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Trump's isolationism: What threats of US withdrawal from WTO mean?

Author : Georgiy Kuhaleyshvili

President Trump threatens to withdraw America from the World Trade Organization, claiming it treats his country unfairly
13:40, 16 August 2019

U.S. President Donald Trump
Open source

August 13, during a visit to Shell’s upcoming polyethylene chemical plant in Monaca, Pennsylvania, President Donald Trump said the United States would withdraw from the World Trade Organization (WTO) if necessary.

He emphasized that the WTO has been dishonest with the United States for years, and now it is time to put an end to this. The WTO has been operating since 1995, its goal is promoting of free international trade, resolving disputes between member countries in this area.

Trump made similar statements in 2016 and 2018. He considers the WTO the worst trade deal. The American president is confident that WTO rules are unfair to the United States, which is constantly losing trade disputes.

Trump's rhetoric about the WTO is largely at odds with the current state of affairs and is designed to address purely political issues.

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Trump is bluffing

To date, 164 countries are members of the WTO, including Ukraine (since 2008). Member countries adhere to general trade rules: set import duties at the same rate, with rare exceptions, mutually reduce trade barriers and restrictions, adhere to transparency and make decisions by reaching consensus.

Trump's idea to leave WTO is paradoxical since the organization has been founded on the initiative of the administration of former US President Bill Clinton. The Americans have attempted to create a mechanism for regulating international trade since the end of World War II.

Before WTO was created, its functions were performed by the General Agreement on Tariffs and Trade (GATT) from 1947 to 1995, which by the beginning of the 90s extended to goods, services, intellectual property, investments, and the agricultural sector. The GATT and the WTO have contributed to an increase in the share of exports in global turnover from 5% to 30%.

Trump's desire to put the United States on a par with North Korea, Somalia, Turkmenistan or South Sudan, which are not members of the WTO, may seem strange. The United States holds a strong position in the organization. Trump's argument that America is losing all trade disputes in the WTO is not actually correct.

According to Roberto Azevêdo, WTO Director-General, the United States won 90% of the disputes that it initiated. Americans often lose only in those disputes that other countries initiate against them. Since the United States is the largest economy in the world, more countries enter into trade disputes with them than with other participants. Azevêdo believes that the United States is treated just like other member countries are.

Leaving the WTO is at odds with Trump’s main political program - to make America “great” and “first” and will result in negative consequences for American business, a reduction in economic influence in the world. States run the risk of losing the most favored nation status in bilateral trade with 163 WTO member countries.

They will have to increase import duties on American goods and services. The products of American exporters will become uncompetitive in foreign markets, an increase in price, and firms from other countries will replace them. Of course, the Americans can take a different path and conclude agreements on a free trade zone with the most interesting partners.

To date, the United States has entered into 20 free trade zone agreements with 20 countries that regulate 40% of foreign trade. Americans will lose access to the trade dispute settlement mechanism (they are involved in more than 100 trade disputes with other countries).

Quitting the WTO will not be easy for Americans, as Trump says. The US Constitution gives Congress the power to regulate trade with foreign countries. US lawmakers have never delegated to the president the right to individually terminate trade agreements. Without the approval of both houses of the US Congress, Trump will not be able to get America out of the WTO.

There is no guarantee that all American lawmakers will support the exit from the WTO. Otherwise, they risk meeting serious resistance from American society. According to columnists Stuart Eizenstat and Anne Pence, if the US withdraws from the WTO, 41 million Americans will lose their jobs, and the purchasing power of an average family will decrease by 10,00 USD.

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According to the Peterson Institute, US GDP will lose 1 trillion USD. It is not surprising that most members of the House of Representatives voted against draft resolutions on withdrawal from the WTO in 2000 and 2005.

Chuck Grassley, the head of the Senate Finance Committee, believes that it is necessary to reform the WTO arbitration panel, which is responsible for resolving disputes, criticizes non-compliance with trade rules by some countries, but at the same time supports US participation in the organization.

Most likely, Trump’s rhetoric about leaving the WTO is a bluff, aimed at solving purely political problems.

Anti-Chinese promise

Trump blackmails other WTO member countries with the US exit and the ensuing turmoil for international trade in order to make concessions on problematic issues. Each time he finds a different reason for this.

Trump criticized the EU for high import duties on American products. He threatened to leave the WTO if participation in the organization would prevent him from terminating the agreement on the North American Free Trade Area (NAFTA). As a result, it never came to the exit from the WTO.

Trump limited himself to increasing import duties on steel and aluminum producers from the EU and some other countries. Well, he agreed with Canadian Prime Minister Justin Trudeau and Mexican President Lopez Obrador on a new USMCA trade agreement as a replacement for NAFTA.

Last year, trade in the United States, Canada, and Mexico reached 1.4 trillion USD. The USMCA can help attract 100 billion USD in investment in the US economy and create hundreds of thousands of new jobs. The Parliament of Mexico has already ratified the new agreement, while the legislators of Canada and the United States are considering this issue.

This time, rhetoric about withdrawing from the WTO was made shortly after the outbreak of the currency war with China. Trump has exhausted the possibilities of unilateral pressure on China by increasing duties on Chinese products. Now he is interested in turning the WTO into an instrument of pressure on China to force his leadership to pursue an open trade policy.

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Trump listened to the advice of Republican Senator Lindsey Graham, who last year recommended that he require the WTO to tighten trade rules against China and threaten to leave the organization in case of refusal.

The WTO turns a blind eye to this, the second economy in the world, but is still considered a developing country, and China is given preferences, including subsidies for the development of the agricultural sector, the right to establish higher duties than developed countries.

Grassley is confident that the United States, together with the EU and Japan, should reform the WTO to force China to abandon subsidizing state enterprises and abolish legal regulations requiring foreign firms to transfer their technology to Chinese government agencies when obtaining permission to do business in the country.

Nancy Pelosi, the leader of the Democratic majority in the House of Representatives, believes that there is also a trade deficit in China-EU relations, as is the case in the United States. According to her, China purchases European products from profits from trade with the United States.

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Pelosi invites the United States and the EU to collectively demand that China stops its trade manipulations and follow WTO rules. Another question is whether the economic heavyweights of Japan or the EU are ready to enter the trade war against China on the side of the United States. So far, their leadership is limited only to criticism of the protectionist policies of China.

It is possible that if the White House is unable to put together an anti-Chinese coalition within the WTO, the United States will temporarily withdraw from the organization in order to increase pressure on China. The Trump administration has already withdrawn from the Trans-Pacific Partnership Agreement, the Paris Climate Protection Agreement or the Iranian deal.

If the States free themselves from WTO trade rules, they will be able to return to tariff regulation under the Smoot-Hawley Act of 1930, signed by ex-president Herbert Hoover. Concerns about the return to this law, which in the 30s allowed the United States to raise import duties, are voice by the American politicians and experts.

The United States could inflate the rates of import duties on Chinese goods to such extend that suppliers from China would lose access to the American market. Perhaps, in this case, President Xi Jinping would adhere to a more balanced policy. This scenario is unlikely due to the losses of the American economy.

Political move

Trump's rhetoric about a possible exit from the WTO is a political move in preparation for the presidential election in 2020. Trump wants to win the second term and has turned the inspection of the new enterprise into an election rally in order to enlist the support of workers in the US chemical industry.

It is no accident that the American president chose the new polyethylene production facility with a capacity of 1.6 million tons per year to voice his idea. Polyethylene manufacturers in the United States found themselves in a difficult situation in the context of a trade war with China, which is the world's largest importer of polyethylene.

In August 2018, China increased import duties on American polyethylene and plastics, in connection with which American suppliers had to reorient to Vietnam, Malaysia, Singapore, Indonesia, and Africa. The Americans managed to find an alternative to China, which reduced the import of American polyethylene by 55%.

However, Southeast Asia would open its own production of these products soon. Not the best news for American chemical plants, especially the new company in the city of Monaca.

The US is the second-largest in the world in terms of polyethylene imports. Trump made it clear that he was ready to raise import duties on polyethylene from foreign manufacturers and squeeze their products out of the domestic market so that American manufacturers could at least partially compensate for losses in export markets.

Trump openly called on plant workers to vote for him, since the production of natural gas in the United States in large volumes necessary for the production of polyethylene would supposedly depend on this. In the presidential election in 2016, Trump won in Pennsylvania and expects to maintain the loyalty of the residents of the state.

His rhetoric also targets voters in the states of Texas, Louisiana, Alabama, Georgia, South Carolina, California, Ohio, Illinois, and Iowa, where the majority of chemical workers live per capita. Although for the chemical industry, US withdrawal from the WTO could result in negative consequences.

In particular, American producers of polyethylene supply their products not only to the domestic market or to China, but also to Latin America, Europe and return import duties are not profitable for them.

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