In U.S. actions, the worry of global trade lawlessness

Source– The post is based on the article “In U.S. actions, the worry of global trade lawlessness” published in The Hindu on 23rd December 2022.

Syllabus: GS2- Effect of Policies and Politics of Developed and Developing Countries on India’s interests

Relevance– International economic relations

News– The article explains the recent WTO ruling on tariff increase by the US on steel and aluminium. It also explains the changing international economic order.

Four separate WTO Panel reports have ruled that the tariffs of 25% and 10% on steel and aluminium, respectively imposed by the US during the presidency of Donald Trump. They are are inconsistent with WTO law.

It held that these tariff rates breached the U.S.’s obligations under Article II.1 of the GATT. It obligates countries not to impose tariffs beyond bound rates.

What is justification by the US for tariff hikes and WTO response to these justifications?

The U.S. tried to justify its tariff hikes under Article XXI of GATT which allows countries to deviate from their trade obligations on grounds of national security.

The panel held that it can review the action of a state taken purportedly to protect its national security.

The Panel rejected the U.S.’s argument that it increased the tariff rates due to global excess capacity, which could lead to excessive imports of these two commodities used in defence production. Thus, it can compromise the U.S.’s national security.

It held that the situation the U.S. referred to does not constitute an emergency in international relations.

How is the international economic order changing?

The International economic order today is moving away from the post-Cold War neoliberal order toward a new geoeconomic order. In the neoliberal order, economic and security interests are relatively independent tracks.

Neoliberalism is based on principles such as non-discrimination in international economic relations and a peaceful settlement of disputes through neutral international courts.

These principles are achieved by legalising the neoliberal order through the creation of global institutions such as the WTO and a plethora of free trade and investment treaties. The US supported free trade because it did not fear the growth of its strategic rivals such as China.

Nowadays, independent economic and security tracks have started to converge. It heralds the geoeconomic order. As the difference between the size of the Chinese and American economies began to shrink at a rapid pace, the U.S. seems to be giving up on free trade and embracing protectionism.

The increasing use of national security to justify such economic nationalism is an attempt to blunt the possibility of international courts reviewing state action.

What will be the implications of the new economic order?

The geoeconomic order will inevitably lead to ‘international trade lawlessness’. The Biden administration has rejected the WTO Panel’s ruling calling it ‘flawed’.

The U.S. is also asking for reforms in the WTO’s dispute settlement mechanism. The fear of being called out for economic nationalism by the WTO’s dispute settlement mechanism has led the U.S. to block the appointment of judges to the Appellate Body of WTO.

This will only embolden other countries to brazenly pursue unilateralism and economic nationalism. The days ahead will be trying times for the post-war liberal trade order.