The EU and the US could potentially be on the verge of an acrimonious dispute at the World Trade Organisation (WTO) – which has the potential to grow into a trade war – if President Donald Trump goes ahead with plans to restrict imports of steel.
The General Agreement on Tariffs and Trade (GATT) – the legal agreement which regulates international trade between states and is enforced by the WTO – requires the elimination of quantity restrictions on goods traded by a WTO member. There are, however, some exceptions to this. One exception, under Article XXI of GATT, says that no stipulations in the Agreement shall be construed “to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests”.
Last month, President Trump, following intensive lobbying from the US steel industry, ordered a special investigation into the impact that steel imports have on the United States’ national security interests. Analysts believe that if the investigation suggests that they may have a negative effect, Trump may use a provision of the Trade Expansion Act of 1962 to impose a quota on steel imports.[1] This quota will be framed as a way to reduce US reliance on foreign steel – an essential material during times of war. In reality though, any restriction would just be an effort to protect the US steel industry by limiting supply from foreign producers. Although the exceptions to GATT exist, the framework also makes it clear that the invocation of such exceptions must be valid, and not merely a form of hidden protectionism.
The issue for the WTO and the EU
If such a restriction were to be put in place, it is likely that the EU, possibly in conjunction with other WTO members, would take a case to the WTO’s Dispute Settlement Body (DSB). The EU’s Trade Commissioner Cecilia Malmström has already indicated that the EU “will have to respond” if such action was taken by the US. Her comment that: “We are allies, we are friends. Almost all EU countries are members of NATO,” suggests that the likely argument against US restrictions would be that there is no risk to the US from being reliant on steel imports from a strong ally. Due to existing restrictions on steel imports on China, resulting from a series of legal anti-dumping measures by the US, the bulk of US steel imports come from close allies – Canada, Mexico and Germany – with whom there is almost no risk of an armed war.
For the Dispute Settlement Body, effectively the world trade court, there is a risk in ruling against the Trump administration. Trump has continually shown contempt for the WTO and GATT, at times even threatening to withdraw altogether, and so it is distinctly possible that he would chose to ignore the ruling and continue with his restriction. This would harm the credibility of the WTO and bring the entire framework of international trade law and dispute settlement into question. To rule in favour of the US, however, would signal that the national security exception can be applied much more broadly than previously believed, and major trading economies may begin to use this exception to administer hidden protectionism, also undermining the entire WTO system.
If the DSB rules against the US, the EU will be permitted to take retaliatory measures, until the US reverses course. EU officials have already suggested that US agricultural exports could be targeted. Such action would not only be harmful to European consumers, by increasing the cost of food in Europe, but could trigger a nasty trade war and the breakdown of reciprocal trade liberalisation between the US and the EU, and perhaps more countries too.
Not only would a new era of protectionism likely spoil any chance of a transatlantic free trade agreement in the foreseeable future, but it would also be detrimental for consumers and firms in the US, the EU and around the world. Even if this issue does not grow to a full-scale trade war, the knock-on effects of increased prices and trade contraction in the industries of steel, and perhaps agriculture, alone would have significant macroeconomic consequences. Even worse, if President Trump continues along the course of increased protectionism, and the EU and other WTO members exercise their right to retaliate, it could result in a protracted trade war with increased tariffs and a reversal in the decades-long trend towards free trade, that started with the signing of the first GATT in 1947.
[1] John Veroneau and Catherine Gibson. April 28 2017. https://www.globalpolicywatch.com/2017/04/trump-moves-on-aluminum-under-section-232-steel-investigation-update/
