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Trump and Trade Bilateralism

By James H. Nolt

Last week I argued that President-elect Donald Trump appears to be an economic nationalist prone to subverting the internationalist world economic order that has endured since World War II. Another aspect of Trump’s nationalism is unfamiliar to most people who have not studied trade history: He is an avowed bilateralist.

 

Multilateralism is a foundation of the world economic order and indeed of American foreign economic policy at least since 1899, when then Secretary of State John Hay promulgated his famous “Open Door Note” opposing great power efforts to carve out exclusive national economic spheres in China. Multilateral principles are written into every major global trade agreement since the General Agreement on Trade and Tariffs (GATT) was enacted at the end of World War II.

Multilateralism means that countries extend to all their normal trading partners equal treatment. It is analogous to the idea of equal treatment in domestic law, which is a fundamental principle of republican government since the 18th century. Bilateralism, on the other hand, means that each country negotiates with each trading partner separately. Each case is unique. Each negotiation is distinctive. The trade terms, such as tariffs, that apply to each country’s products arriving on American shores might differ if bilateral negotiations apply, whereas in a multilateral world order, any trade concession granted to one trading partner automatically applies equally to all others with whom normal trade relations apply.

Normal trade relations are usually grated in a specific trade treaty country by country or, more commonly now, automatically upon membership in the World Trade Organization (WTO). All members of the WTO are required to extend normal trading relations to all other members. Nearly all countries in the world are now WTO members.

Britain began pushing multilateral trade principles during the 19th century. The United States and other countries gradually signed on. Multilateralism has big advantages because it tends to exclude national power from the sphere of trade relations. For example, if the U.S. were to negotiate bilaterally with a small country like Haiti, the U.S. has little interest in making concessions because access to the tiny Haitian market is of relatively little concern to the U.S., whereas access to the U.S. market may be vital to Haiti, particularly for major export industries like sugar. But if Haiti is granted normal trading relations with the U.S., then its exporters face the same trade terms as those of any other country.

Multilateralism is much favored by international relations liberals because it favors rule of law and peace over the predominance of national power and war. In a bilateral world, weaker countries are likely to become economic colonies or dependencies of great powers, in which case trade terms discriminate against outsiders. For example, the colonial systems of the British, French, and (until 1918) German empires favored trade between the colonial power and its colonies over trade with outsiders. The U.S. started to imitate such European imperialism on a small scale in its relations with Cuba and the Philippines after the 1898 Spanish-American War. There was even a struggle at the beginning of the 20th century over this issue between what were called “imperialist” and “anti-imperialist” Republicans. The imperialists won in 1902, but anti-imperialists or multilateralists gained influence under Democratic Party administrations during both world wars.

Bilateralism was further discredited during the 1930s because of the extensive use that Nazi Germany made of bilateral trade negotiations to further its trade with Eastern Europe (including the Soviet Union), Turkey, much of Latin America, and China. During the Great Depression, the trade of Western powers (Britain, France, and the U.S.) was hampered by the collapse of world finance. The Nazi regime took advantage of this by making “countertrade” deals that were essentially complex barter arrangements that avoided the need for trade finance. These deals greatly increased Nazi influence, both economic and political. Consequently, it is no surprise that the victorious Western powers wrote the postwar trade laws to enshrine multilateralism and prohibit most forms of bilateralism.

Yet Trump does have considerable scope to practice bilateralism, as he says he prefers, because of broad latitude granted under numerous special exceptions to multilateralism in international trade law (mostly in the form of WTO rules). The rules were written with the expectation that internationalists would dominate government administrations during the postwar world, at least among most great powers. Indeed, they generally have. But an avowed economic nationalist like Trump has enough discretionary power to make the exceptions become the rules if he so chooses.

In this regard, the most important exceptions are the anti-dumping provisions of GATT and WTO. Dumping is defined as selling products abroad below the domestic cost. That might seem absurd, since it would result in selling at a loss. Understanding dumping requires understanding private power and the strategic value of price wars. The idea of dumping is to sell at such a low price as to drive your competitors out of business, or at least force them to limit their production so that all producers then jointly raise prices in a cartel arrangement. The international lawyers who wrote GATT rules appreciated that powerful corporations and cartels do employ such unfair trade practices, so they devised rules that allow countries to counter this private power with special tariffs to raise the prices of products unfairly dumped.

It is, however, a legal problem to define when a price is unfair. This is quite difficult to resolve across national boundaries because even though there are international tribunals to adjudicate such questions, the evidence of actual costs are the proprietary secrets of corporations that cannot easily be compelled to reveal honest cost data. Therefore, most anti-dumping cases must be argued on circumstantial evidence, which is contestable by the opposing lawyers. Cases usually drag on for years.

Recognizing this fact, anti-dumping rules have long included a significant exception to the procedure in most domestic civil suits. Plaintiffs are allowed to assess compensatory tariffs as the legal process drags on, even prior to the final determination of whether dumping in fact was occurring. Therefore, anti-dumping actions are often abused, since even if a plaintiff will ultimately lose, as the case drags on they can be protected, giving them time to adjust to the low-price competition in a variety of ways.

The Trump administration can use anti-dumping suits to selectively punish any companies or countries whose products are competing against domestic producers, even if the case is ultimately judged spurious. Trump would not need congressional authorization to pursue any particular case. Trump’s ability to pursue a nationalist trade strategy and bilateral trade leverage is considerable. The only debate now is whether that is his intent. He has often said it is. If he thereby erodes the ability of global firms to export into the U.S. market, he will unleash a firestorm of corporate opposition and protest, although this could rally much of his heartland base that warmed to him because of his “America first” economic nationalism. If he does not use this power, his base may feel betrayed, making it harder for Republicans to win in the 2018 congressional races and for Trump to win re-election in 2020.

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James H. Nolt is a senior fellow at World Policy Institute and an adjunct associate professor at New York University.

[Photo courtesy of Narendra Modi]

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