Stratfor's 2018 Annual Forecast said the White House will unilaterally impose tariffs in the name of national security as part of its trade agenda, inviting global retaliation in the process. With new tariffs on metals, that trend is well underway and an even bigger economic attack against China is still likely to come.
The collateral damage from the White House's latest trade moves will resonate globally. U.S. President Donald Trump has signed two presidential proclamations that will place a 10 percent tariff on aluminum and a 25 percent tariff on steel starting March 23. Australia, Brazil, Canada, the European Union, Japan, Mexico and South Korea were clamoring for exemptions from the tariffs before they were signed, but the White House has offered initial exemptions for only Canada and Mexico.
The exemptions for U.S. trading partners in North America are part of a broader negotiating strategy from Trump's administration. The White House has been quick to link exemptions for Canada and Mexico to the ongoing negotiations over the North American Free Trade Agreement (NAFTA), saying the exemptions will remain in place as long as NAFTA talks progress. The United States wants a fast resolution to talks before political complications crop up from Mexico's general elections in June or the U.S. midterm elections in November.
But after eight rounds of talks, only six of 30 chapters in the trade deal have been finalized, and the most contentious issues are still outstanding. The U.S. strategy of linking tariff exemptions to NAFTA talks is unlikely to work, however. Canada and Mexico have already criticized the threats and are not changing their stance in the face of U.S. ultimatums on contentious issues, such as rules of origin.
Meanwhile, other countries seeking exemptions will need to negotiate through offers to enhance U.S. national security. These offers could come in the form of promises to purchase U.S. steel or through voluntary restrictions on steel exports through quotas to the United States. Countries could even try to offer concessions in other spheres, such as defense spending for NATO or support for U.S. foreign policy objectives in the Middle East and Asia.
Around the world, countries are preparing responses to the new tariffs. The European Union has outlined a three-step response to increase tariffs on dozens of iconic American products, to impose safeguards against metal supplies that could be diverted to the EU market, and to launch a case in the World Trade Organization (WTO). In addition, South Korea and other trade targets also intend to bring challenges to the WTO.
Around the world, countries are preparing responses to the new tariffs.
These cases will take years to play out in the WTO, creating a major conundrum for the organization. The United States is justifying the tariffs by relying on a clause in the WTO rulebook that allows for exemptions based on national security. But if the panel that eventually hears the case upholds the U.S. position, other countries could follow suit by wrapping their protectionist trade moves in a national security argument. Or, if the WTO rules against the United States, the organization risks losing credibility if the United States flouts the ruling or, worse, abandons the organization entirely. The United States is already threatening the international organization's dispute settlement process by blocking appointments to the Appellate Body, which functions effectively as a WTO supreme court.
And the tariffs are facing a pushback from within the United States as well. Multiple high-ranking voices within Trump's own party have signaled a willingness to defend NAFTA and counter the tariffs with legislation. Congress will likely be able to protect NAFTA if it so chooses. However, a strategy to counter the tariffs — such as attaching a tariff nullification rider to a spending bill that would fund the government — requires significant bipartisan support to overcome a veto and could carry a high political cost if the effort fails and leads to a government shutdown.
On top of all this, the White House will likely roll out further protectionist trade measures in the near future. An investigation into China's intellectual property violations and investment restrictions is due in August, but it could come sooner. The investigation will be used to justify tariffs on the import of more than 100 Chinese goods and will lead to investment restrictions in strategic sectors. The White House's tariffs may be causing a global frenzy now, but they are merely the prelude to the main event.