WTO’s Azevêdo: Tit-For-Tat Trade Wars Could Spark Global Recession

Following the Trump administration’s launch of tariffs on steel and aluminum, the director-general of the World Trade Organization (WTO), Roberto Azevêdo, spoke again with Global Finance, about the global body’s role and the expanding trade tiffs that could set off another worldwide economic collapse.

ROBERTO AZEVEDO, director-general of the World Trade Organization

Although WTO Director-General Roberto Azevedo spoke with Global Finance in late February, after the WTO ministerial meeting in Sao Paolo, that was before the US announced new trade barriers in the form of tariffs on steel and aluminum. In the month since, the spectre of trade wars has grown larger, as countries weigh their responses to the US–at a time of rising nationalistic fervor. Azevedo agreed to speak with us again, to directly address the prospects of a global trade war.

GF: If the tariffs imposed by Trump government on the US imports of steel and aluminum are not cancelled, will the world face a trade war?

Azevêdo: That’s speculation. There is a risk, but we are not in this situation yet.

GF: But we may come to be in a trade war.

Azevêdo: We may.

GF: Given sanctions that other countries could adopt in response to the US tariffs, what’s the prognosis for global trade?

Azevêdo: Today, the perspective is still positive. Trade and the world economy are growing, but with some risks. If these risks do not materialize, we project a world trade growth of 3.6% to 3.8% this year, which is a very strong level.

GF: But the American tariffs are already in force.

Azevêdo: Even so. They do not have the horizontal impact you can imagine. The steel trade is a drop in a gigantic universe of commerce. Trade numbers will not be greatly affected by these measures. But if these measures are retaliated against by other countries, and the US imposes one more restrictive action and so on, then there may be an impact on our projections.

GF: You have mentioned recession as one of the possible consequences of a trade war.

Azevêdo: It depends on the size of the measures to be taken. In the 1930s, two-thirds of the world trade disappeared.

History shows that trade wars deepen the economic slowdown or the recession. I’m talking the obvious.

GF: At that time the US raised tariffs on more than 20,000 goods.

Azevêdo: That is why I said that it all depends on how quickly and broadly other countries respond to the American measures, and the counter-measures adopted by the US. It’s the story of the domino effect. Trade measures create instabilities. History shows that trade wars deepen the economic slowdown or the recession. I’m talking the obvious.

GF: Yes, but you are the director-general of the WTO. How do you assess the fact that the American measures were adopted under the premise of national security, which is based on Article 21 of the GATT?

Azevêdo: Measures are very often taken using the national security argument.

GF: Isn’t it an unprecedented measure, as several analysts said?

Azevêdo: All economic exceptions are based on national security. Article 21 does not arise in the scenario until after a dispute is opened. When one country questions another because of a sanction, this second country will defend itself in the WTO saying: I am applying Article 21, my fellow, and I have the right to do so.

Measures that violate the basic principles of most-favored-nation and non-discrimination are often taken on the basis of national security. But no one has ever questioned this. Ukraine has questioned the sanctions imposed by Russia, and Moscow will probably defend itself with Article 21. Article 21 only appears when there is litigation.

GF: As the WTO’s Dispute Settlement Body should take a long time to deliver its final conclusion on the American tariffs, it is possible these measures will remain in place for years. Does the lack of enforcement “teeth” weaken the WTO?

Azevêdo: No, the members are the ones who have the ability to bring litigation to their last instances. The system is designed like this. Neither the WTO, nor the International Court of Justice, nor the United Nations, nor any other international entity has enforcement capacity. There is no international police.

The WTO’s Dispute Settlement Mechanism (DSM) does have teeth: the authorization for retaliation. The GATT (the system which preceded the WTO, founded in 1995) did not have this power. This mechanism is so effective that more than 90% of the DSM’s recommendations have already been implemented.

GF: Do you have any scheduled visits to Washington soon?

Azevêdo: I have, for the IMF Spring Meeting, that it was scheduled some time ago.

GF: Will you use your time in DC to meet with USTR and Commerce officials? Will you deliver any special appeal?

Azevêdo: It would not be a specific visit to address steel and aluminum tariffs. I will discuss several commercial issues, and these tariffs would be one of them. The discussions with the USA about the measures on steel and aluminum are happening all the time.

GF: Have you ever called the US to give up these measures?

Azevêdo: No. I have always talked with Americans about the impact of these measures and the alternatives to them.

GF: With whom?

Azevêdo: These are bilateral conversations. I cannot break the confidentiality of the conversations. The tariffs were adopted on the basis of an internal investigation. It is a sovereign measure. What we have to do is to find other solutions. The concerns about the steel oversupply are not new. Maybe this situation is getting better, but very slowly. The US measures have steel oversupply as a reason. For other WTO members, it is a challenging way to protect the American industries.

GF: Washington is signaling negotiations with some steel suppliers, especially its partners in NAFTA, on possible exemptions. As the measures were applied horizontally, would such exemptions be illegal?By exempting one, they will cause damageothers.

Azevêdo: The violations will be always justified by Article 21, regardless of whether it is tariff or discrimination. It doesn’t matter. Every measure that violates the agreement, if adopted on the basis of national security, shall be covered by Article 21.

GF: The US has been extremely critical of the WTO. Do you think maybe these measures were calculated to affect the organization and the multilateral trading system?

Azevêdo: No, I do not see such a Machiavellian thing at this point. The US concerns about the steel and aluminum sectors were manifested during President Trump’s electoral campaign, in 2016. So he is treating a question that was identified earlier. The WTO is not particularly affected by these measures. The organization was created as a forum for talks, consultations and even dispute settlement on trade-restrictive measures.

GF: Will the fact that the WTO’s Appellate Body is without three of its members affect the conclusion of the expected controversies on the US measures?

Azevêdo: I have no doubt. We are very worried about it. The Appellate Body is not yet paralyzed. But it may have to slow down its works soon if we do not recompose its ideal number of members. The members who left the Appellate Body continue to work the appeals they were working on before. There is a progressive phase-out. WTO members are trying to work on two fronts: finding the solutions that lead to the unlocking of appointments and discussing how to keep the system working even if the Appellate Body is blocked.

GF: Who is blocking the appointments?

Azevêdo: The Americans. The US has repeatedly said they are dissatisfied with the way the Appellate Body has been working. As long as there are no reforms in it, they think it is not appropriate to authorize the appointment of new members to this court.

GF: On March 12, the US sent the WTO a paper critical of China. How might the US arguments be received?

Azevêdo: I have not seen this document, but it is not only about China. Americans and other WTO members have complained a lot about the lack of notification from several countries. WTO agreements require its members to notify other members of trade measures taken, for the sake of transparency. The notification level is too low. The US and other countries want a more in-depth discussion in the WTO to see how to improve the level of transparency.

GF: Besides restrictive trade policy, what issues are you currently worried about?

Azevêdo: In addition to what I mentioned, there are interesting things happening in the area of negotiations, such as the creation of informal groups to discuss current issues, like e-commerce, investment facilitation, small and medium-sized enterprises. These groups are already meeting in Geneva.

You were talking about the US being critical of the WTO. But in fact, they have been very supportive of these initiatives. They participate in one of them, the e-commerce group. They are signatories to its declaration, and they have high ambitions. For the US, this is a renewal of the WTO, which they highly value. They have already said publicly that if the WTO did not exist, it would have to be invented. What they then say is that the WTO needs to be updated because it is not giving proper treatment to current situations that didn’t exist in the past. Therefore, WTO reform needs to be carried out.

GF: Do you agree with the need for reform?

Azevêdo: Every international institution needs to be constantly reviewed. The difficulty lies in arriving at a common view on what kind of reforms should be made. No WTO member disagrees with that.

GF: As the WTO director-general, are you going to put this into question?

Azevêdo: Who puts the reform in the discussion are the members. Who creates the mandates in the WTO are the members. They decide, they create the mandate, they make the agenda and they get together. I implement the agenda that they decide.

GF: Can we foresee the start of negotiations on WTO reforms?

Azevêdo: It is necessary to be clear about what kind of reform. This document you just showed is a kind of reform project. Whenever the WTO launches a new agreement, such as the Paris trade facilitation agreement, this is reform. We have eliminated subsidies on agricultural exports in Nairobi. That was another renovation. There was an expansion of the information technology agreement, another reform. We are setting up these working groups and continuing negotiations on agriculture. Every time you make an agreement that modifies the rules of the WTO, this is a reform of the system. Some are deeper, some not. The system is constantly being updated. Some members feel that we need reforms in areas that others do not consider to be priorities. This is the discussion that is happening now.