighthizer, Mr Trump’s proposed US trade representative (USTR) and a veteran trade lawyer, knows WTO law inside out, and will be keen to scrap in the courts. [...]
Ramping up tensions still risks Chinese retaliation. [...]
A second risk is that the WTO architecture crumbles under the pressure of new cases. Resources are already stretched and decisions delayed. Constrained by a budget cap and a limit of 640 employees, it has struggled to cope with an increased number of disputes in the past few years.
A highly adversarial approach to trade could expose a more fundamental problem: “As written, the WTO rules are just not clear enough,” says Chad Bown of the Peterson Institute for International Economics. Mr Trump is right that China has not always adhered to the spirit of global trade law. But he may find that even holding it to the letter of the law is easier said than done. For example, WTO law offers no watertight definition of a state-owned enterprise, so it is hard to identify and oppose subsidies from state-owned banks.
Mr Obama’s strategy for solving the problem was to craft a multilateral trade agreement that included definitions of state-owned enterprises, a section on currency manipulation and chapters on labour and environmental standards, all meant to protect American workers against “unfair” competition. Called the Trans-Pacific Partnership, it initially excluded China. But the hope was that China would one day have to accede, thereby accepting rules written in large measure by America. Mr Trump scrapped it this week.
His strategy is clearly different. As long as he fights China on WTO rules, the world should avoid a trade war. Even if the WTO finds that American trade measures violate their rules, those rules set limits on the extent of retaliation allowed. Outside the WTO, all bets are off.
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