Fights Among Friends: Trump’s Tariffs and the Global Trading Regime

Since March, the new Section 232 tariffs have put the trade world in a frenzy. The president has invoked an obscure national-security trade clause and seemingly disrupted America’s relationships with its top trading partners. While the U.S. has granted temporary exemptions to various countries—including Mexico, Canada, South Korea and members of the European Union—U.S. allies are currently working against a May 1 deadline to negotiate permanent exemptions from the tariffs. Failure to reach an agreement with the U.S. would not only mean steep tariffs for our allies, but it might also further destabilize the global trading system.

The tariffs—25 percent on steel and 10 percent on aluminum—invoke the president’s authority under Section 232 of the Trade Expansion Act 1962. They follow a report from the Commerce Department finding that such trade barriers are necessary protection against the national security threat posed by high levels of steel and aluminum imports to the U.S.

As Robert Williams points out in Lawfare, the broad tariffs were designed to indirectly target Chinese steel coming into the U.S. from third countries; however, the measures are universal and will primarily hurt close U.S. allies. Relatedly, the Section 232 announcement caused outage and confusion abroad. While Canada and Mexico were swiftly exempted from the tariffs, the EU threatened to take countermeasures and pursue a case against the U.S. at the World Trade Organization if the bloc failed to obtain a similar agreement. In response, on March 22 President Trump announced Section 232 temporary tariff exemptions for select countries until May 1—a deadline swiftly approaching.

The EU will likely take action against the U.S. if a permanent agreement is not reached by May. Additionally, China has already filed a request for consultations with the U.S. at the WTO, and the EU has formally requested to join WTO consultations on the matter. If the China-U.S. dispute advances beyond consultations, the U.S. will almost certainly invoke Article XXI of General Agreement on Tariffs and Trade 1994 on the grounds of national security—an option many in the trade community are wary of.

The Trump administration’s trade actions create some risk: They open the door to the WTO decisions potentially interpreting American assertions of national security necessity, and they will alienate key allies. This post will explore President Trump’s exemptions to the Section 232 tariffs and the dynamics of an Article XXI defense insofar as both constructs impact America’s representations about national security on the international stage.

What countries are exempt, and on what conditions?

Following an open letter from Republican lawmakers condemning the measures—and the departure of Gary Cohn, previously the president’s top economic adviser—President Trump and his officials quickly exempted Mexico and Canada from the tariffs in a proclamation highlighting the “special relationship” the U.S. has with Mexico and Canada. Furthermore, President Trump indicated that these exemptions would be contingent on ongoing trade negotiations. In his press conference, the president was much more explicit, declaring that he would indefinitely delay tariffs on Canada and Mexico on the basis the three countries can reach a deal on the Northern American Free Trade Agreement. NAFTA negotiations are currently operating on a “political calendar”: The Trump administration worries that a delayed deal could stall if Democrats win control of one or both houses in Congress in November or Mexico, as is expected, elects a more liberal president in December. Most recently, the Trump administration threatened to withdraw from NAFTA entirely if the three countries are unable to renegotiate a new deal in the coming weeks.

The administration’s attempts to use the tariffs as leverage in the NAFTA negotiations has not been well received. Although temporarily relieved by the flexible exemption arrangement, Canada—which supplies 16.7 percent of the U.S.’s steel imports—continues to push the Trump administration to drop the tariffs altogether. Furthermore, Mexico’s economic minister, Ildefonso Guajardo, maintains that the NAFTA negotiations should remain separate from President Trump’s recent actions, and that the tariff determinations will not be used to influence NAFTA talks.

While other allies such as the EU and South Korea were left out of the first-round of exemptions, the Trump administration offered any country that has a security relationship with the U.S. the opportunity to discuss alternatives to address the threat their imports have on American national security. If the president deems that a “satisfactory alternative” has been met and imports from certain countries no longer harm national security, he has the discretion to remove or modify the tariffs. Following days of negotiations, the president has granted the EU, South Korea and other key allies temporary exemptions from the tariffs.

In Europe, the announcement of the exemption scheme has received mixed reactions. While the U.K. steel industry and German Chancellor Angela Merkel see the news as a sign of the U.S.’s willingness to find a permanent solution to Chinese steel dumping, some European leaders see the temporary exemption as a tool to coerce the EU to fold on its own tariffs, specifically on American cars. French President Emmanuel Macron argued that the EU will refuse to negotiate “with a gun to [its] head.” EU Trade Commissioner Cecilia Malmstrom agreed, stating that the EU-U.S. trade negotiation should not be hindered by “artificial deadlines.” Malmstrom has reiterated the need for the EU and the U.S. to cooperatively address China’s unfair trade practices, which have also hurt steel industries in Italy and Belgium.

Although European leaders remain hopeful for a permanent exemption, an agreement is not guaranteed. Following meetings between Malmstrom and Lighthizer, it remains unclear what conditions must be satisfied for the EU to be permanently exempted. While President Trump has cited NAFTA in his tariff negotiations with Mexico and Canada, and the U.S.-Korea Free Trade Agreement in his consultations with South Korea, the EU and the U.S. have no similar trade agreement talks to consider during the Section 232 consultations, as neither side has suggested resuming the halted Transatlantic Trade and Investment Partnership negotiations.

In his initial press conference on Section 232, President Trump stated that exemption determinations would focus on military allies who are not “paying the bills.” The statement is likely an allusion to the president’s previous criticism of NATO members (particularly Germany) who are not meeting the organization’s defense-spending requirements. The president may also use the tariffs as a bargaining tool to strong-arm NATO countries into compliance. Additionally, before the announcement of the temporary exemptions President Trump stated that the EU would only be excluded from the tariffs if it ended its unfair trade practices and he warned of future taxes on European cars.

Given the volume and nature of the exemptions—and the rhetoric surrounding them—there appears to be a disconnect between the Section 232 tariffs and national-security concerns. In fact, trade experts have been writing prolifically about how these imports pose no serious threat to the U.S. According to Georgetown law professor Jennifer Hillman, who previously served as a judge on the WTO’s appellate body and a commissioner at the U.S. International Trade Commission, in the past there seemed to be a consensus that Section 232 should only be invoked in cases where the U.S. is dependent on imports from countries that are deemed “untrustworthy or potentially adversarial.” In the case of steel—specifically, flat-rolled steel—imports only account for 20 percent of the U.S. steel market. Most comes from Canada, followed by Brazil, South Korea and the EU—all U.S. allies. China, however, ranks 10th among the key sources of steel to the U.S., so a claim of heavy on reliance on imports from American adversaries is dubious.

With a little over a week to the Section 232 exemption deadline, European leaders are still establishing their negotiating position. There are reports that Merkel and the German automotive industry are open to lowering tariffs on European cars, but French President Macron believes that the negotiations should instead focus on transatlantic cooperation against Chinese overcapacity in the steel industry. Both Macron and Merkel are visiting Washington this week in attempt to convince President Trump to drop the tariffs. Despite the reports, the German government remains committed to a united EU negotiating strategy, and the bloc has shown no official signs of conceding on EU tariffs, which could jeopardize Section 232 talks with the U.S.

Moreover, while the president has exempted some countries, he is not above excluding or revoking exemptions for allies. Japan, a close American economic and security ally was notably missing from the list of countries temporarily exempted from the tariffs. The president has repeatedly declared his intention to address Japanese trade practices going back to the 1980s, for example, Japanese car manufacturing. Additionally, should any negotiations between the U.S. and the exempted countries stall or turn sour, the president has discretionary power under the proclamation to impose quotas on imports from these countries before the May 1 deadline.

The WTO

If the EU and the U.S. do not reach an agreement on the new tariffs—estimated to hit the EU’s €5 billion in steel exports to the U.S.—the EU has made it clear it will take steps to challenge the U.S.’s “national security” tariffs as safeguards through the WTO dispute process.

On April 5, China formally initiated the WTO dispute-settlement process by requesting consultations with the U.S. over the Section 232 tariffs. China’s challenge in the WTO Dispute Settlement Body may eventually force the institution to evaluate and decide on Washington’s national-security assertions and risk infringing on the U.S.’s hardline position on state sovereignty in the trading system.

In its request, China claims that the Section 232 tariffs are safeguard measures, inconsistent with provisions of the 1994 General Agreement on Tariffs and Trade and the WTO Agreement on Safeguards. Specifically, China argues that the tariffs exceed the import duties provided for in the U.S. Schedule of Concessions of Commitments annexed to GATT 1994. Furthermore, China claims that the U.S. has failed to show how the metals imports have hurt domestic producers and that the U.S. has not followed the proper procedures in determining and pursuing the tariffs.

U.S. officials have called China’s safeguard assertions “completely baseless,” arguing the Section 232 tariffs are formally based on the national security threat of steel and aluminum imports. Under dispute settlement rules, China and the U.S. have 60 days to resolve the dispute through consultations before it moves to panel adjudication. Most recently, on April 23, the EU filed a formal request to join the consultations, along with Hong Kong, Russia and Thailand.

Once the case reaches the panel phase, the U.S. will likely rely on an Article XXI defense. Under Article XXI of GATT 1994, Members are permitted to implement barriers to protect national security, even when there is no evidence that imports are causing injury. Widely viewed as a nuclear option, the clause gives members almost unlimited freedom to impose trade restrictions, contrary to the values and purposes of the WTO.

Specifically, under Article XXI(b)(iii), Members are allowed to take measures “which it considers necessary to protect its essential security interests taken in a time of war or other emergency in international relations.” The vague and self-judging language of the clause not only gives members great interpretative power in determining what constitutes a national-security threat, but also allows these countries to take corresponding action (such as the Section 232 tariffs) to address security concerns.

Until recently, under the current WTO system, members avoided invoking the exception as it could force the WTO to inquire into (and possibly find against) the country’s national security claim. To date, an Article XXI defense has not reached a panel decision, thus the scope of the clause is still uncertain.

Before 2017, there were only three WTO disputes where Article XXI was used as a defense, all ending in settlements. While Article XXI has been dormant for most of WTO history, since the emergence of China and Russia as more active WTO players as well as new security concerns such as cybersecurity, the security exception has reemerged as a hot topic. Last year, the security issue came up in three trade disputes: China’s new cybersecurity law, the Ukrainian measures against Russia, and the embargo against Qatar by Bahrain, Saudi Arabia and the United Arab Emirates. The Russia-Ukraine dispute is the furthest along in the dispute settlement process.

In January 2016, the Russian Federation began imposing a series of measures that restricted the transit of goods from Ukraine to Kazakhstan through Russia. Ukraine subsequently filed a case at the WTO, claiming the measures (including new administrative procedures) effect Ukrainian exports to central and eastern Asia, as well as significantly increasing the duration and costs of the trips. Ukraine asserts that Russia has violated its commitments under its WTO accession agreement as well as Article V, a provision dealing with the freedom of transit, and Article X, which covers the publication and administration of trade regulations. Russia has invoked Article XXI in its defense. The panel is expected to issue its final report to the parties by the end of 2018. This dispute is the first time a panel has considered an Article XXI defense, and it is predicted to tell us a lot about how the WTO interprets Article XXI cases at the WTO. (The WTO does not follow precedential rules. In other words, future panels and appellate bodies won’t be bound by this decision, but in practice, past decisions are taken very seriously in subsequent proceedings.)

In their third-party submissions on the Ukraine-Russia dispute, the U.S. and the EU took two very different views on the justiciability of Article XXI. In its oral statement, the U.S. argues that once a country invokes an Article XXI defense, the panel should make no findings. The U.S. says “a dispute involving essential security is political in nature and, therefore, beyond the proper authority and competency of the WTO to assess.” Even more, the U.S. stressed the self-assessment design of Article XXI by contrasting the clause with Article XX of GATT 1994, another exception provision. Article XX provides different scenarios in which members can subside WTO rules when a measure achieves a particular policy objective such as the protection of human, animal or plant life. The U.S. distinguishes between the use of “necessary” in the list of Article XX exceptions and the language “which it considers necessary” found in Article XXI. The U.S. believes the difference in phrasing gives the member invoking Article XXI the sole discretion to judge its national security. Specifically, in order for a measure to qualify as necessary under Article XX, it must not be applied in a discriminatory manner or be a disguised restriction on international trade; however, this language is missing from the language of Article XXI. As such, the U.S. asserts that an Article XXI defense should not be subject to a standard of review.

Although the EU acknowledges the variation in language between Article XX and XXI, the bloc argues that this does not give members “unfettered discretion” under the provision. Instead, members who invoke the clause should be subject to a limited review, which the EU believes is necessary to “ensure that the exception is applied in good faith by the invoking Member and prevent abuses.” Some scholars agree with the EU, specifically citing the distinction in WTO law between a member’s authority to define their national security interests and the WTO’s panel’s jurisdiction to review whether a member’s actions constitute misuse of the clause.

So what does this all mean for the U.S.-China dispute or a future EU-U.S. WTO case? Although the U.S. will almost certainly invoke Article XXI as a defense against Chinese and European claims, trade experts and leaders question the tariffs’ connection with U.S. national security. Particularly in the case of the EU, due to its historic security alliance with the U.S., including NATO, the EU has “serious doubts” that the tariffs are sincere national security measures. Despite China and the EU’s claims, the U.S. will likely adhere to its current views on Article XXI and argue that there should be no findings made by the panel in either case.

The U.S.’s extreme approach to the national-security exception leaves the WTO at a crossroads. While in theory, a panel may have the authority to interpret a Member’s national security measures, whether a panel will actually do so in this case is questionable. The panel could agree with the U.S. and in doing so, make it open season for other members to invoke the Article XXI exception as a loophole, or alternatively the panel could decide against the U.S. The latter could result in the U.S. either ignoring a Dispute Settlement Board ruling or a complete U.S. withdrawal from the WTO—as both candidate and President Trump have expressed concerns over the future of the U.S.’s WTO membership.

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By pursuing the current course of action, the Trump administration has demonstrated its willingness to push the limits of the rules-based multilateral trading system. As steel and aluminum imports do not appear to pose a serious threat to U.S. national security, the tariffs appear to be disguised security measures designed to put pressure on American trading partners. As a result, the administration’s action has not only led to internal bickering among allies, but it has also created a misrepresentation of good-faith national security exceptions.