US isolationism will be the defining feature of the G7 gathering of world leaders this week. Donald Trump’s disregard for the international post-war rules-based system has been evidenced by his policies ranging from climate change and the Iran nuclear deal to financial deregulation and trade and investment. Guided by his ‘America first’ mantra, he has been critical of multilateral decision-making, eager to undermine or even dismantle institutions that the US played a lead role in creating. But in aiming to be first, the US risks being left alone.
In the area of climate change, the US’s decision to withdraw from the Paris agreement one year ago has spurred increased interest from the international community to advance the climate change agenda, as explored in this month’s OMFIF Bulletin. Green bond issuance, for example, rose to $155.5bn in 2017, the highest level of annual issuance on record.
On trade and investment, attention has focused on Trump’s acerbic rhetoric towards China. This has translated into policy, from tariffs on US imports from China, to the 2017 decision of the US Committee on Foreign investment to put in place additional investment screening rules. Trade and investment protectionism has extended to traditionally strong US allies such as Japan, New Zealand and, more recently, Canada and Europe.
Trump’s decision last week to impose steel and aluminium tariffs on the European Union provoked a strong response from Brussels. Jean-Claude Juncker, EU Commission president, tweeted, ‘It’s a bad day for world trade. US leaves us no choice but to proceed with a WTO dispute settlement case and the imposition of additional duties on a number of US imports.’ French President Emmanuel Macron went further, saying, ‘This decision is not only unlawful but it is a mistake in many respects. Economic nationalism leads to war.’
The US is also undermining the functioning of the global trade system in other, more indirect ways that have attracted far less attention. One is the US’s undermining of the process to fill vacancies on the World Trade Organisation’s appellate body. The AB, which functions as the WTO’s de facto court of appeals, is composed of seven members. However, only four are currently in office. The stalemate over nominations could have alarming consequences.
In the case of an appeal to a dispute settlement, a division of three AB members is selected to address the case. With only four members, the body is already facing practical challenges as there is limited diversity to ensure that the three-member divisions enable their members to serve regardless of their national origins, as intended. But with three, it could become technically impossible for it to function. Zhang Xiangchen, China’s ambassador to the US, warned in a meeting of the WTO general council last month that ‘if the selection process is not launched, the functioning of the AB will be paralysed, which will put the entire dispute settlement system in a crisis.’
The term of Shree Baboo Chekitan Servansing, one of the body’s remaining members, runs out in September 2018. Officials at the WTO worry that the EU’s dispute settlement is unlikely to have been dealt with by then, and that if the US continues to block new nominations and there is an appeal on the decision, the organisation will be left unable to address the appeal. ‘Ultimately, we will not be able to effectively restrain unilateralism and protectionism,’ said Zhang.
This is not the first time Europe and the US have drifted apart, even in the post-war period. Crises over the Suez canal and Vietnam, tensions with Germany over the dollar that culminated in the Plaza accord, and the imposition in 2002 of steel tariffs by President George Bush’s all tested the strength of the transatlantic relationship over that period. But relations today are at an especially low point. More worryingly, they are coming as Britain’s exit from the EU, the refugee crisis, anti-euro sentiment in Italy and discord between Germany and France over reforms to the financial and economic architecture of the euro area are forcing a rethink of the project of European integration.
Danae Kyriakopoulou is Chief Economist and Head of Research at OMFIF.