Milling & Baking News - March 27, 2018 - 29

Washington Update

Administration trade policy:
Economic or national security?
WASHINGTON - Since President
Donald Trump imposed "national
security" tariffs on steel (25%) and
aluminum (10%), an intense debate
about trade has kicked off. It is an
important debate, on both economic
and security grounds.
At the heart of the economic debate
are two issues: jobs and the stability of
the trading system. Most economists
would agree that open trade generates
more jobs and more economic wellbeing overall. It does so by enabling
all parties to do what they do best and
benefit from the resulting increase in
global productivity gains. Trade protection, on the other hand, raises costs,
reduces choice and limits competition. In basic commodities like steel,
it also can cost more jobs in downstream steel-using industries than it
protects in the primary steel industry.
All of this occurs before taking account of the risks to the trading system
more generally. Countries hurt by new
tariffs may retaliate, often hitting more
efficient sectors in the country initiating the tariff increase. Escalating titfor-tat retaliation only compounds the
problem. As international trade flows
contract, economies become less efficient, consumers face higher costs and
the downward spiral continues until
some balance can be restored.
Role of security
The interplay between trade and
security interests is more complex, going back at least to the construction of
the post-World War II "liberal global
order" President Trump is accused of
upsetting. That system got its start at
the Bretton Woods conference of 1944,
which strove to create a set of institutions and a rule of law that would prevent future economic disputes becoming military conflicts.
The framework agreed upon included three new international institutions: the World Bank to address
reconstruction and development; the
International Monetary Fund to address exchange rates and balance of
payments; and the International Trade
Organization (I.T.O.) to address trade
liberalization.
From the beginning, however, national security concerns fit uncomfortably
into this more global perspective. For
example, the I.T.O.'s limits on national
sovereignty were a step too far for the
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U.S. Senate, which rejected American
membership. What emerged in its
place was the General Agreement on
Tariffs and Trade (GATT). It not only
preserved the right of each member
to decide whether to accept a GATT
dispute-resolution decision; it also contained Article XXI, which permits members to take actions deemed necessary
to protect their national security with no
real authority to discipline such actions.
Even U.S. domestic agricultural policies
and accompanying border restraints
largely were excluded from the GATT's
more liberalizing provisions.
Ambivalence about how best to
preserve security has persisted. Some

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BY ROBBIN JOHNSON

has invoked a little-used authority in U.S. trade law permitting him
to protect industries seen as vital to
U.S. national security. Its application
to steel and aluminum is concerning
enough, but its potential extension to
other industries raises very real concerns about the stability of the global
trading system as a whole. Article
XXI and the World Trade Organization's new dispute-resolution powers
to authorize retaliation have put the
W.T.O. system in a precarious position around its core mission: preventing trade conflicts from escalating into
more serious confrontations.

argue that deepening economic engagement with the rest of the world
leads to a growing stake in preserving
the system, thereby providing the stability and avoidance of military conflicts originally intended. Others insist
that a major country like the United
States needs to protect those industries
and capabilities necessary to ensure its
safety and the safety of its allies.
China has emerged as a central pivot
point in this debate, not just because of
its large trade surplus with the United
States but because it represents a statemanaged economic system that fits
poorly with many of the disciplines
contemplated at Bretton Woods. Steel
is a prime example. China's huge expansion in steel production burdened
the world with surplus capacity that
depressed prices. The United States
has used traditional trade tools to
limit steel imports from China, which
has reduced China's share of U.S. steel
imports to roughly 2% in 2017. So,
U.S. steel tariffs ironically hit mainly
good allies while doing little to correct
either the steel problem of surplus capacity or the systemic issue posed by
Chinese economic policies.
Confronted with this reality, and
against a campaign promise to attack
"trade imbalances," President Trump

Other factors
This crisis has not unfolded in isolation. U.S. domestic political support
for trade liberalization has withered.
The Doha Round of trade negotiations, launched in the wake of 9/11,
has foundered through 15 years of inaction. Economic interests frustrated
with this lack of progress have persuaded governments to pursue regional and bilateral deals. The TransPacific Partnership that President
Trump withdrew from was one such
regional agreement, designed both to
advance trade reform among willing
partners and to isolate China.
Other regional trade agreements
have further carved up the global
system and have been ineffective as
a means of "competitive liberalization" to spur action through the Doha
Round and the W.T.O. And both the
North American Free Trade Agreement and the European Union are under stress as points of friction arise.
So, while it is easy to see President
Trump's tariff initiative as a specious
pursuit of flawed economic reasoning, it also raises some serious issues
that have confronted the global trading system for decades. Unfortunately,
the inherent conflicts between unfettered trade and national security have
been papered over rather than directly
addressed. The emergence of China,
with its state-managed economy and
its growing regional/global ambitions, makes it more than a poster
child for trade protectionists. There
are real issues here that need to be addressed. MBN

Robbin S. Johnson, a fellow
with the Hubert H. Humphrey
Institute of Public Affairs,
is a contributing editor at
Sosland Publishing Company.
Milling & Baking News

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Milling & Baking News - March 27, 2018

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