Comment: Decades of effort to build closer alliances could unravel.

US President Donald Trump is threatening to unravel 70 years of painstaking effort that the United States has led to build an international system of trade based on mutually accepted rules and principles.

Ever since an agreement on trade emerged in 1947 from the ashes of World War II, presidents of both US parties have pushed this system as a way to strengthen alliances and promote the expansion of democracy and prosperity in Europe and Asia.

But with Trump's decision to enact aluminum and steel tariffs against US allies in Europe and North America, he is subverting previously agreed upon trade pacts. The result is a brewing trade war with Canada, Mexico and Europe, which are expressing shock and bitter frustration while enacting tariffs of their own on a bevy of American products.

The measures announced last week went beyond Trump's previous actions, such as pulling out of the Trans-Pacific Partnership, a recently forged trade agreement with 12 nations, and his efforts to renegotiate the North American Free Trade Agreement with Mexico and Canada.

Advertisement

Now, he has imposed restrictions on aluminum and steel imports in the name of national security, even though almost all trade and national security analysts agree that it strains credulity to say it is risky to source metals from allies with whom the US routinely shares sensitive intelligence information.

Veterans of trade policy worry that tensions will further escalate, putting existing trade agreements in peril and the future of World Trade Organisation, the group that the US helped establish in 1995 to adjudicate the rules of global trade, in doubt.

"Trump's actions create a feeling of chaos and lawlessness. America is no longer abiding by basic due process and commitments made to other nations," said Jennifer Hillman, a former commissioner at the US International Trade Commission.

Trump Administration officials say the reaction from the rest of the world has been overblown. They say they are still eager to negotiate and they are just trying to stop a flood of cheap Chinese steel on the world market that has harmed American jobs and industry. Commerce Secretary Wilbur Ross is heading a delegation in Beijing to "discuss rebalancing" trade relations between China and the US.

Trump has argued he's just trying to get other countries, especially China, to play by the rules, and the President's advisers say trade agreements negotiated in the 1990s are past due for an update that better reflects the current realities of the global economy.

"When you're almost 800 Billion Dollars a year down on Trade, you can't lose a Trade War!" the President tweeted, referring to the US trade deficit in goods. The overall trade deficit, which includes services, was US$566 billion last year.

"We are the ones trying to save the rules-based trading system," a senior Administration official said. "Europe and Canada are cheating. They are giving subsidies to some of their industries and putting US companies at an unfair disadvantage." The sudden US hostility toward existing trade agreements comes at a fragile time. While the world economy has been chugging along, multiple countries are recoiling from the trend towards economic integration that has been continuing for decades.

Britain is in the process of exiting the European Union. With newly elected populists in power, Italy is dancing close to leaving the euro currency zone. And a leading candidate to be Mexico's next president, Andrés Manuel López Obrador, is also a trade sceptic and may take an even more confrontational approach with Trump than the current president, Enrique Peña Nieto.

Advertisement

"The door is open to the system unravelling," said Douglas Irwin, an economics professor at Dartmouth.

One reason for worry about things spinning out of control, trade experts say, is Trump's apparent belief that he can use threats to coax concessions out of allies.

While South Korea, Brazil and Australia have been more acquiescent, most of the world's major powers have rejected his demands.

Canadian Prime Minister Justin Trudeau revealed that he had rebuffed a request by Vice-President Mike Pence to resolve Nafta negotiations with an agreement to revisit the terms of the pact every five years. That shattered hopes of Trump securing victory any time soon on Nafta. In the case of steel and aluminum, US allies have refused to agree to quotas limiting their metals exports, thus forcing Trump to enact tariffs.

Trump is acting more aggressively in part because cautious advisers have fallen away, and he has been emboldened by hardline trade sceptics who have cast aside warnings about economic pandemonium.

As a result, the UK, France, Germany, Mexico, Canada, Turkey and Japan have begun or announced countermeasures. They are also forging ahead with their own trade agreements without the US.

Adam Posen, president of the Peterson Institute for International Economics, said: "It will be hard to establish trust in the US again, and all the uncertainty will drive down investment and productivity."

"It is possible to address the negative consequences of liberalising trade without destroying the global trade system which has brought so much prosperity to the world," said Minouche Shafik, director of the London School of Economics.