3-7-18 4:24 PM EST | Email Article
By Simon Nixon 

In the eyes of the world, Brexit and the Trump presidency are two sides of the same coin. Their triumphs in 2016 are seen as part of the same world-wide antiestablishment, anti-globalization rebellion.

Some Brexiters reject any link, arguing that Brexit was a vote in favor of free trade in contrast with President Donald Trump's protectionism. Yet these Brexiters may have more in common with Mr. Trump than they care to admit.

That may not be obvious now that Mr. Trump has announced plans to introduce punitive tariffs on imported steel and aluminum. The president justifies this move on the grounds of national security but it has provoked accusations of protectionism, given that the bulk of U.S. steel and aluminum imports come from allies such as the European Union, Canada and Japan. That has prompted threats of retaliation and sparked fears of a trade war.

Nonetheless, the similarities become more apparent when one examines Mr. Trump's wider trade agenda, which was published on the same day that the president announced the tariff hikes.

At its core is Mr. Trump's assertion that the U.S. has been a victim of unfair trade deals and a pledge that the U.S. will no longer "passively adhere to outdated and underperforming trade deals that allow institutional bureaucracies to undermine U.S. interests." This was a swipe at the World Trade Organization's appellate body -- its highest tribunal for settling trade disputes.

American criticism of the appellate body has a long pedigree. During the Uruguay round of world trade negotiations that led to the creation of the WTO, U.S. negotiators lobbied unsuccessfully for tribunals to show deference to national authorities.

But Mr. Trump is the first to act on those concerns: he has already blocked the appointment of three new judges and, with a fourth due to retire this summer, the WTO will be left with the minimum three needed to form a panel -- and will fall short if a judge is obliged to recuse themselves because of a conflict of interest.

It is this gumming up of the WTO's adjudication system as much as -- or in combination with -- Mr. Trump's protectionism that makes this a perilous moment for the global rules-based trading system.

Yet Mr. Trump's concerns about WTO -- that it allows foreign judges to encroach on U.S. sovereignty -- echo those of Brexiters over the role of the European Court of Justice, whose decisions override national law.

In the same way that the U.S. has won far more cases at the WTO than it has lost, British citizens and businesses have overwhelmingly benefited from ECJ judgments that have pried open foreign markets and torn down trade barriers. Nonetheless some find the idea that a foreign body can overrule national governments intolerable.

But what is the alternative to sacrificing some sovereignty to facilitate global trade? For Mr. Trump and the Brexiters, the answer appears to lie in bilateral deals underpinned by bilateral dispute resolution mechanisms which are typically established on a state-to-state basis.

This is of course what Prime Minister Theresa May proposed last week when she set out her vision of an ambitious new U.K.-EU trade partnership based upon mutual recognition of each other's regulatory systems and underpinned by a joint tribunal that would rule on disputes and manage divergence of rules while "respecting the integrity of each other's legal orders."

But there are two problems with this approach. The first is that it is hard to see how it could ever enable anything close to the frictionless trade that exists within the EU's single market.

What marks out the EU as the world's most deeply integrated free trade area is that common rules can be uniformly enforced quickly via domestic courts, thereby giving trading partners the confidence to invest and create extended supply chains. But how quickly would an EU-U.K. tribunal make decisions? How easy will it be for companies and citizens to access the tribunal? How will its decisions be enforced? Who will judge if in fact a decision has been properly enforced? Not surprisingly, the EU has already rejected Mrs. May's approach.

The second problem is that even bilateral deals depend on a functioning global rules-based system.

The EU, for example, has bilateral deals with more than 50 countries, each with its own bilateral dispute resolution mechanism. Yet the EU has rarely resolved a dispute using these arrangements, opting wherever possible to resolve disputes via the WTO, says a senior EU official.

The reason is that a WTO judgment carries the moral and political weight that comes with the backing of 164 members, making it very likely that it will be enforced. This peer pressure should not be underestimated: it explains why the U.S. quickly backed down following an adverse WTO ruling the last time a trade war threatened to erupt with the EU in 2003.

That highlights a key difference between Brexit and the Trump agenda. Brexiter concerns over sovereignty risk damaging only U.K.-EU trade. But if Mr. Trump's concerns with sovereignty herald a return to a pre-Uruguay trading system based on bilateral deals, the consequences for the global economy could be devastating -- not least for post-Brexit Britain.

Write to Simon Nixon at simon.nixon@wsj.com


(END) Dow Jones Newswires

March 07, 2018 16:24 ET (21:24 GMT)

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