What Trade Organization? The justification used by the Trump administration for its steel and aluminum tariffs is riskier for the global trading system than the tariffs themselves.
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What Trade Organization?

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What Trade Organization?

What Trade Organization?

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CARDIFF GARCIA, HOST:

Hey, everyone. It's Cardiff. This is THE INDICATOR from Planet Money. Last week, President Donald Trump announced new tariffs on imports of steel and aluminum.

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PRESIDENT DONALD TRUMP: We will have a 25 percent tariff on foreign steel and a 10 percent tariff on foreign aluminum when the product comes across our borders.

GARCIA: And the main worry right after was that the tariffs would lead to a trade war, that other countries would retaliate by imposing their own tariffs on goods that the United States sells to them and that then the United States would retaliate against those retaliations and so on. The global trading system would start to unravel. That was the concern.

And the legal justification that President Trump gave for the tariffs was not that other countries had treated the United States unfairly, though he does like saying stuff like that on TV and tweeting it. Instead, his administration offered a different rationale.

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TRUMP: The actions we're taking today are not a matter of choice. They're a matter of necessity for our security.

GARCIA: National security - that was the legal justification that the Trump administration chose to give for the tariffs. And that choice might be just as big a threat to the global trading system as the tariffs themselves. Today, we're going to explain why.

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GARCIA: How would you describe the World Trade Organization? What is it?

SOUMAYA KEYNES: OK, so the World Trade Organization is - it's - essentially, it's member-driven.

GARCIA: That is Soumaya Keynes. She is the trade correspondent for The Economist magazine.

KEYNES: So it's a club of 164 countries who all get together, and they say, we are committing to a certain sort of set of rules. So say you're America or the EU. You have a list of products and a list of tariffs that you've signed up to on those products. And you say, I won't raise my tariffs above this level on these products.

GARCIA: So our Planet Money Indicator today is 164 countries - yes, including the United States and China, who are part of the World Trade Organization - or just the WTO for short. These 164 countries agree to abide by the WTO rules because those rules protect against any one member from unfairly raising tariffs against another. These rules underpin how global trade works.

KEYNES: And the idea is that everyone signs up to them. And so if one country breaks its promises, if one country changes its policies, then what the World Trade Organization offers is a forum for solving that dispute.

GARCIA: So here's how a typical dispute might be resolved through the process. Let's say, hypothetically, that India raises tariffs on cheese imported from France, which is a member of the European Union - or the EU.

KEYNES: So suppose India raises tariffs on imports of French cheese. The European Union can go to the World Trade Organization and say, hey, that's not fair. Then there's a process. And ultimately, the judges at the World Trade Organization can rule, yeah, India broke its promise.

And then what they do is they say, OK, EU, you are allowed to retaliate and, essentially, kind of get compensation to block out a certain amount of Indian exports to the EU, right? So you're allowed to retaliate, but the WTO judges limit the amount by which you're allowed to retaliate.

GARCIA: Oh, and that's how it's supposed to stop a trade war - right? - because you're allowed to retaliate, but the retaliation has to be proportional to the initial wrong.

KEYNES: Exactly, exactly. So you're the EU, you hit back at India, you kind of feel like justice has been done, and the whole thing stops escalating.

GARCIA: But Soumaya says there is a big exception to this process. It's called an Article XXI Exception, and it says that if a country shows that tariffs are necessary for defending its national security, then the country can raise those tariffs, and other countries can't retaliate. The country can kind of do whatever it wants.

Was it clever, then, of the Trump administration to cite national security instead of some other reason for the tariffs, given that other countries can't go to the WTO in the hopes of retaliating?

KEYNES: It depends how you look at it, right? So from one perspective, it's this masterstroke - right? - because countries can't hit back without breaking the rules themselves. On the other hand, it's really, really dangerous and risky because if other countries find that their way of retaliating, their way of sort of getting redress, has been blocked, then maybe they start taking matters into their own hands, right? So maybe you get retaliation outside the system.

GARCIA: Retaliation outside the system - that's why national security is rarely used as a rationale for raising tariffs. It's like a loophole in the WTO rules - a loophole, by the way, that other countries might now be more tempted to use themselves against the U.S., like if, again hypothetically, the U.S. wants to export more of certain kinds of foods to India or China.

Maybe they do the same thing. Maybe everybody starts citing national security for their own tariffs.

KEYNES: I think that's one of the big systemic concerns looking into the future on this. So, you know, what if countries like India or China start putting massive new restrictions on their agriculture markets because food security is important for national security?

Now, quite aside from whether you think that it's a good thing that they should be able to do that, you would hope that they would do it within the rules, whereas essentially what the U.S. is doing is it's saying, no, we're going to turn away from the rules and do whatever we want. And that does create this big question of why other countries should pay any attention to them either.

GARCIA: Using a flimsy pretext of citing national security and essentially saying that protecting certain domestic industries is necessary for defending national security, even when it's really not, that is what other countries think the United States has just done to justify the steel and aluminum tariffs. They point out that the U.S. already makes most of the steel that it uses and that the countries the United States imports the most steel from are allies, rather than countries the U.S. would be likely to fight in a war - a real war.

And if enough other countries start using that same loophole to retaliate, or even if they just use that loophole because they want to for their own reasons, then eventually they may start to question why they should bother with the rules at all.

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GARCIA: If you want to read more about the WTO and the use of the national security loophole, we are posting a link to Soumaya's recent article about it at npr.org/money, along with other links about the topic.

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