WTO warns over tit-for-tat trade wars

Global trade has seen its most rapid growth in six years, says the World Trade Organization’s annual analysis.

But the positive news could be put at risk by tit-for-tat tariff wars that have broken out, according to the head of the WTO, Roberto Azevedo.

Broader global tensions could also see trade suffer.

Last month, President Donald Trump unveiled plans for a 25% tariff on US steel imports from countries such as China and a 10% tariff on aluminium.

That followed an announcement earlier in the year for tariffs – import taxes – on washing machines and solar panels.

The president said that battles on trade were good and “easy to win”.

China responded by imposing its own tariffs on US goods and has complained to the WTO and threatened legal action, claiming unfair treatment.

‘Unmanageable escalation’

“The strong trade growth that we are seeing today will be vital for continued economic growth and recovery and to support job creation,” said Mr Azevedo, the WTO director-general.

“However, this important progress could be quickly undermined if governments resort to restrictive trade policies, especially in a tit-for-tat process that could lead to an unmanageable escalation.

“A cycle of retaliation is the last thing the world economy needs.”

He said that countries should show restraint and settle their differences “through dialogue” and collective action.

China has already announced retaliatory action against the US move, announcing tariffs of up to 25% on US imports such as pork, fruit, nuts and wine.

Despite growing fears over a global trade war between the world’s two largest economies, trade volume growth in 2017 hit 4.7%, the highest level since 2011.

Stronger world growth and increasing levels of consumption have driven the rise, which has helped, for example, the UK economy, where exports are valued at more than £600bn a year.

Tariff uncertainty

WTO economists said that 2018 should see trade growth expansion of about 4.4%, well above the post financial crisis average of 3%, though still below the 4.8% average seen in the 1990s.

The WTO annual trade report said risks were now “tilted to the downside” because of the uncertainty over tariff policy, which could affect business investment and that trade growth would slow to about 4% in 2019.

It also cautioned that central banks were looking to tighten monetary policy – for example, by raising interest rates – at a faster pace.

The Bank of England has already said that interest rates are set to rise more quickly than previously thought, with the next rise expected by the markets as early as next month.

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Carmakers fear rising trade barriers after Brexit

A storm is brewing as clouds gather over Bristol Port, with the rain set to fall on tens of thousands of vehicles parked in the port’s car compounds, ready for export by ship, or destined for UK dealerships.

It is an apt backdrop for the UK automotive sector’s current predicament.

“Brexit has derailed the industry,” says Sarwant Singh, senior partner and global head of automotive and transportation at consultants Frost & Sullivan.

“The uncertainty causes people not to buy cars.”

The number of cars sold in the UK dropped 5.7% in 2017, according to industry body the Society of Motor Manufacturers & Traders, and ratings agency Moody’s predicts a further 5.5% fall this year.

There has been little respite from foreign markets, with exports slipping 1% last year.

Each year, about 80% of the vehicles built in the UK are exported, so smooth international trade relations are vital for the automotive sector’s continued prosperity.

But these days, the relations are as choppy as the sea in the Bristol Channel.

Industry executives’ main fear is that Brexit will result in heightened barriers to trade, not only with the European Union, but with the rest of the world too, once the transition period ends on 31 December 2020.

The prospect of an escalating trade dispute between the US and its main trading partners, the EU and China, also looms large, after US President Donald Trump’s recent threat to tax cars imported into the world’s largest market.

“All of Europe is exposed,” says Justin Cox, director of global production at consultants LMC Automotive, “but some plants are more exposed than others, and it so happens that several of those are in the UK.”

Then there’s China, the world’s second-largest car market. Trading relations with China are already complicated, and may well be subject to even greater complexity in future.

“A UK-China free trade agreement will be neither easy nor clearly advantageous for the UK,” says Bruegel, a European think tank that specialises in economics.

Part of the issue, it says, is that the UK would like to land better trade deals with China when it leaves the bloc than the ones the EU already has in place. But being smaller, the UK will be in a weaker position during trade talks, so there are no guarantees China will be prepared to offer better terms.

On top of this, UK automotive trade with China – and other fast-growing markets such as India, Brazil and Russia – could suffer, depending on the terms of a post-Brexit trade deal with the EU, Mr Singh says.

That’s because the UK might not be able to piggyback on the EU’s existing bilateral trade agreements with third countries, including those entered into since the Brexit vote with Canada and Japan. Instead, it would face years of protracted trade talks with dozens of countries.

Getting a good Brexit deal is also important because of the interdependence of European automotive companies.

“The motor industry has taken advantage of the EU’s single market as much as, perhaps more than, any other industry,” says Mike Hawes, chief executive of SMMT.

As a result, EU customers buy about €15bn ($18.5bn; £13bn) worth of British-made cars per year, accounting for some 53% of the UK’s vehicle exports, according to the European Automobile Manufacturers Association (ACEA).

Conversely, EU manufacturers deliver 81% of the cars imported by the UK, to the tune of about €45bn, a trade imbalance that Brexit supporters hope will give the UK leverage during trade talks.

At the same time, about 80% of the parts and components used to build cars in the UK are also imported from the EU, while 70% of the parts and components made in the UK are exported to EU countries.

“Any changes to the deep economic and regulatory integration between the EU and the UK will have an adverse impact on automobile manufacturers with operations in the EU and/or the UK, as well as on the European economy in general,” the ACEA says.

Hence, both the UK and the European car industries are keen to see a final UK-EU deal that retains frictionless trade in the long-term.

“Anything short of single market membership could be a problem for the UK,” says Simon Dorris, managing partner at Lansdowne Consulting.

Free trade is indeed key to future prosperity, not just within Europe but beyond, according to Prof Patrick Minford of Cardiff University, who chairs Economists for Free Trade, a group of pro-Brexit economists.

Its much debated paper, From Project Fear to Project Prosperity, suggests fears of rising trade barriers for carmakers after Brexit are misplaced.

Prime Minister Theresa May has said that Brexit presents an “opportunity to strike free trade deals around the world“.

“Auto manufacturers will improve profitability post-Brexit,” Prof Minford predicts.


Motor vehicle production, 2017

  • UK production: 1.75 million motor vehicles. Exports to the EU: 800,000
  • EU 27 production: 19.69 million motor vehicles. Exports to the UK: 2.3 million

    Source: ACEA


    Despite the uncertainty about a future trade deal, a number of big carmakers have committed to building more cars in the UK since the Brexit vote, including Nissan, BMW, Toyota, and last week Vauxhall, which is owned by French group PSA.

    But Parliament’s cross-party Business, Energy and Industrial Strategy Committee is pessimistic, recently warning that “there are no advantages to be gained from Brexit for the automotive industry for the foreseeable future”.

    The UK prime minister’s desire for free trade is shared by the global motor industry more generally.

    Executives are nevertheless pragmatic, and accept that although international trade is governed by rules policed by the World Trade Organization, free trade is rarely a reality.

    Trade-distorting subsidies and a variety of measures, such as regulatory barriers, internal tax measures, and intellectual property rights, still impede the free flow of goods, even when trade agreements are in place, according to the European Commission.

    The EU, for instance, will not import cars unless they meet EU safety and emissions requirements.

    Moreover, trade agreements are generally conditional. For instance, cars exported from the EU must be predominantly made within the EU to be allowed free entry into other markets.

    Such “Rules of Origin” could complicate exports for UK carmakers after Brexit, as an estimated 55%-75% of the parts and components that make up a car built in Britain are imported, according to Mr Hawes of SMMT.


    Global Trade

    More from the BBC’s series taking an international perspective on trade:

Who is losing out from Trump’s tariffs?

The US-China trade dispute is starting to have consequences.

US tariffs on foreign steel and aluminium went into effect last month. China’s retaliatory duties on more than 100 US imports, including pork, fruit and wine, kicked in soon after.

Further tariffs on $50bn worth of the each country’s products are in the offing, as the Trump administration presses China on state subsidies and practices it says encourage intellectual property theft. The White House has threatened even more.

Economists expect the duelling taxes to have a relatively limited impact on the overall US economy. But they say the measures will touch most parts of the country and lead to higher prices for everything from televisions to vitamins.

For certain industries like agriculture, aerospace and manufacturing, the effects could be severe.

So how are US companies handling a looming trade war?

Roadtec: ‘Unanswered questions’

For some firms, the measures are welcome. Companies such as US Steel have announced plans to expand their operations, bringing on hundreds of workers.

Their customers – many of them manufacturers located in the Midwest – are worried, however.

They say US tariffs have already increased demand for domestic steel – which accounts for the majority of the metal’s sales in America – driving up prices for firms reliant on steel-based parts.

The proposed tariffs, which include taxes on hundreds of Chinese-made parts and equipment, promise more pain.

At Roadtec, a growing 600-person Tennessee company that makes asphalt paving machines, suppliers are already asking 40% more, says the firm’s marketing director, Eric Baker.

He says the firm is still trying to figure out how to best address the higher costs.

“There’s a lot of uncertainty right now,” he says. “I think the biggest question is how long this is.”

Seneca Foods Corp: ‘Absorb the cost’

Hundreds of firms have asked the Commerce Department for exemptions from the US steel and aluminium tariffs, including Wisconsin-based Seneca Foods Corp.

The firm, which makes its own cans to support a large fruit and vegetable processing business, started importing coils of tin-plated steel just a few years ago, after domestic supply became uncertain.

Leon Lindsay, Seneca’s vice president for sourcing, says he is not sure where he will buy coils now, given the uncertainty about how the US tariffs will affect other markets such as Europe.

In the meantime, a Chinese shipment from an order of 11,000 metric tons, placed last summer, is due in port in the next few weeks and faces the new 25% mark-up.

Mr Lindsay said he is not optimistic a Commerce Department reprieve will come in time, nor can the firm, which is in the competitive food industry, pass on the higher cost of steel to its customers.

“The stuff we’re asking for exclusion [for] is on the water. It can’t go back, so we’re the ones that will probably have to absorb the cost, which is significant,” he said.

Hsu Ginseng Farm: ‘This comes up with every customer’

Farmers are also bracing for a hit.

Will Hsu, whose father started a ginseng farm in Wisconsin more than 40 years ago, was in China last week, meeting with clients and sales staff.

“This comes up with every customer that we meet with. This comes up with our staff,” he said. “They’re worried about how they’re going to pass on that price increase.”

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    Wisconsin, the source of more than 90% of the United States’ cultivated ginseng, can’t afford to lose access to the Chinese market – which has been a key buyer of American ginseng since the 1700s and is the destination for more than three quarters of the state’s crop.

    Industry members said American ginseng has a reputation for quality, commanding a premium price that provides some room to negotiate.

    Mr Hsu says his farm, which employs about 400 people in the US and China, also has enough US clients to handle a temporary tariff. But levied long term, the tax could force him to scale back.

    Hutchinson Farms: ‘Cutting off our nose’

    Farmers are also worried about foreign competition.

    About a third of America’s soybean crop heads to China each year – some $14bn in exports – but Argentina and Brazil are also big exporters.

    Drought has hurt Argentina’s crop, but farmers in Brazil expect the US-China dispute to increase demand for their product, says Victor Carvalho of Informa, a business intelligence firm. They are also watching to see if US prices will fall enough to make it worth importing US soy to crush and resell, he says.

    Will Hutchinson, a fourth generation farmer from Tennessee, has been monitoring developments on the news and is hoping the situation will de-escalate.

    “Trade is vitally important to both countries,” he says of China and the US. “We don’t need to be cutting off our nose to spite our face.”

    Greenland America: ‘There will be an overhang in the market’

    About half of US scrap aluminium exports went to China last year, but US firms are already starting to turn to other markets.

    The shift is a response in part to tougher environmental rules China had already imposed on waste imports. China’s new tax on aluminium scrap compounded the problem.

    Randy Goodman is executive vice president at Georgia-based Greenland America, a brokerage that buys and sells scrap metals in countries around the world.

    So far, he says less than 10% of his firm’s business to China has been affected, but he’s worried about the future.

    “The issue is that these other countries or even the domestic consumers … can’t pick up all the slack so there will be excess material,” he says. “There will be an overhang in the market that will eventually affect the pricing.”

    ‘It’ll be very good’

    President Trump has said he is confident that confronting China will lead to a stronger US economy, and tried to reassure those who are worried.

    “It’ll be very good when we get it all finished,” he said this week.

    The people whose livelihoods are caught up in the dispute are hoping the president is right.

What next for Trump’s trade agenda?

There’s no doubt about the big question that looms now for international trade officials.

It is: what can they expect next from the United States under President Trump?

For decades after the Second World War, the US was arguably the biggest cheerleader for the gradual liberalisation of trade that took place.

Now, the US is the principal cause of anxiety among supporters of that process.

President Trump’s approach to international commerce is assertive and confrontational, driven by an agenda described as economic nationalism.

It is a central element behind the escalating trade tension this week.

Some fear that this approach will undermine the system that has evolved in the last three quarters of a century.

Ambivalent

It is a complex system based to a large extent on rules managed through the World Trade Organization (WTO), supplemented with agreements among groups of countries that provide still deeper trade integration.

President Trump has shown little enthusiasm for those deeper agreements. He pulled the US out of one that had not been implemented as soon as he took office – the Trans-Pacific Partnership, and has threatened to repudiate another, the North American Free Trade Agreement.

On the WTO, the Trump administration has been ambivalent.

Some recent steps have been given a WTO justification. The controversial tariffs on steel and aluminium followed an investigation by the US Commerce Department which concluded that imports of the metals were a threat to national security.

In essence, the argument is that the US military needs a more reliable source of supply from the country’s own industry.

WTO rules do permit countries to impose trade barriers to protect national security that would not otherwise be allowed.

It’s another question whether national security really was the motivation and many critics, including the European Commission and China, don’t believe it was.

Tariffs on imported washing machines and solar panels were safeguard measures, actions that are permitted in response to surges in imports, provided they are done in a way that is consistent with the WTO rulebook.

More difficult is the proposal, not yet implemented, to target Chinese goods with tariffs because of the country’s alleged appropriation of the intellectual property – such as patents and designs – of American companies.

It is certainly true that protecting trade partners’ intellectual property is required by WTO rules and the US concern about China is shared by others, including the EU.

But countries are in most circumstances supposed to use WTO procedures before retaliating on the basis of a dispute panel authorising such action. The US has made an official complaint to the WTO but that only happened last week.

It will be many months until there is a ruling and even if China loses and fails to comply there will be a further delay before the US is given authority to retaliate. Will President Trump be willing to wait that long?

Unilateral action

So it is certainly possible that the US will jump the gun and decide to go ahead while the WTO process rumbles on. That would be hard to reconcile with the organisation’s rules.

At a WTO meeting last week Chinese officials warned that unilateral action by the US undermines the multilateral trading system and sets a very bad precedent.

China’s Ambassador Zhang Xiangchen told the meeting that member countries should act together to “lock this beast back into the cage of the WTO rules”.

Still, the fact that the US has started the dispute settlement process can be seen as a sign that the Trump administration sees the WTO as useful.

It is worth noting that China is striking its first retaliatory blows without a WTO ruling, though there is a way that can sometimes be done under the rules. It is however debateable whether that provision really applies in this case.

Still, the Trump Administration has a strikingly different tone on trade after its predecessor.

The economic nationalism that motivates President Trump and some of his team is disposed to see other countries as trading unfairly. It sees trade deficits as a sign of weakness, as an indication that trade agreements are defective and unfair.

It is true that President Trump has fired the most influential voice pressing this approach, his former chief strategist Steve Bannon. But the disagreements that led to that were not about trade.

And there are others of similar view still in key positions for trade policy. His Commerce Secretary Wilbur Ross, the US Trade Representative Robert Lighthizer (who is in charge of negotiating trade deals) and the president’s trade adviser, Peter Navarro, director of the National Trade Council are all from that mould.


Global Trade

More from the BBC’s series taking an international perspective on trade:

  • Markets edgy on US-China trade war fears
  • Trump announces tariffs on $60bn in Chinese imports
  • Brexit boost for consumers short-lived says IFS
  • US retail giants ask Trump to reconsider China tariffs
  • UK to seek exemption from US steel tariffs

    Mr Bannon’s departure did not reflect a disagreement over the economic nationalist agenda. But the resignation of Gary Cohn, as head of the National Economic Council did.

    Mr Cohn was someone seen as resisting that agenda in the administration. The firing of Secretary of State Rex Tillerson reflected a number of disagreements with the President including the steel and aluminium tariffs.

    One of President Trump’s central views on trade is that other countries take advantage of the US. It is certainly true that US trade barriers are among the lowest. Tariffs – taxes applied to imports – are the easiest barrier to measure and average levels in the US are low. Not the lowest in the world as Mr Navarro has claimed.

    Hong Kong doesn’t have any at all and depending on how you calculate average tariffs several others are lower than the US. But certainly American tariffs are relatively low.

    There are some goods where American tariffs are high – known in the trade world as “tariff peaks”. There are some in excess of 100% for agricultural products and there is a 25% duty on light trucks.

    Does that mean other countries are taking advantage of the US? It’s debateable. The mainstream view among trade economists is that the main losers from tariffs are buyers of the affected goods in the country that imposes them.

    Main beneficiary

    They have to pay more, either because they buy imports from a supplier that has to recover the cost of the tariffs or from a domestic supplier who is able to raise their prices as result of the protection afforded by the tariffs.

    And sometimes the buyers of the affected goods are businesses that use them as inputs. Steel and aluminium are cases in point.

    So there is a case that would be supported by many trade economists that the main beneficiary of low US tariffs is the US itself, particularly American consumers.

    But President Trump’s focus has been on producers – firms and employees – who see themselves as being hit by low cost, and they argue, unfair foreign competition especially from China.

US trade deficit widens in February

America’s trade deficit widened in February as its international trade hit a monthly record.

The deficit was $57.6bn – the largest monthly gap between exports and imports of goods and services since 2008, the US Commerce Department said.

The figures come as President Donald Trump tries a variety of tactics to reset the balance between US imports and exports.

The deficit was larger than analysts predicted, as imports of services rose.

That reflected payments made to broadcast the 2018 Olympic Games, the Commerce Department said.

Overall, February imports were $262bn, rising 1.7% from January amid ramped up spending on items such as civilian aircraft, computers and food.

Exports also rose 1.7%, reaching $204.4bn over the month, driven by sales of oil and natural gas and automotive vehicles.

The US recorded a monthly deficit in goods – the focus of much of President Trump’s attention – with most countries, led by China at $34.7bn. However the gap with China shrank 2.3% from January.

Wells Fargo analysts said they expect to see exports and imports grow in coming months, with strong domestic demand leading to further widening of the deficit.

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    However, they wrote that the rising trade tension between the US and China, which have each announced plans for tariffs on $50bn of the other’s goods, are a “potential fly in that ointment”.

    “A full-blown trade war between the world’s two largest economies, should one develop, probably would not cause American exports and imports to go into reverse, but it could weaken growth in trade,” they wrote.

    China has initiated a complaint with the World Trade Organisation over the US plans to impose a 25% tax on Chinese-made imports worth about $50bn for what the White House says are unfair intellectual property practices.

    The WTO circulated the request for consultation to members on Thursday, launching a discussion period before the complaint heads to formal dispute settlement process.

    Mr Trump has said he wants America’s deficit with China to decline by $100bn.

    Economists say focusing on deficits, rather than total trade, is misplaced.

Five reasons why trade wars aren’t easy to win

What happens now that President Donald Trump has said he will move forward with tariffs on steel and aluminium products?

Analysts are warning of a trade war, as officials from Europe, Asia and Latin America threaten retaliation.

Mr Trump predicted it would be “easy” for the US to win.

But most economists and trade experts reject that view, saying every country, including the US, stands to lose in the event of a serious trade fight.

“If what we’re talking about is who gets hurt the least, that would probably be the United States, but all countries get hurt in a trade war,” says Edward Alden, senior fellow at the Council on Foreign Relations.

Here’s why “winning” might not be so easy for the US.

1. Tariffs may not actually boost steel and aluminium jobs much

Mr Trump promoted his decision as a win for the steel and aluminium industries and said he expects investment and hiring to follow.

  • Trump steel tariffs: European Union gears up for trade war
  • Steel tariffs – what impact will they really have?

    But technological changes have made the industry less labour intensive. Historians say previous efforts to protect steel jobs have been largely ineffective.

    The companies present at Mr Trump’s announcement did not respond to BBC inquiries about potential expansions.

    A 2002 analysis by the Peterson Institute for International Economics of proposed tariffs predicted the measures would “save” just 3,500 jobs.

    2. Tariffs are likely to raise costs in the US

    Today, the steel industry estimates that it employs about 140,000 people – far fewer than in the sectors that rely on it.

    Criticism of the tariffs from those firms was immediate. For example, the National Retail Federation blasted it as a “tax on American families”.

    US Commerce Secretary Wilbur Ross said companies were over-reacting, but Mr Alden says the economic costs will be serious.

    The Charlotte Observer reports that Electrolux, manufacturer of washing machines and cookers, has already put on hold an expansion planned for Tennessee.

    3. Tariffs could hurt allies and prompt retaliation

    Individual industries and countries – especially places that are already negotiating wider trade deals such as Canada – will be lobbying furiously in the coming days for exemptions from the final tariffs.

    Absent that, analysts say they expect retaliation – and a broader weakening of the global free trade system.

    Countries could complain to the World Trade Organisation, but such cases take years and Mr Trump has been dismissive of that body.

    Moreover, WTO judges may be hesitant to second-guess the rarely used “national security” rationale the US has used to justify the tariffs, says Columbia Law professor Petros Mavroidis.

    Those factors make unilateral retaliatory tariffs more likely, he says. Such actions, which are expected to target industries in politically sensitive US states, could be in place within a year, he says.

    4. China has options

    The US blames China for flooding the market with cheap steel and aluminium and has already stepped up protective measures against Chinese steel products.

    Mr Trump says wider tariffs are necessary to stop Chinese steel appearing in the US via other countries.

    But US businesses, including those in the car, tech and agriculture industries, are eager to get into the Chinese market, giving leaders there some leverage.

    5. The domestic political consequences are unclear

    Mr Trump isn’t unique among US presidents in using trade policy to protect politically strategic industries.

    But how beneficial such actions are is difficult to decipher, given the time lag between the decisions and elections, says Kenneth Lowande, a research fellow at Princeton University’s Center for the Study of Democratic Politics.

    At the moment, Democrats are the most vocal defenders of the president.