Trade Knowledge Exchange > Commentary > Trade, War and Trade Wars

Donald Trump’s decision to repudiate the Joint Comprehensive Plan of Action agreed with Iran has not only precipitated a security crisis, it will also further ratchet up tensions in world trade. Trade is a fundamental part of the deal, for Iran, but also the European Union. In just two years, EU exports to Iran increased by over 66% between 2015 and 2017, reaching just under 12 billion dollars according to UN trade data. By contrast, US exports to Iran have barely budged since the deal, and are around 2% of the value of EU exports.  Renewed US sanctions will therefore hit the EU, while the US would feel little pain.

US sanctions on Iran are therefore really indirect trade sanctions on the EU, and specifically France, Germany and Italy. It is therefore unsurprising that EU ministers are exploring ways of preserving the deal, while also raising the possibility of countermeasures to any US sanctions.

The possibility of an Iran-induced cycle of trade measures and countermeasures follows hard on the heels of the   trade measures that the Trump administration has implemented on steel and aluminium. They fit in with a wider narrative that the Trump administration has tried to convey – that others, including allies, are doing disproportionately well, at the expense of the US, and must therefore be coerced to the negotiating table.

What might this all mean for the rules-based international trading system that has been one of the crucial foundations of post-war peace and prosperity? An old adage in politics says “never to let a good crisis go to waste”. Can that logic be applied to the current situation?

That there is a crisis is not due primarily to the threat of sanction, the levying of tariffs by the US or retaliation by the partners. We have been here before. What stands out is the legal and institutional framing of the current tensions. The US has couched its actions in terms of security interests. This applies not just to the Iran deal, but also to its trade measures on steel and aluminium.

The importance given to security in the administration’s discourse is partly a domestic political play. It is also “heads I win, tails you lose” proposition to the international community.

Consider the tariffs on steels and aluminium. If the WTO were to rule against the US, the US is likely to claim it has overreached its jurisdiction and prejudged matters of national security. It may pick up its bat and ball and leave. Even if it did not, it would have even more reason to shun multilateralism and the rules that go with it.

If the US were to win at the WTO, that may well encourage other parties to take protectionist measures under the cover of national interest, and negotiate their application bilaterally. This is an approach the US favours, on the grounds that it plays to its strengths.

If you add to this the fact that WTO trade negotiations remain deep-frozen, and that the WTO’s dispute settlement mechanism could be weakened by a shortage of judges on its appeals body, it is easy to see how the world trading system is at its weakest since its inception in the 1940s.

Two things could turn this crisis into opportunity. The first is that the trade community needs to argue the benefits of the WTO, and open trade, from first principles. The US administration is profoundly misguided on the causes of its trade deficit. But it is correct to point out that other partners need to do more on liberalising their trade regimes, and deepen commitments on things like services and intellectual property.

However, the US is best advised to work within, not outside the system. The US’s foundational role at the GATT and the WTO reflects its awareness that helping to shape multilateral rules works much more to its advantage than trying to deal bilaterally with a multitude of partners. And as far as security is concerned, the empirical research demonstrates convincingly that increased trade reduces the risks of countries going to war. Indeed, part of the logic of the JCPOA was that it would deepen Iran’s integration into the international community via trade, and reduce the incentives and scope for hardliners in Iran to pursue a more belligerent approach.

Secondly, we need to realise that this isn’t solely a “US” or even a “Trump” crisis, and that other nations, notably larger emerging ones like China, India and Brazil, need to step up to the plate. In the early stages of the Doha Round, the then US administration floated a proposal to scrap all tariffs on industrial goods. That raised howls of protest from partners, but had they accepted that proposal, there would have been far less oxygen for the protectionist tendencies of the current US administration. Moreover, liberalisation is a win-win arrangement: it is economically beneficial, and enhances a country’s leadership credentials on trade.

Historically, developing countries have hidden behind the banner of special and differential treatment at the WTO to make shallower commitments on trade. This has been to their detriment: it has weakened domestic reforms, it has deprived them of negotiating currency, and now it has left them – and the WTO as a whole – more exposed to a protectionist upswing in advanced countries.

For its part, the EU could also revisit aspects of its trade policy. Tariffs on things like motor vehicles ( a particular sore point for the US) have little or no economic justification, and their elimination would not only reduce trade tensions, it would also be a boon to consumers.

Recent liberalising measures announced by China suggest the message about emerging countries taking leadership is getting through. A lot more of the same, from more countries, will be needed.


About the Author

Amar Breckenridge

Amar
Breckenridge

Amar Breckenridge is a manager in Frontier Economics' public policy practice, and leads its work on international trade policy.

Amar’s work on trade spans trade policy analysis and modelling, support to dispute settlement and litigation, and trade negotiations. Amar spent five years as a staff economist at the World Trade Organisation prior to joining Frontier.

He is also a member of the Experts Network at ICTSD.


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