Almost a half century of negotiations to improve the agreement culminated in the creation of the World Trade Organization in 1995. The lynchpin of the modern rules-based international trading system, the WTO now includes 164 nations that together conduct more than 96 percent of the world’s trade.
This system has worked so well for so long because the WTO and its biggest champions, such as the US, made three interrelated attributes integral to their trade policies. That is, its members reduced uncertainty by creating predictable trade policies, created an environment that facilitates decision-making – particularly in the long term – by consumers and producers, and placed credible and legal directives that are clearly understood by allies and by those who are not.
Even though the US played a salient role in the creation of both the GATT and the WTO, Mr Trump’s trade policy has not followed these guidelines. To me he seems more interested in wreaking havoc with the current global trading system than with ensuring its continued viability. And he’s frequently – and very recently – intimated that he might even withdraw the US from the WTO.
Mr Trump seems to think that by issuing tariff threats, being unpredictable, and viewing foreign countries – even allies – as rival businesses he can extract concessions from trading partners. Instead, such tactics are proving to be counterproductive.
Perhaps more than anything else, Mr Trump’s policies have created a lot of uncertainty among US trade partners.
His steel and aluminum tariffs are a case in point. In March, the administration announced across-the-board tariffs on imports of the metals of up to 25 percent to punish nations – particularly China – for subsidising their own industries and dumping their production on US shores.
After key allies including Canada, the European Union and Mexico complained, the administration granted some countries temporary exemptions to the tariffs. But just a few months later, on May 31, it reversed course and began to impose the tariffs on those countries as well, leaving heads spinning. Only a week later, at the G-7, Mr Trump was threatening to cut off all trade with his counterparts one minute, suggesting that everyone eliminate all tariffs the next.
Another recent example of fostering uncertainty is the curious case of the Chinese phone manufacturer ZTE. In March 2017, Mr Trump’s Commerce Department fined ZTE $1.19 billion for violating US sanctions law by selling technology containing US components to Iran and North Korea. This past April, the agency said ZTE was still violating US law and barred American companies – most importantly chip-maker Qualcomm – from selling anything to ZTE, which led to an announcement that it was shutting down less than a month later.
Within days, however, Mr Trump appeared to have an abrupt change of heart and tweeted that he and Chinese President Xi Jinping were working getting ZTE “back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!”
Flip-flops like these make it hard for trade partners to predict what the US government is going to do, breeding enormous uncertainty.
Consider the situation faced by an American businessman who produces high-level industrial equipment that is exported to many countries around the world.
His company’s equipment is made using aluminum and steel and, as a result of Mr Trump’s new tariffs, this businessman will have difficulty predicting what the cost of the metals will be in the future. This will have clear implications for the pricing of his products. In addition, if the US gets into a trade war, this businessman will also not know whether some or all foreign buyers might look elsewhere for similar but cheaper alternatives.
Such thinking affects not just individual business people but also companies.
Far from hypothetical, companies are already warning about this. Ford and Toyota North America have both complained about the negative impacts of Mr Trump’s metals tariffs on costs and on the ability to make sound investment decisions.
Mr Trump’s steel and aluminum tariffs have also raised questions about their legality and credibility.
German Chancellor Angela Merkel and French President Emmanuel Macron have both asserted that these tariffs are illegal. As such, the European Union has filed a suit against the US at the WTO. It’s unclear whether the American national security justification will sway the WTO judges.
Prime Minister Justin Trudeau, who was the target of a post-G-7 Trump tweetstorm, has wondered how Canada could possibly be a national security threat to the US. Even Defense Secretary James Mattis is reported to have pointed out the implausibility of the national security argument for the tariffs.
This gloomy state of affairs shows that even some of our long-standing friends believe that the Trump administration’s recent actions are illegal and, more generally, that these same allies cannot make head nor tail of the administration’s trade initiatives.
The US is the world’s richest and most powerful nation, in part because of its embrace of a rules-based international order that includes the present treaty-based global trading system.
Rather than build on that success, President Trump’s trade actions thus far have created chaos, which has not led to any noteworthy success either in terms of extracting concessions from trade partners or creating the “great” agreements he touts in his book “The Art of the Deal.”
In negotiating deals, trade or otherwise, Mr Trump seems to like to break all the rules. He needs to learn: That’s not what made America great.
Amitrajeet A. Batabyal is Arthur J. Gosnell Professor of Economics, Rochester Institute of Technology. This commentary first appeared in The Conversations