How trade wars end — and why Donald Trump’s will be different
As China and the United States got closer to a full-blown trade war on Wednesday, with China threatening tariffs on 106 more U.S. products after a similar U.S. move on Tuesday, one major question is now looming larger than ever over the world’s two biggest economies: Once you’re in a trade war, how do you get out of it?
Both sides have shown little willingness to back down in recent weeks. After President Donald Trump proclaimed in an early-March tweet that “trade wars are good, and easy to win,” China shot back days later in a statement that “China would fight to the end to defend its own legitimate interests with all necessary measures.”
If past trade disputes and differences with the current confrontation can offer any indication, there likely won’t be an easy solution.
In theory, the World Trade Organization is tasked with solving or preventing exactly such escalations. Officials there are aware of what’s at stake and have issued relatively strong statements, at least compared with other remarks coming out of an organization that’s painstakingly trying to portray itself as neutral. “A trade war is in no one’s interests. The WTO will be watching the situation very closely,” WTO director general Roberto Azevedo said in early March, after Trump announced his controversial tariffs plan.
The problem is that “watching the situation very closely” is almost all the WTO can do at this point.
Most ordinary trade disputes have in the past been solved through the WTO’s dispute settlement process, which relies on member states to refer their cases to the organization to work out a solution. In other words: Rather than putting nations de-facto on trial itself, the WTO mostly acts as a voluntary mediator or platform for adjudication panels if members decide to press demands. Member states like the United States have opted into that mechanism by signing and ratifying the organization’s rules.
Between 1995 and 2015, over 500 such cases were filed to the WTO, challenging subsidies, tariffs regimes or animal welfare measures, among other complaints against member states. Many of the complaints are subsequently resolved through mediation by WTO officials. “Of the 500 cases filed, just over half have reached the litigation stage, suggesting that the system’s requirement for the members concerned to try to find a solution by consulting with each other helps to avoid many cases entering the litigation phase,” the organization writes.
President Donald Trump proclaimed in an early-March tweet that “trade wars are good, and easy to win.”
But while China has already used the WTO to accuse the United States of unfairly imposing trade restrictions over the last months, Trump does not appear interested in being dragged into the organization’s dispute settlement process. In fact, Trump appears to be deliberately undermining the legitimacy of that process by specifying that his tariffs plan was based on “national security” concerns. WTO rules mandate that a member state can claim exceptions from its trade obligations if the member’s national security is at stake.
That reasoning has long been a no-go among WTO member states because they were aware of the implications of triggering trade disputes under a “national security” framework, thus rendering the WTO meaningless.
Essentially, Trump’s critics argue, the president now risks causing long-term damage to an organization that regulates an international economic system the United States helped create for the sake of winning a short-term dispute with China.
Trump has defended the measures, arguing that his national security reasoning is justified because the United States needs to produce more steel and aluminum for its defence sector.
His critics doubt that national security concerns are at the core of the measures, however. Trump has himself implied that the tariffs are designed to create jobs in the United States (“We must protect our country and our workers. Our steel industry is in bad shape. IF YOU DON’T HAVE STEEL, YOU DON’T HAVE A COUNTRY!”) and to punish China for what the president considers an unfair trade relationship.
Even though some experts agree that some of China’s practices are questionable, they still argue that Trump’s response is at least similarly dangerous.
When Saudi Arabia, Bahrain and the United Arab Emirates violated the unspoken rule of avoiding to claim national security exceptions last year to justify their economic sanctions against Qatar, other member states immediately voiced concerns. The fear is that with the WTO’s two biggest member states now implicated in a similar dispute, a measure designed as a last-resort exception could now become the norm.
With a WTO-negotiated solution nowhere in sight, the economic and political damage of the dispute between China and the United States will likely increase. To both the Chinese leadership and President Trump, the tit-for-tat tariffs announcements are now also an exercise in muscle flexing between the two political powers.
Unless both sides negotiate a solution, there doesn’t appear to be a way for either of them to both back down and save face. In the long run, the choices will probably consist of an unlikely acknowledgment of defeat or a more likely face-saving agreement, especially if economic costs mount.
The risk of such a cycle of retaliation was one of the reasons behind the creation of the WTO’s predecessor in 1948. One of the nations that spearheaded those efforts? The United States. It took until 2001 until China finally joined the club, amid U.S. applause.