A bimonthly magazine on international affairs, edited in Germany's capital

Trade Wars: The US, China, and Europe in Between


Washington’s trade war with China continues to escalate. The tit-for-tat row has forced Washington’s traditional partners to seek new alliances, says Amrita Narlikar, president of the German Institute of Global and Area Studies (GIGA) and professor at the University of Hamburg. It may offer a chance to reform the international trade system.

© REUTERS/ Damir Sagolj

Dr Narlikar, the US and China have started a trade war, imposing tariffs on each other’s products. What does this mean for the EU? World value chains have been disrupted and EU stocks are down… It’s a difficult situation for the EU, for a variety of reasons. Yes absolutely, it’ll disrupt global value chains. In fact, there are several indirect effects that we need to think about. For example, the EU is looking into putting up import limits on steel imports because the expectation is that the US tariffs will lead to an even larger spare capacity from China in the global market. And this (spare capacity) would in turn drive down steel prices, which would threaten the EU markets, making the EU steel sector less competitive. That’s just one example. There are some scholars who are arguing that retaliation may not be necessary—they say we don’t need to get into an all-out trade war. It will be very difficult, though, to resist the pressures to go for retaliation.

What do you think about retaliation as an option? Before we go into the issue of retaliation, I’d like to make two points. First, not all of the issues that President Trump has been raising are ridiculous. There is this tendency by the media and scholars to ridicule everything that Trump says, but there is some truth, some validity, to the issues that he has been raising. For example, China does violate intellectual property rights. China does have stringent technology transfer requirements for investors. The Chinese market is not so open. China does make very effective use of loopholes in the WTO’s subsidies agreements. And Trump is tapping into something very fundamental, very visceral, within the US, and that is why a large proportion of the US population is still in support of his policies. It is the same part of the population that feels really let down by globalization, by open trade—the part of the population that believes (rightly or wrongly) that the gains of globalization have passed them by. And we have to take some of those concerns seriously. A failure to do so only polarizes the debate further and makes many of Trump’s supporters believe that he is their only hope—whereas some of these issues are systemic, they have also been raised by other countries and their populations and would be best dealt with through international cooperation.
Second, I must also emphasize that the way in which Trump is going about addressing these concerns is not good for anyone. It’s not good for the people he’s trying to help—these policies are not going to put “America First,” and they’re going to be costly for other countries as well. They’re not going to make consumers within the US better off, and they will also generate costs for many producers within the US, for example, those affected directly by higher prices for steel and aluminum.
Of course, the sensible way to deal with some of the issues, which Trump is now trying to address with his protectionist policies, would have been to discuss them in the WTO and to explore how the system can be reformed to accommodate the concerns of many people, not just within the US. Other countries have also raised similar concerns on restricted market access for their own exports, inadequacies of some of the agreements of the WTO that allow some countries to play the system too easily, and constant deadlock in the organization that makes it difficult for members to bring new issues to the table and also address some old ones. But (the reform debate at the WTO) is not happening, and now we are in this spiral of retaliation.
So having set that context, let me return to your question, which was: What do I think about retaliation? And my answer is: the EU at this point has very little choice but to use that as one tool. It has to stand up to what President Trump is doing. It has to explore retaliation, ideally under the WTO, so that it is still legal. We don’t all have to throw the rule book out of the window and go for unilateral retaliation, just because the US has done so. And that’s what many other countries are doing too—they are filing cases under the rubric of rules provided by the WTO. That’s what India, the EU, and Turkey have done. That’s what Russia and Japan are doing.
But there are two other very important moves that have to come with retaliation. First, we need to have a conversation about reforming the system to address the concerns of the many who feel marginalized by globalization more broadly and by certain aspects of international trade as we have it in the WTO. A little bit of humility will be crucial to go hand in hand with an acknowledgement that although trade tends to benefit countries in aggregate, its gains are not spread evenly within countries and it also produces losses for some sectors. Reform is necessary within societies, and also in terms of global governance. In some cases, reform will mean tightening the rules of the WTO.
In other cases, it may mean having more flexibility to allow countries to raise tariffs or other barriers under specified conditions, and also encourage countries to have better welfare policies that facilitate a better distribution of the gains from trade within their own societies. This conversation will be extremely important not only from the perspective of many of President Trump’s supporters, but also for the many dissatisfied groups within the EU and in other countries that are not convinced about the benefits of multilateral trade.
An important part of this discussion will be to make a clear distinction between the problems that come from trade and the problems for which trade is just the easy scapegoat. For example, job losses in some sectors in industrialized countries are happening, not because of trade, but because of technological innovation. Raising trade barriers is not going to solve this category of problems.
And second: I think the goal has to be to keep the US engaged and to bring the US back into the system. But we need to have other strategies in place as well. And here cooperation among other countries is very important. So for the EU, it is going to be really important to work with Canada, India, and Japan in order to try and develop a coalition of the willing of some kind, one that stands for liberal values, including trade openness and multilateralism.

On the subject of the WTO: The US has been undermining the organization, holding up judge confirmations, threatening to ignore it. Its demands have been vague, but what does the US want in terms of WTO reform? Right, this is something that has not been very systematically thought through. It should be. I’m not sure if the US even knows what it really wants, because we’re not seeing a very coherent strategy come out of this administration on trade, except for a strong expression of distrust of multilateral rules, coupled with some simplistic and misguided claims like trade wars are “easy to win” and that they will somehow put “America First.” And this stance is not going to achieve much for the US, or anyone else for that matter: trade wars are not easy to win, and they’re not going to put “America First.”
But if you look behind these sweeping claims, there seem to be some serious concerns that seem to underpin some of this discourse. These concerns are related to the way the international trading system has been working over the years and whether different people see this as fair. Even Trump is using the language of “fair trade,” though that too means different things to different people.
To me, there was an opportunity to have a systematic discussion about these concerns last year around the time of the G20 summit. And Germany tried to do precisely that—as the host country of the G20, it tried to get this conversation going. For example, in the G20 declaration in Hamburg, we have a reference to “legitimate trade defense measures.” Now, this is just the kind of issue we should be talking about if we want to address the concerns of those who believe themselves to be marginalized from the gains of international trade.
We need to ask ourselves, under what circumstances do we think trade defense measures can be legitimate? This needs spelling out because you can take all kinds of protectionist measures and somehow claim “legitimacy” for them. That’s why you need a forum like the WTO that can address these concerns at a multilateral level among different parties and then come up with a system of rules.
If the Trump administration had started a real conversation about how we might improve the rules of the system—how we can make globalization fair and sustainable for all (including Americans)—it would have found a much more sympathetic ear from the EU and many other countries. And we would have been making real progress because a lot of people have been pointing out problems of inequality and problems of marginalization of some countries and populations within them—the system does need reforming, and we could have been working on this critical agenda together.
Still, not all problems are to do with the WTO or global governance. The WTO creates a system of international rules that affords countries some negotiating space. International rules can also encourage countries to take on certain domestic measures. So while the WTO can’t order states to have better welfare mechanisms in place, the WTO can potentially say: “These are the problems resulting from dislocations that are happening because of trade, and they need to be addressed by having better distributive mechanisms within your own country. This is not something that we, the WTO, can regulate, but we can encourage you to address these concerns, and show ways in which some countries—like the Scandinavians—do this more successfully than others. There is a whole range of options that different countries could choose from, depending on their national social contracts.”
The WTO can really help frame this debate, point to good practices, and also help come up with better processes for its own decision-making that could allow it to function as a more efficient organization that is able to deliver results in a timely fashion. But the WTO itself hasn’t done very much on this, probably because it is a “member-driven organization.” And while this is certainly a constraint, international institutions can have some agenda-setting power even within such constraints. I believe that the WTO could take on more leadership in agenda-setting and putting good ideas out there.

I want to come back to the tariffs that the US and China have been putting on each other. Is there any possibility of European mediation to defuse tensions? Trump has been critical of the EU, but Europe shares some of the American concerns about Chinese behavior and perhaps shares Chinese concerns about America undermining the WTO. What role can Europe play between those two great economic powers? Mediation is perhaps not quite how I would see it—but working together with the US would have been a very smart route to take because the EU and the US have some interests that align well with each other. But it’s not one that we’re seeing Europe taking so far, not in any systematic way. Because you’re right, the US and the EU do share concerns about China. And these concerns are not only economic but also geopolitical. So for example, the US is discussing restrictions on Chinese investments in key sectors such as robotics, artificial intelligence, and aerospace. Those restrictions are in fact derived from geopolitical concerns.
The EU should really have these concerns too. The EU seems to be slowly waking up to the risks that China poses via the One Belt, One Road project, for example. Or what’s happening in the South China Sea dispute. These are just the avenues where the US and the EU should have a shared agenda, and they could do a lot to come together on these concerns. And it’s not only the US and the EU. It’s also countries in the region that are very worried—Japan and India for example—where we could see some systematic coalition building and action. This is an avenue that’s ideally worth exploring with the US. But the EU should also be talking about this with India and Japan.

What do the US-China tariffs mean for Germany specifically or German industries? Is there any chance that they might be positive in the short run if people are buying more European goods or is this all negative, disrupting world trade? We’re going to get some trade diversion, and yes, we’re going to get some trade creation too. One could see a real problem emerging specifically for Germany: if this escalating trend continues and China decides to tax US car exports to China, then German auto-manufacturers like BMW and Daimler, which have production in the US, would also be adversely affected. They might have to move their plants elsewhere if they are to remain competitive in the Chinese market. That would mean huge relocation costs and a disruption to global value chains.
Now, there are other countries that may win partly from the US-China trade war. For example, when the Chinese put up tariffs on US soybeans, Brazil is the obvious country to benefit as a major soybean exporter. Then there are other countries that are not so deeply integrated into global value chains, which will perhaps not be so adversely affected—New Zealand is one example. But if the trade war does spread—across products and countries—then we will see a global slowdown of growth, which will not help anyone.
Another big problem is going to be what happens within economies. And this includes the US. Trump’s steel and aluminum tariffs will bring some gains to US factories that were no longer producing these products, but producers that use steel and aluminum inputs will, of course, be very adversely affected. This would then extend to adversely affect other consumers and producers. We are likely to see a similar set of effects in other countries too. Some small groups that might gain—but also many that lose.

The EU is also signing new trading partnerships: Canada, Australia, and a new massive trade agreement with Japan. To what extent could that soften the blow of US and China tariffs? So ordinarily, I would say that regional trade agreements are not a good idea. When multilateralism works, you do not turn to regionalism, not least because you get a downward spiral for multilateralism as well: when you have the regional alternatives, there’s always temptation to go down the regional route because it might be quicker than negotiating a deal with 164 countries. But where we are now, you do need to have these bilateral, regional conversations—given especially how badly multilateralism is doing, not only because of the recent problems, but also because of the recurrent deadlocks that have plagued the Doha negotiations of the WTO.
In this context, countries may feel that they have little choice left but to take the regional route, especially if the WTO fails to use this latest crisis as a way to rejuvenate itself. And if this turns out to be the case, it would make sense to be inclusive with the regional trade agreements. And even better would be to have a group of like-minded countries which use this open regionalism as a building block towards reinforced multilateralism. This is where I would refer to a coalition of the willing, where you do have parties like the EU, Canada, and India determined to defend the liberal order. And I’m defining liberal order very broadly there because this is not only about trade.

Final question then: We’ve covered a lot of ground this morning. We’ve talked about US-China tariffs, retaliation, US tariffs on steel and aluminum, EU retaliation, other trade deals. Where do you see this going in the next few months, the next year? Do you expect more escalation between the US and China? Or do you see an off-ramp, a way that we could defuse tensions instead of retaliating? What do you see happening going forward? Given where we are right now, I think the chances for continuing retaliation and escalation between the US and China are high. That’s partly because the US administration’s policy appears to not be coherent on trade aside from the general rhetoric that we’re putting “America First.” We are not getting the clarity we need from the US side.
As I’ve said, it’s very difficult to resist the pressure of retaliation for countries that are involved, even when retaliation hurts your own consumers. Retaliation won’t make Chinese consumers better off. But because there’s a feeling that the US is tearing up the rulebook and consumers are suffering, it’s very tempting for governments to go down the road of retaliation. So I think there will be an escalatory dynamic.
Where I think there is still hope, where we might be able to rescue the situation, would be if we were to follow the three steps I mentioned earlier. First, rules-based retaliation. So not simply a knee-jerk tit-for-tat retaliation, but one that uses the WTO’s Dispute Settlement Mechanism and perhaps even involves coordination among different countries hit by US tariffs. Second, keeping the dialogue going with the US and exploring together how the system might be reformed. And third, more cooperation between other like-minded countries, forming a coalition of the willing, to defend multilateral cooperation plus free and fair trade.
And returning to the point you raised earlier, can the EU mediate between the US and China. Like I said, “mediation” isn’t perhaps quite the right term here, but the EU and US do share and should share many concerns about China’s rise. This is not only an economic issue; it’s a geopolitical issue. And some of these concerns are shared by other powers in Asia. So this is another area where coalitions of the willing could arise. These are the issues where I believe we still have hope. Hope that is not only driven by a defensive agenda that involves rescuing the situation, but hope that even allows us to think carefully about how the system can be reformed more fundamentally and have it work for all in a sustainable way.

The interview was conducted by Noah Gordon.