3-8-18 5:44 AM EST | Email Article
By Emre Peker in Brussels and Jacob Schlesinger in Washington 

President Donald Trump's planned tariffs on steel and aluminum threaten a world-trading regime already battered by mounting protectionism and its struggle to tame China's state-driven capitalism.

Mr. Trump is expected to sign a proclamation this week outlining his plan to impose the tariffs, which have angered close U.S. allies. European Union officials have suggested they could impose up to $3.5 billion in retaliatory tariffs on U.S. products almost immediately.

The plan to slap duties of 25% on steel imports and 10% on aluminum, citing national security concerns, is forcing members of the World Trade Organization to grapple with flaws and weaknesses in the global body. The U.S. helped establish the WTO in 1995, but Mr. Trump has attacked it since before his campaign as broken and working against U.S. interests.

Even WTO supporters concede they face a difficult choice: Challenge the U.S. using WTO rules and risk exposing it as inadequate to the task, or circumvent its rules and risk destroying the whole institution.

The conundrum is embodied in the EU's rapid response plan, which Brussels says would be legal but some Europeans fear would enter uncharted territory by leveling retaliatory duties without a WTO ruling.

For more than three decades the WTO has functioned because members, led by the U.S., deferred to its rulings, even when they disagreed with them. Now Mr. Trump is questioning that approach and the EU response could challenge it, too, say some trade specialists.

A WTO ruling on the U.S. use of a national-security justification could also risk either opening a wider loophole for protectionist policies or alienating member governments.

"It is putting a lot of pressure on the WTO in a very sort of existential way," said Jennifer Hillman, a former WTO judge appointed by the U.S. under President George W. Bush.

The WTO is already beset by criticism for its response to China, which joined in 2001 and has used its membership to become the world's largest trader.

Despite pressure from other WTO members, Beijing has delayed economic reforms and expanded a form of state-driven capitalism that global trading rules fail to address, many critics say.

"I don't believe that the WTO is set up to deal with a country like China and their industrial policy," Mr. Trump's trade representative, Robert Lighthizer, told Congress last year.

Mr. Trump as a candidate mused about quitting the WTO. A White House trade adviser, Peter Navarro, on Sunday declined to rule it out unless the organization adapts to U.S. demands.

Concerns over the WTO's future and authority are reflected in the varying responses to Mr. Trump's initiative, diplomats say. Japan, Australia and South Korea, among others, are using diplomatic channels to seek Washington's favor, rather than promising swift retaliation.

Most countries are lobbying for exemptions from potential U.S. tariffs. Swedish Prime Minister Stefan Löfven on Tuesday visited the White House representing the EU, seeking preferential treatment. Mr. Trump rejected the idea, saying the EU "has been particularly tough on the United States."

EU Trade Commissioner Cecilia Malmstrom on Wednesday said the 28-country bloc has "no intention of escalating, but can also not just stay silent."

Brussels plans to challenge any U.S. tariffs at the WTO, possibly with other trading partners. It also plans within weeks to enact what Ms. Malmstrom said are WTO-compliant measures to shield European industries from the fallout and levying duties on American products.

Ms. Malmstrom rejected labeling EU members as security threats to the U.S., as EU officials argue that such a justification for imposing tariffs wouldn't withstand WTO scrutiny. "It is alarming that the U.S. would invoke this article," she said. "We have also serious doubts whether this is WTO-compatible."

The argument -- that the U.S. is misrepresenting its justification for the tariffs -- is controversial, however. Germany is fretting that such a response would give Mr. Trump an excuse to target other European industries, including German autos.

A fundamental question U.S. allies are struggling to address is whether the Trump administration wants to work through the WTO. Many see invoking national security as a move to circumvent the body. WTO rules give members wide latitude to curb imports in the name of self-defense out of deference to their sovereignty. Most countries have refrained doing so to discourage widespread abuse of that freedom.

The WTO's former director-general and ex-EU trade commissioner Pascal Lamy said the question of whether the national-security exception "applies to steel or aluminum, potatoes or soldiers' boots...is subject to interpretation."

Mr. Lamy, who led the EU's successful WTO case against steel tariffs imposed by former President George W. Bush in 2002, said in that case both sides played by WTO rules. Now, he said, "we might not be on the same planet" with the Trump administration.

"WTO members should prepare themselves for a WTO minus the U.S., just in case," he said.

The Trump administration's criticism of the WTO centers around the body's legal system -- which has unusual enforcement clout for a global organization -- and a series of rulings over the years that, U.S. officials say, have unfairly gone against Washington and curbed its ability to enforce American trade laws.

Those complaints precede Mr. Trump, and have been raised repeatedly by U.S. officials and lawmakers almost since the body's creation. But his administration has laid out a more aggressive response than earlier American governments.

"Trump has allowed pent-up frustrations with the WTO dispute-settlement system and some of its outcomes to find free expression and be translated into action that undermines the system," said Eric White, a former EU trade lawyer who fought U.S. tariffs at the WTO and is now a Brussels-based consultant with the law firm Herbert Smith Freehills.

The Trump administration's strategy is two-pronged. First, to dust off little-used American laws allowing for unilateral imposition of tariffs and quotas without seeking WTO permission -- laws previous presidents had largely set aside after the WTO's creation. Second, to essentially threaten to shut down the WTO's dispute-settlement mechanism, unless it enacts reforms demanded by the U.S. The Trump administration has been blocking new appointments to that court, aggravating a backlog of cases piling up as the seven-member body functions with three vacancies.

The U.S. has a strong record of winning WTO disputes, according to Canada-based Centre for International Governance Innovation. But WTO rulings that limited U.S. ability to levy tariffs have stoked anger.

EU officials concede the WTO has shortcomings and Ms. Malmstrom has called on the U.S. to cooperate with its allies to improve the body.

"We have a bull in a China shop," an EU diplomat said. "What we're trying to do is contain the bull without tearing down the shop."

Bojan Pancevski in Berlin and Valentina Pop in Brussels contributed to this article.

Write to Emre Peker at emre.peker@wsj.com and Jacob Schlesinger at jacob.schlesinger@wsj.com


(END) Dow Jones Newswires

March 08, 2018 05:44 ET (10:44 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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