Photo: AFP
The world trade system faces threats from many directions, economists say. Photo: AFP

In the era of Trump, tariff wars and Brexit,  a widely-overlooked ruling early this month at the World Trade Organization looks set to place that organization under US threat, at a time when the world is receding ever further into an era of managed trade.

And with the administration of Donald Trump having pivoted Washington away from its customary role as global free-trade champion, Japan is emerging as the unlikely leader of free trade in the Asia Pacific.

These were among the key issues discussed during a “Free Trade, Fair Trade” panel that took place at the Asan Plenum, a two-day conference held by think tank the Asan Institute in Seoul last week.

WTO vs Section 232

The judgment by a WTO panel that permitted Russia to ban trans-shipments from Ukraine to Central Asia, on the grounds that Kiev and Moscow are in conflict, has opened up a “Pandora’s Box” according to experts. The April 5 ruling was the first time in the history of the WTO, which was founded in 1995, that “national security” had provided the grounds for a ruling.

“This is very dangerous for the WTO,” said panelist Ahn Duk-geun, a professor of international trade law and policy at Seoul National University. “This can provide an excuse for the US to take very strong actions against the WTO.”

The Trump administration has previously made clear it does not accept WTO jurisdiction over national security issues.  The WTO ruling comes at a time when Washington is wielding its rarely-used Section 232 legislation to invoke a range of steel and aluminum tariffs and is threatening similar action on autos and auto parts – all on the grounds of national security.  Many criticize these grounds as dubious, and Turkey has appealed to the WTO against Washington.

Even US free traders are appalled at the use – or misuse – of Section 232, part of the US Trade Expansion Act.

“Our own Secretary of Defense said he did not believe that was a national security threat, but applying the tariffs against our allies was a national security threat,” said panelist Tami Overby, a senior director at Washington consultancy McLarty Associates, and the former head of the US Chamber of Commerce’s Asia team. The economies of the EU, Japan and South Korea could all be overshadowed by section 232.

Whether the administration can be diverted from its dangerous course is unclear. “I hope and pray we will see a [Congressional] check and balance,” Overby said.

If not, a perilous precedent is set. “I believe we are setting a very bad example for other nations – for example, China, India and Brazil – who may use national security exemptions in this way,” she said.

Other major powers are using the body successfully. “The EU and Japan are using WTO dispute-resolution procedures – it is working,” said panelist Patrick Messerlin, a professor of Economics at Sciences Po, Paris. “But with the US, there would not be enough manpower on the juries!”

Even so, the world trade body is clearly creaky.

“The WTO has never been able to deal with subsidies in agriculture and industry or services – which make up 70% of developed countries’ GDP,” said Messerlin. “But the WTO did well on tariffs, and it was good on dispute resolution mechanisms. So there were two real successes for the WTO, and they are both under fire from the Trump administration.”

Given the hostility from Washington, and the massive scale of China’s state subsidies, panelists warned of a possible collapse of the WTO. “We probably should prepare for a worst-case scenario of the dissolution of the WTO,” Ahn said.

“We should constantly persuade the public, we should stay inside the WTO,” said panelist Yukiko Fukagawa,  deputy dean of the School of Political Science and Economics of Waseda University. But she warned: “We need to be prepared for a world without the WTO.”

A world of risk

The WTO has not managed to advance its trade liberalization agenda since the 2001 Doha Round of negotiations bogged down. As a result, multiple countries have embarked upon free-trade agreements without the global body. Most notably, Trump-era Washington has been reluctant to engage in global bodies, and has brandished tariff threats to force parties to the negotiating table.

Overby listed Trump’s priorities as, firstly, NAFTA; secondly, the China trade war; thirdly, negotiations on a bilateral trade deal with Japan; and fourthly, similar negotiations with the EU.

But an end to the trade conflict with China may be in sight. “I believe we are coming close to an agreement. By the end of April or early May, we should have the contours of a deal,” she forecast. But she raised questions over the fate of existing tariffs, and other issues. “What are the enforcement mechanisms?” Overby asked. She predicted a deal to be “heavy on a shopping list – buy US beans, buy Boeing aircraft,” but feared it would “weaker on the intellectual property side, on subsidies and systemic challenges.”

“The US may be the victor, but the losers will be all the East Asian economies, [due t0] the regional value chain,” added Ahn. “We will have unprecedented managed trade which will cause huge distortion and disturbance to regional economies.”

Yet even amid this high-risk environment, there have been surprising collateral benefits.

“The EU has actually been a huge beneficiary of [US actions undermining free trade] – it has been able to sign an FTA with Japan,” said Messerlin.

Moreover, the other major “black swan” of recent years, Brexit, has also benefited the EU – by presenting other member states with a vision of chaos few would wish to emulate. “The UK has provided a lesson for all Europeans: the machinery of government has collapsed and the UK is seeing jobs leaving,” Messerlin noted. Given this example, “Even the Far Right Party in France has toned down their voice,” he said. “The rest of the EU should thank the UK!”

Tomorrow’s model: TPP

Panelists lauded the 11-member, Tokyo-led Trans-Pacific Partnership – rebranded the Comprehensive and Progressive Agreement for Trans-Pacific Partnership after the US withdrew – as a model 21st century, multilateral FTA.

“Nobody argued with the modernization of NAFTA – it was pre-Internet – so it needed updating,” said Overby. “But TPP had effectively modernized that. On day three of his administration, Trump withdrew the US from TPP. I believe history will judge that as one of his biggest strategic mistakes.”

Japan has had more post-crisis time to mull the benefits of free trade, suggested Fukagawa. “It has been a quarter of a century since the collapse of Japan’s bubble economy,” she said. “But in the US and EU, it has just been 10 years since the global financial crisis, so Japan has been promoting its EU FTA and TPP. Free trade is good for everyone!”

Indeed, Japan’s role as the driving force behind TPP makes Tokyo a beacon of free trade in the region – a huge turnaround from the days when the island nation was perceived as a bastion of protectionism.

“Japan is more open today, the US is more protective,” conceded American Overby. “Many in the US predicted that the TPP would collapse without the US. I am glad that were wrong.”

Some in Japan, seeing the emergence of massive economic blocs, hope that the pact will gain big members once they see the benefits enjoyed by the current 11 member nations. “The EU is big enough, China is its own world, and then there is the US,” said Fukugawa. “TPP is shaped so that we can combine with the US bloc in the future.”

The loser: South Korea?

If South Korea, Asia’s fourth-largest economy and the world’s 11th largest, joined TPP, it would advance this strategy. “I would hope Korea would join,” Overby said. “It would provide additional weight that could, at an appropriate time, attract the US.”

But that looks problematic. Tokyo is currently prioritizing closer ties with Beijing and New Delhi, Fukugawa noted – and there are bilateral political obstacles. “For Korea to join TPP is difficult at this time because of political frictions,” she said.

South Korea’s Moon Jae-in administration has reignited historical disputes with Japan’s Shinzo Abe government with a range of actions. It has de facto overturned a 2015 bilateral agreement on comfort women and overseen a court decision demanding reparation for wartime forced laborers – which, Japan says, contravenes a 1965 treaty. It has also refused international adjudication on the latter issue.

This leaves South Korea, already reeling from US actions, out in the cold.

“Korea thought it was at the center of FTAs – it has FTAs with the EU, China, the US and ASEAN – but now the US has tried to move the center for economic integration with the EU, NAFTA and Japan, said Ahn. “After we completed [the Korea-US FTA renegotiations] we were shocked. We had no opportunity to discuss new global trade rules!”

Faced with this disturbing new reality, TTP “…is the only hope or opportunity to have a linkage with the new global trade order, but the political situation with Japan makes this a lost opportunity,” Ahn said.

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