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New world order: Turnbull - Trump’s man of steel

Ministers in Malcolm Turnbull’s Australian government might be congratulating themselves on having secured tariff exemptions of sorts on steel and aluminum in a trade skirmish with US President Donald Trump’s administration. However, none would need reminding such special treatment could turn out to be a pyrrhic moment in an unsettled global trading environment.

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Whatever else might be said about Trump’s trade bluster it is not in Australia’s interests, as a nation dependent on open markets, for measures to be enacted which detract from a continuing process of trade liberalisation.

"It is not in Australia’s interests, as a nation dependent on open markets, for measures to be enacted which detract from a continuing process of trade liberalisation.”

Understandably, Turnbull himself, Foreign Minister Julie Bishop and Trade Minister Steve Ciobo, among others, have scored the carve-out of Australian steel and aluminum from proposed tariffs as testimony to the special relationship which exists between Canberra and Washington.

These ministers have sought to make the best of an irrational process which puts at risk a rules-based global trading system painstakingly constructed - with American leadership - since the promulgation of the General Agreement on Tariffs and Trade (GATT) in 1948.

What was clear to an enlightened generation of post-war leaders was if the world was to forestall the sort of conflict which ravaged Europe in the first half of the twentieth century it needed to put in place institutions like the GATT which would even out the economic bumps. Depression-era protectionism contributed to the slide to war in 1939.

Eighty years later institutions like the World Trade Organisation - the successor to the GATT as the arbiter of trade disputes - are at risk of unravelling in the face of an American administration antagonistic to established rules of trade.

This weakening of the WTO’s authority has a potential – and unwelcome – consequence:  upsetting a delicate trading balance at a moment when a mercantilist China’s rise is unsettling the global system.

Impact

In Geneva, the WTO’s Director General Robert Azevedo gave voice to concerns about the impact of Trump’s tariff moves on a stable trading environment.

“It is clear that we now see a much higher and real risk of triggering an escalation of trade barriers across the globe,” Azevedo said. “Once we start down this path, it will be very difficult to reverse direction. An eye for an eye will leave us all blind and the world in deep recession.”

Indeed, we are already witnessing first steps in the sort of trade skirmishing which might lead to something more serious. Europe has warned if the US carries out its threat to slap a 25 per cent tariff on steel imports and 10 per cent on aluminum it will retaliate by imposing equal tariffs on a range of consumer, agricultural and steel products produced mostly in Republican Party aligned US states.

In response the US would raise tariffs on the importation of European cars, Trump has said.

China – which has been relatively restrained in response to the Trump provocations on trade thus far– has threatened to impose trade penalties on US imports, including agricultural imports, from soybeans to sorghum.

In light of all this it is not difficult to sketch a scenario where escalatory actions lead to an all-out trade disruption which feeds on itself in an environment in which confidence is eroding in American leadership set against China’s rise.

Trump refers repeatedly to an ‘unfair’ trade imbalance with China as pretext for his tariff increases. Yet, as Chad Brown from the Peterson Institute for International Economics in Washington notes, the decisions on steel and aluminum will “have little direct impact on imports from China”.

“Based on the Trump administration’s analysis, my calculation is that his proposed tariffs would eliminate $US14.2 billion of US imports in a year – but only $US689 million from China, less than 5 per cent of the total,’’ Brown writes.

“More than 50 per cent of the trade losses – or $US7.5 billion – would hurt US military allies on whom Washington would have to count in any national security emergency: the European Union, Canada, Japan and South Korea alone.”

Assessment

From an Australian perspective it is interesting to note Ciobo has not ruled out support for an EU referral of the United States to the WTO over its tariff decisions.

“We need to assess it on a case-by-case basis. We’d look at that,’’ he told the ABC.

If Canberra supported EU action before the WTO this time, it would contrast with the Howard government’s decision not to back the EU, New Zealand and six other countries in their protests in 2002 when the then Bush administration imposed tariffs of 8 per cent to 30 per cent on steel imports.

What tends to get lost sight of in all the noise surrounding the US tariff threats is Australia is a relatively insignificant player in the US steel and aluminum markets. It is not in the top 10 as a supplier of either steel or aluminum.

Around 0.8 per cent of Australia steel exports went to the US in 2016 and 2017 and 1.5 per cent of aluminum: total value $A545 million. 

Canada is the biggest supplier to the US of steel and aluminum, accounting for about 40 per cent of US aluminum imports in 2017 or $US7 billion worth.

Trump has said he will exempt Canada and Mexico from his tariff measures provided agreement can be reached in a re-negotiation of the North America Free Trade Agreement (NAFTA). This might be regarded as a form of trade greenmail.

What is noteworthy and troubling at the same time is the national security pretext Trump has deployed to introduce his tariff increases under section 232 of the Trade Expansion Act of 1962.

Affected countries might choose to disbelieve the ‘national security’ argument and view US actions as outright protectionism. In that case they would feel entitled to retaliate without reference to the WTO.

Greg Ip notes in the Wall Street Journal an anomaly which applies to aluminum “essential for key military and commercial system’’, in Trump’s own words.

Aluminum can’t be produced without bauxite and yet the US closed its last Bauxite mines 30 years ago.

This suggests Trump’s tariff decisions have less to do with the overall benefits to the US economy and its global leadership role than to short-term political considerations, notably shoring up vulnerable Republican seats in the rust-belt states of Pennsylvania, Ohio and Indiana for mid-term Congressional elections in November.

Rancor

Unfortunately, rancor and uncertainty over the Trump ‘America First’ tariff decisions overshadowed a significant success last week for Australian trade diplomacy -- and Trade Minister Ciobo personally – with the initialing in Santiago, Chile of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TP-11).

The 11 include, apart from Australia, Japan, Canada, Chile, Mexico, Malaysia, New Zealand, Singapore, Vietnam, Brunei and Peru.

This agreement when implemented will eliminate 98 per cent tariffs in eleven Pacific Rim countries whose gross domestic product totals $US13.7 trillion, or 13.5 per cent of the global economy.

The agreement will bring particular benefits to Australian agricultural commodities exporters, including significantly improved access to Japanese and other markets at the expense of US competitors.

In other words, Trump’s decisions on trade such as wrenching the US out of the Trans-Pacific Partnership are not proving to be a zero sum game, anything but.

Tony Walker is a former Political Editor of The Australian Financial Review. He is a vice chancellor’s fellow at La Trobe University.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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