Fighting the Trump trade threat: The EU must go through Congress

The Trump administration’s actions on trade so far reflect a mixture of traditional, assertive American approaches and more troubling new ideas that could have serious consequences, writes Noah Gordon, warning that Europe has a lot to lose in a steel trade war against the US.

Europeans worry about Donald Trump’s ‘America First’ trade policy. He is prone to using belligerent rhetoric – he has called the Trans-Pacific Partnership (TPP) a “rape” of the US and said “the Germans are bad, very bad” because of their trade surplus.

One of the president’s few consistent political beliefs is that countries with trade deficits are losers, and that multilateral arrangements unfairly constrain American sovereignty.

But on closer inspection the Trump administration’s actions so far reflect a mixture of traditional, assertive American approaches and more troubling new ideas that could have serious consequences for Europe. To see which are which, US trade partners have to go beyond Trump’s insults and look at what his administration does.

The Bombardier case, which put noses out of joint in Canada and the UK, is the sort of trade dispute that the US has often had in the past. At Boeing’s request, the US government has proposed tariffs on a series of Bombardier passenger jets, with a decision due in February. Boeing alleges that Canadian subsidies enabled Bombardier to sell the planes below cost price.

The proposed tariffs are not illegal, as the World Trade Organisation (WTO) allows countries to impose ‘countervailing duties’ on countries that subsidise imports that hurt domestic producers. Countervailing duties and anti-dumping duties (imposed on firms that sell goods at less than cost price to damage competitors) are common worldwide.

But it’s worth noting it was civil servants who calculated the high tariff rate on Bombardier – up to 300% – not White House ideologues. And Bombardier is one of 39 active US countervailing or anti-dumping investigations.

Delays in negotiating regional trade agreements are also not unusual. The Trump administration has been happy for talks on the Transatlantic Trade and Investment Partnership (TTIP) to stall.

But European opposition was at least as responsible for its failure. Polls and protests in Germany revealed deep public scepticism about the pact, while then French President François Hollande in May 2016 decried TTIP’s “undermining of the essential principles of our agriculture, our culture, of mutual access to public markets”.

TTIP’s demise is a symptom of a general backlash against trade agreements on both sides of the Atlantic rather than evidence of a rogue American president wrecking the world order.

Trump’s hostility to the WTO is more alarming. The US has been blocking the appointment of new judges to the organisation’s main court, citing procedural concerns – this when it is already short-staffed and facing a backlog of cases. The WTO Appellate Body is the heart of the organisation and has helped resolve disputes between the EU and the US over, for example, steel and hormone-treated beef.

Trump has complained wrongly that the US loses “almost all” of its cases and has “fewer judges” than other countries. Most ominously, the 2017 US trade agenda suggests that the US could ignore WTO rulings if those decisions infringe on its sovereignty. The trade body’s chief says America risks “compromising the system as a whole”.

Trump has put steel back on the agenda. His administration is making use of an obscure 1962 law to investigate whether steel imports are a threat to national security and should thus face higher tariffs. Under the law the president can restrict imports on his own authority. The American Iron and Steel Institute found, however, that just three per cent of domestically produced steel is used for US defence.

If another country challenged Trump’s action, the US could invoke the WTO national security exception (Article XXI of the 1947 General Agreement on Tariffs and Trade (GATT) Treaty), which was designed primarily for times of war or the implementation of sanctions). This ‘self-judging’ exception is rarely used, and the GATT/WTO has never made a binding ruling as to whether it is appropriate. Member-states are expected to show restraint in invoking it, but there is the potential for serious misuse. A spat over US steel tariff could set the WTO against Trump or open the floodgates for other countries to follow suit and erect trade barriers on the grounds of security measures.

Europe has a lot to lose in a steel trade war. Subsidised overproduction in China is principally responsible for the glut and low price of steel. Though just two per cent of US steel imports come from China, Trump is likely to choose a broad tariff rather than country-specific quotas, because imports of Chinese steel are already subject to countervailing duties and the US steel industry complains that China stealthily ships steel through third countries. So other exporters to the US, like Germany, would suffer disproportionately from a broad US tariff.

What is more, the cheap steel headed for the US would be redirected to Europe. That is why the European Commission is preparing to defend itself with a mix of tariffs and quotas on steel from across the globe. The WTO permits these ‘safeguard’ measures when there is a sudden and damaging surge in imports. The EU used them in a major 2002 dispute with the US, when George W. Bush put his own safeguard tariffs on steel. In that case, after an EU legal challenge, the WTO ruled that the US safeguards were unjustified and illegal. This ruling opened the door for the EU to levy retaliatory tariffs on politically sensitive goods like Florida orange juice. Bush accepted the WTO ruling, backed down, and removed the US tariffs before the EU hit back.

Such WTO-compliant defence measures must be part of the solution if Trump takes the protectionist route. But Europe’s top priority should be to step up the lobbying effort. European NATO officials are going through the Pentagon to explain how America’s partners are threatened by steel tariffs. Europe must also communicate to pro-trade, pro-NATO senators that national-security tariffs are not in America’s national interest. American beneficiaries of cheap steel, such as automakers, will be on Europe’s side. Commerce Secretary Wilbur Ross has already announced that the steel investigation will be delayed in order to avoid “unnecessarily irritating” the legislators the White House needs for its tax reform proposals.

Europe also needs to convince the US administration that the WTO dispute settlement benefits everyone – and that reform efforts must be undertaken co-operatively. Petitioning interest groups in Washington may sound like a soft response, but a tit-for-tat trade war helps no one.

Noah Gordon is the current Clara Marina O’Donnell fellow at the Centre for European Reform (CER) in London.