The WTO needs to show its hand in looming trade war

Economic theory accepts multilateral free trade as one of the pillars of prosperity. And the influence of cross-border exchange of goods services and investments on inter-dependent economies had been growing for decades and become even more profound in the future. But provided that the borders remain free or limited to legitimate trade barriers.

A country or regional bloc whose economic strength allows for a high degree of openness have the advantage to exploit the exchange of such goods and services. Multilateral free trade accordingly plays an important role in policymaking.

But industrial nations that advocated free trade created enhanced socioeconomic vulnerability within their own borders, a fact starting to register even with those who were passionate advocates of this approach.

More ill-effects from the removal of trade barriers between a steadily growing number of countries have surfaced, and none more painful than the jeopardising jobs within developed economies. Rising and more assertive economies were prepared to challenge and eventually rebalance the post-World War II multilateral trade patterns, and one in which the US had an uncontested leadership status.

Maintaining a comparative and/or an absolute advantage in the global markets is far from being the sole reason for governments to initiate trade practices perceived by others as unfair and thus actionable under mutually agreed rules. For example, subsidies can be used to promote objectives in social and economic government policies. The fact is the World Trade Organisation (WTO) refrains from issuing a blanket condemnation of subsidisation practices.

Recognising that dumping and/or subsidy practices of Country A can have an adverse effect on the interests of Country B, the WTO rules allow the imposition of countermeasures in the event of serious prejudice causes or if it threatens to harm competing domestic industries.

If proven, countervailing duties can be levied on the import responsible for the damage done, or like products manufactured and offered for sale at a lower price than charged in the home market by producers of Country A in the market of Country B.

The WTO is the thus not only engaged in setting trade rules, but also a dispute resolving platform. In contrast to the majority of international organisations, whose impotence to achieve anything can be spectacular, WTO rules and procedures can rightly claim to exercise real authority. Its commitments are binding and enforceable upon its members.

Complaints brought to the attention of the WTO or any measures deemed incompatible with the WTO supervised agreements are settled via dispute settlement. If a losing party chooses to ignore a panel’s verdict or recommendation, then the winning party is legally entitled to commercial retaliation by imposing on the loser punitive measures.

WTO law constitutes an area where commercial retaliation is entirely manageable, and where punishment takes the form of tariff compensation on other goods and/or services or by the suspension of agreed tariff bindings. These can be enforced on an offender up to the amount of the inflicted damage.

The European Union is bringing the latest US global tariff plan to the attention of the WTO. It will be interesting to see whether the issue remains limited to a bilateral zero-sum game or erupts into a full-blown trans-Atlantic trade war.

Johann Weick is an analyst on trade policy.