As China and the United States got closer to a full-blown trade war on Wednesday, with China threatening to impose tariffs on 106 more U.S. products after a similar U.S. move on Tuesday, one major question is looming larger than ever over the world’s two biggest economies: Once you're in a trade war, how do you get out of it?
Both sides have shown little willingness to back down in recent weeks. After President Trump proclaimed in an early March tweet that “trade wars are good, and easy to win,” China shot back days later with a statement saying that “China would fight to the end to defend its own legitimate interests with all necessary measures.”
If past trade disputes can offer any indication, there likely won’t be an easy solution.
In theory, the World Trade Organization (WTO) is tasked with solving or preventing exactly such escalating situations. WTO officials are aware of what’s at stake and have issued relatively strong statements, at least compared with past responses from an organization that's painstakingly trying to portray itself as neutral. “A trade war is in no one’s interests. The WTO will be watching the situation very closely,” the WTO's director general, Roberto Azevedo, said in early March after Trump announced his tariffs plan.
The problem is that “watching the situation very closely” is almost all the WTO can do at this point.
In the past, most ordinary trade disputes have been solved through the WTO’s dispute settlement process, which relies on member states to refer their cases to the organization to work out a solution. In other words: Rather than itself filing complaints against nations, the WTO mostly acts as a voluntary mediator or platform for adjudication panels if members decide to press demands. Member states like the United States have opted into that mechanism by signing and ratifying the organization’s rules.
Between 1995 and 2015, more than 500 such cases were filed to the WTO, challenging subsidies, tariffs or animal welfare measures, among other complaints against member states. Many of the complaints were then resolved through mediation by WTO officials. “Of the 500 cases filed, just over half have reached the litigation stage, suggesting that the system’s requirement for the members concerned to try to find a solution by consulting with each other helps to avoid many cases entering the litigation phase,” the organization says.
But while China has used the WTO to accuse the United States of unfairly imposing trade restrictions over the last months, Trump does not appear interested in being dragged into the dispute settlement process. In fact, Trump appears to be deliberately undermining the legitimacy of that process by saying that his tariffs plan was based on “national security” concerns. WTO rules mandate that a member state can claim exceptions from its trade obligations if the member’s national security is at stake.
That reasoning has long been a no-go among WTO member states, because they understand that triggering trade disputes under a “national security” framework could eventually render the WTO meaningless.
Essentially, Trump’s critics argue, the president now risks causing long-term damage to an organization that regulates an international economic system the United States helped create for the sake of winning a short-term dispute with China.
Trump has defended the measures, arguing that his national security reasoning is justified because the United States needs to produce more steel and aluminum for its defense sector.
His critics doubt that national security concerns are at the core of the measures, however. Trump has himself implied that the tariffs are designed to create jobs in the United States (“We must protect our country and our workers. Our steel industry is in bad shape. IF YOU DON’T HAVE STEEL, YOU DON’T HAVE A COUNTRY!") and to punish China for what the president considers an unfair trade relationship.
Even though some experts agree that some of China’s trade practices are questionable, they still argue that Trump’s response is at least similarly dangerous.
When Saudi Arabia, Bahrain and the United Arab Emirates violated the unspoken rule of avoiding national security claims to justify their economic sanctions against Qatar last year, other member states immediately expressed concerns. The fear is that with the WTO’s two biggest member states now linked together in a similar dispute, a measure designed as a last-resort exception could now become the norm.
With a WTO-negotiated solution nowhere in sight, the economic and political damage of the dispute between China and the United States will likely worsen. To both the Chinese leadership and Trump, the tit-for-tat tariff announcements appear as an exercise in muscle-flexing between the two political powers, even though Trump insisted on Twitter on Wednesday that the escalation was neither a trade war nor a confrontation in which the United States could lose much.
“We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S.,” Trump wrote. “Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!” He later tweeted: “When you’re already $500 Billion DOWN, you can’t lose!”
Markets responded more anxiously on Wednesday, however, as the Dow Jones industrial average lost more than 500 points at opening. The Standard & Poor’s and Nasdaq indexes also dropped sharply.
Unless both sides negotiate a solution, there doesn't appear to be a way for either of them to back down while saving face. In the long run, the options will come down to an unlikely acknowledgment of defeat or a more likely face-saving agreement, especially if economic costs mount.
The risk of such a cycle of retaliation was one of the reasons behind the creation of the WTO’s predecessor in 1948. One of the nations that spearheaded those efforts was the United States. It took until 2001 for China to finally join the club, while America applauded.
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