World trade order in a wobble as Washington snubs WTO status quo

[December 15, 2017]  By Michael Nienaber

BERLIN (Reuters) - The frustration of Roberto Azevedo was evident when, as director general of the World Trade Organization, he summed up the results of a three-day ministerial conference in Buenos Aires in the past week. There were simply none.

The delegates of more than 160 countries from around the globe failed to reach any new agreements in the face of stinging U.S. criticism of the WTO and vetoes from other countries. At the end, they were not even able to agree on a joint communique.

And a further blow could strike in the coming week when Republican U.S. lawmakers aim to pass sweeping changes to the tax code which may introduce protectionist measures critics say are at odds with WTO rules.

"In retrospect, 2017 could mark the beginning of the end of the rules-based free trade order and the system unraveling," said Andre Sapir, senior fellow at the Brussels-based think tank Bruegel. He called it a "big worry".

U.S. President Donald Trump, propelled to power by his election promise to put "America First" and protect U.S. workers against what he views as unfair trade practices from China and others, has weakened the WTO as a forum to settle disputes.

In the past months, Washington has blocked the appointment of several WTO appeals judges, a move which could paralyze the body's dispute settlement system for years to come.

"The new U.S. administration does not want to work within multilateral frameworks. It wants bilateral deals," Sapir said.

As a critic, he says, "This would lead to a system in which the stronger ones outplay the smaller ones, it would be the law of the jungle."

This apparent change of course in Washington is puzzling for free trade advocates who argue that the United States for decades supported and benefited from multilateral decision-making and rules-based arbitration enshrined in the WTO statutes.

THREAT TO GROWTH

For them, Trump's protectionist rhetoric is a threat to global growth and prosperity since tariffs and other trade barriers such as import restrictions, registration formalities or state aid for domestic suppliers push up costs for everyone.

The slow dismantling of the international trade order could also hurt mid-term export prospects for European countries and Germany in particular at a time when the euro zone economy is benefiting from a surge in demand for its manufactured goods.

A rebound in exports is one of the key drivers of Germany's economic upswing as they still account for more than 40 percent of its gross domestic product. The United States is Germany's most important single export destination after the bloc of European Union countries.

But the combat lines have also become blurry.

In a sign that other countries share Trump's concerns about Chinese trade practices, the European Union and Japan joined Washington in the past week in vowing to combat market-distorting policies that fuel excess industrial capacity, including subsidies for state-owned enterprises and technology transfer requirements.

Following the fruitless WTO meeting, the U.S. tax overhaul could now be another nail in the coffin of free trade. The European Union and the finance ministers of Europe's five biggest economies have sounded an alarm over elements of the plan.

Director-General of World Trade Organization Roberto Azevedo speaks during the Business Forum at the 11th World Trade Organization's ministerial conference in Buenos Aires, Argentina December 12, 2017. REUTERS/Marcos Brindicci

In a letter sent to U.S. Treasury Secretary Steven Mnuchin, Britain, France, Germany, Italy and Spain said that the inclusion of "certain less conventional" tax provisions would contravene WTO rules and violate double taxation treaties.

In a separate letter, the European Commission warned Mnuchin the planned overhaul contained elements that risk seriously hampering trade and investment flows between the world's two biggest economic blocs.

Some of the provisions would discriminate against foreign business in the United States, the Commission said, while the Federation of German Industries (BDI) - the biggest lobby group for manufacturers in Europe's largest economy - was more blunt.

"Clearly protectionist," it said of some proposed excise taxes.

What actually emerges from Washington remains unclear, but even if U.S. lawmakers decide to delete some of the disputed measures in their final bill, Trump is still wedded to a unilateral approach to trade that does not require consultations with Congress.

So far, he has not fulfilled campaign threats such as withdrawing from the North American Free Trade Agreement (NAFTA) or imposing steep import tariffs on imported goods such as German and Japanese cars manufactured abroad.

But Trump has ordered the U.S. Commerce Department to conduct an investigation into whether steel imports threaten U.S. national security and whether broad import restrictions should be imposed.

European allies have warned Trump that such a move could trigger a global trade war since trading partners could retaliate and impose trade barriers on certain U.S. goods that they label as a threat to their national security.

Chad P. Bown, senior fellow at the Washington-based Peterson Institute for International Economics, said Trump's approach may not end up targeting China, but will hit partners such as Canada, Germany, Japan, Mexico and South Korea - most of which have little to do with the concerns the U.S. has with China.

In a research note entitled "Trump Is A New Kind of Protectionist - He Operates in Stealth Mode", Bown warned that Trump's version of protectionism could result in higher costs for U.S. industries that use steel and aluminum.

But for Trump the drive is a matter of "America First" whether the international trade order established after World War Two gets in the way or not.

(Reporting by Michael Nienaber; additional reporting by Gernot Heller and Tom Koerkemeier in Berlin and by David Morgan and Susan Cornwell in Washington Editing by Jeremy Gaunt)

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