Unit 4 - Readings & Viewings

Read closely the language of GATT/WTO Article XXI.  This is the national security exception in the GATT Agreement.  Remember that treaties are normally supposed to be interpreted with fairly strict attention to text as a matter of public international law doctrine (see Articles 31-32 of the 1969 Vienna Convention on the Law of Treaties for applicable interpretation rules;  the US is not a signatory to the Vienna Convention, but believes that it simply restates the applicable customary law).  What is your impression as a matter of treaty law, is the “national security” exception about excluding from coverage trade in weapons of war and mass destruction, or is it about maintaining the national manufacturing base?  The question is whether the proper treaty interpretation is that the exception addresses “military” security versus “economic” security, where to draw the line, and why?

For quick insight into the how the WTO DSB formally interpreted Article XXI for the first time recently, read William Reinsch & Jack Caporal, “The WTO’s First Ruling on National Security:  What Does it Mean for the United States?” (Critical Issues, CSIS 04/05/19).

How would you now understand President Trump’s claims that he could levy tariffs on Chinese goods generally and European cars because they threaten US national security, looking to both the language of GATT/WTO Article XXI and the Russia vs Ukraine DSB opinion (and recently published follow-up decisions on tariffs to be charged on aluminum and steel)?  The opinion itself is interesting in terms of what it tells us about the “justiciability” question.  So we shall ask a student group to read the full (100+ page) Russia-Ukraine DSB opinion and report to the class on how it was argued, and whether they agree or disagree with the CSIS handicapping of the US position above, and why?  The actual proceeding is DS512  Russia--  Measures Concerning Traffic in Transit, and all students should at least read the short summary here.  Similarly, the recent decisions in the aluminum and steel proceedings are DS552 (Norway 12/09/22), DS554 (Russia 07/04/22), DS556 (Switzerland 12/09/22), DS564 (Turkey 12/09/22).  Similarly, read each's short summary and then look at the table of contents of any of the three DSB opinions and from one opinion read the 6-7 page excerpt in the final portion of the opinion addressing the grammatical argument the US made concerning Article XXI.

Read also S.295, the draft bill of Senators Graham and Schumer concerning the imposition of special revaluation tariffs, claiming that the value of China's currency is manipulated to maintain it at an artificially low foreign exchange level.  (Much copycat draft legislation has followed this 2005 draft legislation;  none of it ever passed.) Ask yourself first whether the apparent reliance on Art. XXI by the Graham-Schumer legislation is legally justifiable (meaning revisiting the question how broad “national security” really is under Art XXI)?

On a related note, read also from Economicscenarios.com “What if the US imposes a tariff on China’s exports to force a revaluation.”  Also, if such tariff were imposed, what would be the effect in any case as modeled by Economicscenarios.com?  How would 20% tariffs levied by the US against China now (see Chad Bown, “US-China Trade War Tariffs:  An Up to Date Chart,” Peterson Institute of International Economics, speaking as of the 02/14/20 implementation of the Phase 1 US-China trade deal at be the same or different from the 27% tariffs mooted in opposition to what was argued in the past to be an undervalued Chinese currency)?  The hidden issue is that understanding how tariffs play out in the international economy in practical terms is largely an economics modeling issue.  The idea is that there will be offsetting adjustments over time, but on the political side you face the law of unintended consequences, see from today’s Bloomberg.com Whitley, “Trade War’s Next Salvo to Hit US Shoppers Harder than Chinese.”

Now comes the most painless dose of international economics and national accounting I can provide, which is an examination at the technical level of current account and trade balance deficits.  What does it mean, and can you simply undo a trade balance deficit by levying tariffs?  The point of this is understanding from a technical perspective whether as a matter of trade economics what happens in a so-called trade or tariff war.  Please read “National Income and the Balance of Payments Account” (International Economics:  Theory and Policy v 1.0, Saylor Academy, 2012). This is what I would like you to discuss in your smaller student groups, to bring along those who hoped never to see the inside of a b-school or economics class.  You can test yourself also in reading McBride, “The U.S. Trade Deficit:  How Much Does It Matter?” (CFR, last update 10/17/17).  Does it make more sense to you now?

Let us tie this back to something we talked about last week.  Remember last week’s examination of the GATT/WTO Agreement and its overlap with international monetary law in GATT/WTO Article XII?  Well, now that you have a bit more familiarity with the details of national accounts and balance of payments, look at the United States Balance of Trade and the United States Current Account to GDP historical numbers and forecasts (click around to find them, if you must), what do you think will happen to the current account deficit assuming all countries indeed head into a global recession as a result of the COVID-19 global pandemic?  On a multiyear time horizon, what happened in the last big global financial crisis and recession circa 2007-09?  How do these “twin deficits” as referred to in the international economics reading overlap, and why?  What accounts for the divergence forecast 2020-22, remembering that all forecasts are merely educated guesses about the future?

But this is not just solely US problem, see Salna, Singh & Suhartono, “From Caviar to Coffee, Indonesians May Have to Pay a Lot More for Imported Goods”? (bloomberg.com 09/04/18) (Perhaps our Indonesian colleagues know what imported consumer goods attracted much higher special taxes, as permitted presumably by Article XII, because everyone may have rushed out to buy them before the new tax regulations were applied?)

Now what about the Covid Pandemic?  If you look at the US 2020 current account which was ballooning, and see that the most current US 2020 balance of trade was widening, understand that it mostly reflects the still “hot” economy in the United States compared to the already “cooling” economies abroad, to the extent they may be more dependent on export trading (balanced against the imponderable that US COVID-19 current developments seemed less favorable–  this is the question now asked about China's economy since late 2022).  The outsized 2008 current account deficit arguably resulted more from other countries importing less from the US as their economies slowed down in the 2007-08 Financial Crisis than the US importing more goods (except maybe to the extent any appreciating US currency rendered the foreign goods cheaper).  Thinking in trade law terms the 2020 US balance of payments could be attributed to lower sales of soybeans (Midwestern farmers) and civilian aircraft (Boeing, including all those undelivered 787s piling up in North Charleston, like on a car dealership lot) by the US to foreigners.  Guess where the retaliatory tariffs have been aimed?  Assuming the emerging markets slow more as a general matter, the US dollar steadies or rises as the “safe haven” trade, and we pursue the trade war in earnest, is it more likely that the US balance of payments position improves or worsens in the short to medium term?  It is a complex problem in economic terms, but for economic, technical reasons it presumably will be very difficult under these circumstances for any US administration to achieve any significant movement on statistics like decreasing trade deficits through the medium term (disconcertingly, they are more likely to increase under the circumstances).  So does this kind of situation look the same or different from the US as opposed to the Indonesian perspective, and why?

Finally, on the whole question of US-China "decoupling," the topic seems to generate as much heat as light, so as background on the spectrum of opinion read the following:

Bessler, "Demystifying the Debate on US-China Decoupling" (CSIS New Perspectives on Asia blog 11/16/22

Similarly, on the problem of potential technology export controls for China on semi-conductors and related fabrication machinery raised by the recent CHIPS and Science Act, see

Lewis, "Commentary:  Notes on Creating an Export Control Regime" (CSIS 12/16/22)

Would such an export control regime be lawful under Article XXI and its jurisprudence?  Where do you come out on the wisdom question, which is the issue underlying the various positions in the US-China decoupling debate?