Add a looming WTO crisis to the list of tariff-related problems

A recent decision by a World Trade Organization (WTO) dispute-resolution panel claimed new powers that may set a course for major confrontation with the United States and can best be described as institutional overreach.

The decision does not directly involve the United States, but if it is endorsed by the appellate body, it will set a precedent that the WTO has the ability to deny U.S. claims for exemptions from WTO trade rules on national-security grounds, the grounds that the United States used in placing tariffs on steel and aluminum.

The WTO panel claimed the right to review Russia’s decision to block Ukrainian trucks from delivering goods to Kazakhstan on national security grounds. The United States and Russia have historically argued that national security issues under Article XXI of the WTO Charter were exempt from review.

Indeed, the rules dating back to the General Agreement on Tariffs and Trade (GATT), now included in the WTO Charter, specify that national security claims are “nonjusticiable.”

Nonetheless, the panel broke new ground first by reviewing Ukraine’s claim against Russia and second by limiting national security claims under Article XXI to an “emergency in international relations” that must be related “to the ‘hard core’ of war or armed conflict.”

In this case, the panel found that the armed conflict in eastern Ukraine justified Russia’s claim. Ukraine has announced plans to appeal the ruling.

Several countries that face U.S. tariffs on steel and aluminum are heartened by the panel’s decision. Those tariffs are based on Article XXI and on section 232 of the 1962 Trade Expansion Act.

The terms used by the WTO panel appear to say that the United States cannot justify the national security claim because the current challenge to national security is not based on the “hard core of armed conflict.”

When GATT was implemented at the end of World War II, the United States argued that the security of the United States requires maintenance of a defense-industrial base capability of turning out the armament needed in a conflict equivalent to World War II, which is to say a war being fought in both Europe and Asia.

That maximalist position has always been a part of U.S. strategic thinking. Without doubt, no U.S. president from either party would agree to allow the WTO to challenge this fundamental approach to U.S. national security needs.

While it is too early to speculate on how this might play out, it is time to consider the possibilities. Obviously, the appellate body (AB) could strike down the initial decision and avert a confrontation with the United States. 

It could also ratify the decision, which might prompt President Trump to pull out of the WTO. If it does not consider the claim on its merits, the AB would set a precedent that other nations could decide to protect an industry by declaring it essential to national security, even if the claim is specious.

For the sake of argument, it is worth considering how a totally neutral body would judge the case that U.S. steel and aluminum tariffs are indeed justified by national security.

According to former Secretary of Defense James Mattis, the U.S. military needs only about 3 percent of U.S. steel and aluminum output. This figure indicates that the United States has the surge capacity to ramp up production for military hardware if needed.

Moreover, Federal Reserve data show steel production through 2017 at levels comparable to steel output in 1990, which suggests that there was no sudden crisis to justify the imposition of emergency import restrictions.

Absent data that are not readily apparent, it would seem that President Trump’s 232 tariffs don’t pass the smell test.

Indeed, President Trump’s public statements about the tariffs have linked these tariffs to his expectation that they will harm other countries to the point that they make concessions in other areas to the benefit of U.S. exporters.

Unfortunately, the data makes clear that these tariffs do more harm to U.S. companies that use steel and aluminum to manufacture other finished products than to foreign steel and aluminum producers.

These tariffs are, in fact, taxes paid by U.S. manufacturers who use steel aluminum in their finished products. The National Taxpayers Union published a study last September estimating that President Trump’s tariffs now exceed all the taxes in President Obama’s Affordable Care Act.

The Peterson Institute’s analysis of the tariffs show that they cost U.S. consumers $900,000 for every job saved. According to the American Action Forum, recent U.S. tariffs costing $37.9 billion have triggered retaliatory tariffs from our trading partners that cut into $131 billion worth of U.S. exports.

In other words, the 232 tariffs are problematic in three separate areas:

• They are driving a crisis at the WTO;
• they do not appear to be justified on national security grounds; and
• most critically, they clearly do more harm to the U.S. economy than to the foreign producers that they are intended to pressure.

In the final analysis, however, this is a problem that we in the United States should fix.

The WTO was created to manage a rules-based trading system. It can do so effectively only if it respects the rules as written and refrain from judicial activism. Ignoring the national security exclusions written into Article XXI would be an egregious form of judicial activism.

At the same time, President Trump should recognize that the United States benefits from participation in the WTO rules-based trading system. He would be wise to adhere to the spirit of these rules and claim an exemption from them only when U.S. national security is truly at risk.

Richard Holwill had been co-chair of the U.S. Chamber of Commerce’s Trade Task Force and an advisor to the U.S. Trade Representative. He served in several senior positions at the U.S. State Department and as ambassador to Ecuador. He is a member of the Council of American Ambassadors.