Special Interview 1
Interview with Dr. Gary Clyde Hufbauer, Nonresident Senior Fellow at the Peterson Institute forInternational Economics (PIIE)The Future Direction of the Trade War& Role of the WTO
By Japan SPOTLIGHT

We are in the midst of a trade war provoked by US President Donald Trump’s tariff policies. What is theoutlook for this trade war? Could the WTO stop it? How can we stop a trade war that has been envisaged
only in international economics textbooks? Dr. Gary Hufbauer, a distinguished trade policy expert at thePeterson Institute for International Economics (PIIE), responded to our questions in a telephone interview
as below.
(Interviewed on July 10, 2018)

Trump’s Provocative Tariffs
JS: The recent US tariffs on

Chinese goods were closely
followed by Chinese retaliatory
tariffs. The next step in thesetensions between the UnitedStates and China may come latert h i s s u m m e r. Tr u m p i s a l s oconsidering drafts of executive
orders designed to restrict China’s
access to US technologies that are
crucial to military and civilian
industries. Is this a correct view ofthe situation?

based on national security
concerns. Would these
protectionist measures based onnational security be legitimate,based on WTO rules?

Hufbauer: The answer is a little bitcomplicated. What you said is true ofaluminum and steel tariffs and also thethreatened auto tariffs. For the China tariffs,
Trump has talked about various things, but isusing Section 301 of the Trade Act of 1974 to
say that China is acting in ways that are
Dr. Gary Clyde Hufbauer“unjustified, unreasonable or discriminatory”— those are the three words in the legal text and according to Trump,
China is doing all these things and therefore he is putting on these
Hufbauer: Let me add one important qualification. Trump has said thattariffs.
he would wait to see if new legislation passed by Congress would deal
Let me talk first about the Section 232 tariffs, which Trump claims
with the investment issue, and give him authority to restrict Chinese
are a matter of national security, and venture a guess whether theseaccess to US technology. He made this surprising announcement
are legitimate under WTO rules. My answer is a little bit complicated.
about 10 days ago and now we are waiting for Congressional
Firstly, to this date, the WTO has not made an affirmative decision inlegislation. That’s a change from the focus on an executive order andany national security case. In fact, countries were very disciplined
instead waiting until legislation is actually enacted.
about not using the national security exception until Trump camealong. Many WTO members seem to believe that it is up to each
JS: Just to confirm the facts: in August the US is
member country to define its national security concerns. That’s the US
planning the next tranche of tariffs which will
government’s interpretation of GATT Article 21, which is titledamount to around $16 billion. Is that correct?
“Security Exception”. For almost all other GATT provisions, the WTO
dispute settlement body says that it will decide whether the measure
Hufbauer: Yes, that is correct. That is what Trump is threatening to do,
was appropriate — whether it be for anti-dumping duties,
and Trump will go ahead with the additional tariffs. These tariffs arecountervailing duties, tariff changes and so on. But for Article 21, thejust on Chinese goods. Trump has also asked Commerce Secretarydispute settlement body has not made any decisions, creating a strong
Wilbur Ross to prepare a Section 232 report aimed at putting a 20% or
impression that it is up to each country to say what measures are
25% tariff on all auto imports from all countries. Ross has not yet
entitled to the security exception. However, if the WTO disputedelivered that report, and these are separate from the China tariffs.
settlement body now says that it will independently investigate
whether the measures are justified under the national security
JS: Thank you for the clarification. Coming back to
exception, then almost certainly it would determine that thesemy first question, this tariff policy is implemented
aluminum and steel tariffs were not justified. All sorts of expert
22 Japan SPOTLIGHT • September / October 2018https://www.jef.or.jp/journal/

Special Interview 1
testimony would say that the US has no national security reason for
limiting imports of autos or steel or aluminum — certainly notmeasures that cover all autos, steel and aluminum. If the US had said
that it would not import some special type of steel used in missiles,
that would be completely different, but the Trump administration said
all steel. Likewise for aluminum; I am sure there are special types ofaluminum used in military airplanes for example, but Trump said allaluminum. The same goes for autos. So I think that if the WTO actuallylooked at the substance of US claims, it wouldn’t find a national
security justification. The big question is whether the WTO disputesettlement body will look at the substance, and that is what we cannot
really tell at this stage.
On Section 301, China is challenging the tariffs that were imposedlast Friday in the WTO, and no doubt the US will challenge Chinese
retaliatory tariffs. Neither set of tariffs is justified; there have been no
findings by the WTO that China’s actions are discriminating or
unjustified or unreasonable. So, until the US actually makes that casein the WTO, there is no basis for it to impose the tariffs. Likewise there
is no basis for China to impose its tariffs, but both countries havedecided to operate outside the WTO framework for this battle.
JS: I do not think that any protectionist measures are
justified, even against China. However, China is,frankly speaking, practicing some trade or industrial
policy measures that are not consistent withinternational rules. The US could be justified tosome extent in forcing China to observe
international rules. But the US government is now
attempting to enact protectionist measures
regarding other allies such as the European Union,
Canada and Mexico. I think this would be against
the US national interest. Would you concur?
Hufbauer: I agree with you completely, and those countries haveretaliated. My colleague Chad P. Bown put a blog on the Institute’s
website this morning which details the Canadian retaliation and theway the EU retaliated as well on the steel and aluminum tariffs. Mexico
either has retaliated or has promised it will retaliate — I don’t knowwhether Mexico has put its tariffs into effect yet, but the EU and
Canada have. In terms of national interest, this battle is ridiculous — itis totally against the US national interest to be putting tariffs onimports from military allies, and no previous president would haveconsidered doing this.

WTO Role in Stopping Trade War
JS: When and how will the WTO be involved in the

consultation process on the dispute settlement
mechanism, assuming that the affected parties file asuit against the US policies?

Hufbauer: If a country files a complaint, there is supposed to be
consultation. The consultation is supposed to last 60 days, before theother country requests a panel to be formed. Forming a panel will not
be easy because the US will object, or China or the EU will object, tothe panelists. So it will be hard to find panelists that the countries
agree on, and back and forth consideration of possible names will takea couple of months. Eventually, the director general of the WTO willname the panelists if the countries cannot agree. Then the panelists
will commence and hear the pleadings from both sides. That process
would last almost a year, taking us up to the middle of 2019 before thepanel renders its decision. Then appeals will go to the appellate body,
if there are sufficient appellate body members at that time (three is theminimum). There is a good chance there will not be sufficient appellate
body members because the US is blocking new appointments, andexisting members are coming to the end of their term. If there are notthree appellate body members, then the body can’t decide a case.
That’s the rule. So once the body drops down to two members, there
is no more appellate body and at that point there is no way a decision
can become final without appellate body review. The whole dispute
resolution mechanism would have broken down at that point. That is
not necessarily what is going to happen, but there is a very goodchance that it will. Thus, we may never get a WTO decision on thesecases.
JS: Do you think that any political power could
influence such a WTO decision-making process?
Hufbauer: Tetyana Payosova, Jeffrey J. Schott and I recently posted apolicy brief on what the WTO could do to satisfy the US objections,some of which are legitimate, to how the appellate body operates. You
could look at that policy brief on the PIIE website. It is possible that
other WTO members will read our policy brief — it has been up for amonth or two — and agree to changes, but I wouldn’t say it’s
probable. If they don’t, I don’t see how the political system will resolve
the situation; instead, you might just see compromise agreements
between the US and China and the EU, issue by issue. That is not theWTO, it is bilateral deals, which is how Trump wants to handle trade
policy. [Note: subsequent to this interview, the EU issued a paper on
the operation of the WTO which picks up some of the proposals in the
Payosova, Hufbauer and Schott policy brief.]
JS: What do you think about the WTO’s rule-making

function? Is it almost completely dead?

Hufbauer: Almost completely dead. There are some small areas where
negotiations are still being carried out, and Alan Wm. Wolff, theAmerican WTO deputy director-general, wrote a nice piece on this. He
cited three or four areas where small negotiations are going on, so
there are negotiations but not on the big issues. I think there are
ongoing discussions on fishery subsidies, for example.
JS: According to news sources, Trump would like the
US to withdraw from the WTO. Do you think this is
likely or imminent?

Japan SPOTLIGHT • September / October 201823

Special Interview 1
Hufbauer: Well, he has talked about this. Trump says the WTO is
unfair and that the US loses all his cases, and then he says the US is
not going to withdraw. If he actually sent notice to other countries that
the US is withdrawing from the WTO, that would trigger the six-monthwithdrawal provision before a country can leave. However, giving thenotice is not the same as actually withdrawing. If Trump issues a
notice, nothing will take effect until 2019, but meanwhile Congress will
be very, very upset because Congress regards trade as its area under
the constitution. Article 1, Section 8 assigns the power over foreigncommerce to Congress, not to the president. Congress will certainly beagitated if the president issues a withdrawal letter, and it is unlikely that
Congress will allow the president to take the second step of actual
withdrawal six months later. Actual withdrawal would mean thatpromises that other countries have made about maximum tariffs on
US exports would no longer have any value. Other countries could
legally put a 20% tariff on US exports of turbines or soybeans oranything else. Congressmen representing exporters would be violently
opposed to this possibility. Trump has been briefed about these
consequences and so I don’t think that he will withdraw from the WTO.

Economic & Political Consequencesof Trade War
JS: Let’s talk about automobiles. Japanese autobusiness people are pretty worried about thepossible outcome of tariffs on automobiles; a 20%
or 25% tariff would have significant impact on global
trade and the economy. How do you estimate theimpact?
Hufbauer: My colleagues Sherman Robinson and Mary Lovely haveposted quantitative estimates. A 25% tariff would be enormous, andwould hit Europe, Canada, Mexico, Japan and South Korea. I am very
skeptical that Trump will do it, but if he does put a 25% tariff on autos,
that would trigger a big trade war. My colleagues argue that this would
disrupt supply chains in the industry, and in the course of retaliation,some 200,000 employees in the US would lose their jobs. Autos soldin the US would be $2,000 to $7,000 more expensive. For thesereasons, I don’t think Trump is going to impose tariffs on all US auto
imports, but a 20% tariff on luxury autos from Europe is more likely.
Trump doesn’t like Europe, so he could put a 20% tariff on Mercedes,
BMW, Porsche autos. He would then say to working-class American
people that the rich people could afford to pay a tariff on these autos.
[Note: after this interview, Trump agreed on a tariff truce with the EU.]
JS: Including other protectionist measures to betaken by the Trump administration that could cause
retaliation by China, these trade wars stand to havea serious impact on the global economy. The global
economy is in relatively good shape, and so in the
short term the negative impacts of a trade war could
be limited but more significant in the longer term.

24 Japan SPOTLIGHT • September / October 2018

Hufbauer: If everything that Trump has threatened actually happens —and of course other countries will retaliate — I think we will face a
global recession. There would be so much dislocation in the global
economy. The reason you get a recession is not only because trade isdislocated, but multinational business firms will wonder what theworld is coming to, with the major powers fighting a tariff war witheach other. What is the business motivation to make new investmentswith a tariff war going on? So I think that big companies will cut backon their investment plans, which would cause a recession. It doesn’t
matter as much what US consumers do, as they basically spend mostof their income anyway, but if investment goes down, that affects theentire economy and will lead to a recession. Unemployment will riseand of course stock markets around the world would take a sharp hit.
That would be the outcome of the action that Trump has threatened.
JS: Regarding the political perspective in the shortterm, perhaps the US economy's favorable
condition could conceal the negative impact ofthese protectionist measures?
Hufbauer: In the short run, I agree. The US has a strong economy andcan take this kind of blow better than other countries can. But I think
the short run is a year at most. I think weakness abroad will comeback and hit the US. The investment uncertainty that I emphasized —US firms wouldn’t really know what to invest in. If Apple invests inmore iPhones, who is going to buy them? Is China or India going to
buy them? We have had a period of 70 years where the rules of trade
have been respected by the major countries, but now you would havea situation where major countries would not be respecting the rules,
and companies would have to think about who is going to buy thethings they produce, and doubts about investment will come back to
hit the US.
JS: Do you think that concerns about protectionism

would have an impact upon the mid-term elections?

Hufbauer: It’s having an impact in the farm states because farmers
realize that their prices are lower because of what has alreadyhappened. Affected farmers are concentrated in the so-called “redstates”, the Republican states. I don’t know whether Trump will lose
many red states in the election, but he might lose some Congressmen
because farmers are unhappy. Plenty of other firms besides farming
are hurt, but I think that for them the hurt is not concentrated enoughto swing the politics. What Trump is saying is that Americans muststand up to China — otherwise China will dominate us and take over
our industries. So if you are a patriotic American you must support his
policies. Many farmers are very skeptical and don’t believe that line,
but maybe people in industrial cities accept Trump’s argument. That iswhat the election will be about. If we get more pain, and more
retaliation, then more people will switch to opposing Trump, but at the
moment we are at the initial stages of a big national debate.
JS: Thinking about the sources of this trade war, theSpecial Interview 1
global imbalance seems to be the main issue. Thisis presumably more to do with macro policy as
opposed to trade policy?
Hufbauer: Yes, the big issue is the US-global imbalance. Trump talks
about bilateral imbalances but a country will have bilateral imbalances,even if it has a global balance. Trump is concerned about both bilateral
deficits and the US global deficit — the latter as you mention is amacro issue. I don’t think it’s a problem, but Trump thinks it’s a big
problem. There are three ways to cure a global trade deficit, all ofwhich are much less pleasant than the problem itself. The first way is
to devalue the dollar, to ask the Federal Reserve to devalue the dollar
25% on a trade-weighted basis. It is not at all clear that the president
can tell the Federal Reserve to do that, however. Such a move would
cause a lot of distress in the global economy as well as the US
economy — inflation and a falling stock market. The second way
would be to get rid of the US fiscal deficit by raising taxes. But Trump
doesn’t want to raise taxes, that is the opposite of what he wants. If
you raise taxes by a trillion and a half dollars a year, you will get rid of
the fiscal deficit and the trade deficit. But you will have a recession as
well. The third way — and these are all overlapping — is you cantrigger a recession by destroying business confidence, for example bya global trade war. When the US has a recession, the trade deficit goes
down. Of course, that will mean Trump is out of office in 2020. All ofthese macroeconomic approaches create problems bigger than the
trade deficit; that is the reality even if Trump does not accept it. He
thinks that by going after individual countries he can reduce the global
trade deficit — this is what he tells the American people.
JS: Looking at the Chinese economy, I am sure that it

will suffer from this trade war. Do you think it could
withstand such a trade war?

Hufbauer: The difference between China and the US is that China is anauthoritarian country. The Communist Party controls the press, thepeople, business firms, the provincial governments and everythingelse. The Chinese government is telling the population that it is theirpatriotic duty to stand up to America; in the past, China has enduredmuch more painful measures than what we are talking about here.
Mao’s great revolution was a disaster — millions of Chinese died, andeverybody was impoverished. In economic terms, China will suffer a
lot but political control is strong enough that the suffering will be
accepted. In the US, conversely, the economic suffering will be muchless, but the political acceptance of suffering is very much lower thanin China. Trump supporters may accept economic distress in the shortrun, but they will fall away as the suffering gets more severe.
JS: In thinking about the outlook for a trade war

between the US and China, do you think China
would make any concessions in light of thepotential negative outcomes for its economy?
Hufbauer: Yes, they did offer at one point to buy $70 billion more of

US goods but that was a concession which Trump did not accept.
China has already cut the tariffs on autos from 25% to 15% and they
could cut other tariffs too. But Trump and his team have to be willingto accept modest concessions; they can’t expect China to do
everything that they want. Some people on the Trump team see Chinaas the big adversary and they are not willing to accept modest
concessions; they want the China that existed in 1980, not the Chinathat exists in 2018. I am talking about hawks like Director of Trade andIndustrial Policy Peter Navarro and National Security Adviser John
Bolton. Everything depends on whether Trump listens to them.
JS: Do you think there is likely to be a Chinese policy

for strengthening regulations to protect
international property rights?

Hufbauer: That would be in China’s own interest, because what they
have been doing is sufficiently aggressive and unpopular thatmultinational companies are very skeptical about bringing their new
technologies to China. China is hurting itself by espionage and forced
technology transfer. At some point China will recognize this and willchange its policies. Look at the example of Japan — it has a whole
range of first-class technologies, autos, medicine, world-beatingmachinery, but Japan respects intellectual property so companies
worldwide are willing to partner with Japanese companies. It is clear
what China could achieve were it to adopt a different attitude.
JS: On the US side, would there perhaps be room forcompromise in thinking about national security
issues because China is a very important country
regarding security issues in Asia, particularly withrelation to North Korea?
Hufbauer: Absolutely. The Trump administration can easily modify its
elastic views on national security. At the beginning of our conversation
we talked about the executive order. They didn’t issue this executive
order for two reasons: one, Congress is making progress on newlegislation and two, Secretary of State Mike Pompeo told Trump that if
he issued the planned executive order, China might not cooperate somuch on the North Korea file. So that was why Trump reversed courseon this executive order; the China angle was very important. I do thinkthat Trump could greatly modify his national security statements andhe would not lose any votes in the US; he would actually make himself
more popular with Congress where many members object to his
national security tariffs. This is an area where Trump could
compromise.

New Global Governance Scheme
JS: Let’s look at global governance. China recently

strongly advocated for free trade and the role of theWTO. Do you think China could potentially be a newleader of the WTO?

Japan SPOTLIGHT • September / October 201825

Special Interview 1
Hufbauer: Yes, it could. It is very plausible. It really depends onwhether President Xi Jinping is willing to make concessions, to reduce
Chinese tariffs, respect intellectual property and not give large
subsidies to state-owned enterprises. If he is willing to do such things,
China could easily take over leadership of the WTO. It is amazing that
the US is implicitly offering to let China to take over the leadership,
albeit unintentionally. More likely is some kind of coalition between the
EU and China, as equal partners, with the US out of the picture. If the
WTO survives, that is how it will survive.
JS: Why do you think that a China-EU alliance would
be possible?
Hufbauer: Well, both because the US has been so disrespectful of its
European allies, and because the grievances between the EU and China
are not as big as those between China and the US. The EU doesn’t
have such a big trade deficit with China, and the EU is more willing totake an approach of negotiation rather than confrontation on
intellectual property issues. Both the EU and China see the US as
going on a very odd course of isolation and protectionism, and both ofthem understand and appreciate the value of the open world trading
system. So there is a coincidence of interest. Those are the reasons
why it could happen.
JS: How do you see the role of the TPP/RCEP orother regional economic integration bodies inpreventing trade wars?

Hufbauer: The TPP depends entirely on Japanese leadership at thispoint, and I guess it will be ratified by the requisite number ofcountries in January 2019. And if Japan takes the view that it will begood to enlarge the TPP to add other countries that want to come inlike Colombia, Thailand and South Korea, then the TPP could becomea real force. The TPP, actually the CPTPP now, is a very positive force
in the international economy at the moment. It is possible that a futurepresident post-Trump will see the error of US withdrawal from the TPP
and will want to join. I am more skeptical about the RCEP, which has
the big problem that it encompasses both China and India. India is so
far from being an open market economy, and is quite afraid of China,
so there is a lot of internal tension within RCEP. And the agreement is
not strong on trade and investment rules. So I think its formation will
be slow and it will not have nearly the same strength as the CPTPP.
JS: What do you think about the role of APEC?
Hufbauer: APEC has become a bit like the G7 (which the US walked
out of and thus devalued). The best thing APEC does is that the leaders
meet and actually talk to one another and that reduces tension. But it
will never be a rule-making body or an organization giving much
guidance. It is kind of an umbrella organization that publishes usefulthings, a little like the OECD but not as strong. But it won’t be ameaningful trade or investment rule-making body. It tried that in the
beginning, but that hasn’t transpired.
26 Japan SPOTLIGHT • September / October 2018

JS: In global governance, my observation is thatmany issues are intertwined today, including
national security and economic interests, and also
structural reform and trade liberalization are also
closely intermeshed. That means that WTO-type
international organizations may not necessarily be
powerful in solving global economic issues.
Hufbauer: You may be right. Organizations like APEC or the WTO canusually point out examples where country policies have succeeded andwhere they have failed. That they can do. But we may be at a period intime where the major powers don’t want more rules from multilateralorganizations. The US certainly won’t accept more rules and so why
should other major powers? I agree with what you just said.

Restoration of WTO
JS: How do you think we can restore the WTO as arule-making body in the future?

Hufbauer: I think there are a few things that need to be done. First ofall, we need a combination of Japanese-Chinese and EU leadership.
We used to have Japan-Canada-US-Europe, but the US is out of thepicture now. So it is down to Japan, China and Europe to get together
and make serious efforts to restore the WTO. Secondly, the WTO must
agree that the way forward with regard to making rules is byplurilateral agreements covering a subset of WTO members. We arenever going to get 164 countries agreeing to multilateral rules onimportant subjects. There will always be one country, like India, that
disagrees. But there are plenty of areas where we could haveplurilateral agreements where the three powers that I mentioned could
work constructively and other countries could join or not as they wish.
The first one might be the Trade in Services Agreement (TISA) which
got a fair distance on a plurilateral basis before Trump came to office;that was the end of it as far as the US is concerned, but othercountries should take it up because TISA could have an enormous
positive impact on globalization going forward. Digital trade is anotherarea, state-owned enterprises another. There are many areas where
there could be meaningful trilateral agreements but it really depends
on China, Japan and the EU seeing that as worthwhile to build up the
WTO.
JS: How about sectoral agreements?
Hufbauer: That is what I mean by plurilateral agreements that don’t
involve all the members to deal with a specific issue. You might have
30 members, you might have 50; that is the way forward.

Written with the cooperation of Joel Challender, who is a translator,
interpreter, researcher and writer specializing in Japanese disaster
preparedness.