Amidst global uncertainty over trade, an opportunity for BRICS

Reuters photo

By

Anna Berger

From 25-27 July, the heads of state of Russia, Brazil, China, South Africa, and India will gather in Johannesburg, South Africa for the 2018 edition of the annual BRICS Conference to discuss cooperation in the areas of economics, security, and politics. As Vladimir Putin, Michel Temer, Narendra Modi, Xi Jinping, and Cyril Ramaphosa sit down together to discuss this year’s agenda, there is likely to be one major global event casting a shadow over the discussions: U.S. President Donald Trump’s tariffs.

The question is, how will a trade war affect the BRICS group’s efforts to create global complements to the Western-established International Monetary Fund and World Bank? Although the mounting trade crisis will negatively impact not only individual countries’ economies, including those of the BRICS countries, but also the global economy as a whole, President Trump’s actions and the ensuing global uncertainty provide an opportunity to strengthen the group’s fledgling development institutions, the New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA), and the influence of the BRICS group as a whole.

Trump’s Tariffs

Since his presidential campaign, Donald Trump has repeated his claims that the world is taking advantage of the U.S.’s trade policies, and in March, he finally acted on his claims. The introduction of higher U.S. steel and aluminum tariffs had no specific country target, but heavily affected key U.S. allies, including Canada and the EU, and came in the midst of renegotiations of the North American Free Trade Agreement (NAFTA) amongst Canada, the United States, and Mexico. Citing the U.S. Trade Expansion Law of 1962 Section 232, which allows the President to change import rules on the basis of a national security concern without Congressional approval, President Trump claimed that these tariffs were a response to a trade imbalance disadvantaging the U.S.

As a result of the imbalance, the U.S. relies on steel and aluminum imports from abroad for the materials necessary to build weapons and defense systems for its military, Trump explained, presenting a national security concern that the U.S. may not have the necessary materials to produce defense items in a time of crisis. Trump claimed that such a decision was acceptable under WTO rules because of Article XXI of the 1994 General Agreement on Tariffs and Trade (GATT), which allows deviation from the accord in situations “relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment” and those situations “taken in time of war or other emergency in international relations.” This Article is rarely invoked because of its subjective nature and fears that its use could provoke tit-for-tat reactions.

The response from the global community was swift, particularly from key U.S. allies and trade partners such as the EU and Canada. In order to mitigate the negative fallout from the tariff announcement, President Trump announced temporary exemptions from the new tariffs for Canada, Mexico, EU member states, and several other countries, but halted those exemptions on 31 May. In response, key U.S. partners have declared retaliatory tariffs on the U.S.; Canada has imposed $12.8 billion (USD) of countermeasures on U.S. products including yogurt, chocolate, and maple syrup, and the EU imposed €2.8 billion (Euros) worth of countermeasures on U.S. products such as whiskey, peanuts, and Harley-Davidson motorcycles. Many of these products were strategically selected to inflict maximum stress on states that were critical to Trump’s 2016 victory, including Pennsylvania and Ohio.

President Trump saved his harshest critiques for China, however. He has long claimed unfair trade actions by China that cause harm to the U.S, and at the end of March, he went on to announce further tariffs aimed at Chinese imports. These tariffs were based on an investigation undertaken by the United States Trade Representative (USTR) claiming to show that Chinese trade practices with the U.S. violated its obligations as a World Trade Organization (WTO) member. China subsequently announced counter-tariffs on U.S. products including pork and a range of agricultural products. Since then, the United States and China have continued tariff escalation, in back-and-forth tariff introductions, affecting billions of dollars worth of exports.

The responses of the other BRICS countries to the U.S.’s steel and aluminum tariffs have varied. In May, the Indian government submitted a complaint to the WTO about the U.S. tariffs and announced a month later that it will begin applying increased tariffs on select U.S. products at the beginning of August as a retaliatory measure. Additionally, India is working with Norway to bring the U.S.’s actions to the dispute resolution mechanism at the WTO. Meanwhile, Moscow announced in July that it is raising tariffs from 25% to 40% on some U.S. products. Neither Brazil nor South Africa has yet announced that either government will pursue retaliatory tariffs on imports from the United States, even though both are is affected directly by the tariffs–the U.S. was Brazil’s second-largest export market in 2017, accounting for almost $29 million in exports, and the U.S. was also South Africa’s second-largest export market in 2017, accounting for exports worth over $6.5 million.

Beyond the risks each country faces by itself in either undertaking, or not undertaking, retaliatory tariff measures against the U.S., some economists are worried about the secondary impacts of the evolving trade war on the economies of countries not directly involved in back-and-forths with the U.S. Paul Gruenwald, chief global economist at S&P Global Ratings, has expressed concern over the effects on the economies of Indonesia and India of the US-China trade war and the resulting uncertainty and unease spreading over as a result of the uncertainty and unease spreading over Asia.

The Opportunity for BRICS

While a global trade war will clearly have certain negative effects on the BRICS economies, and the global economy as a whole, the current actions of the United States also present opportunities for BRICS. Since its inception, the group has worked to establish global complements to the World Bank and the International Monetary Fund with its 2014 creation of the NDB and CRA. Thus far, these institutions have not yet grown sufficiently to be true complements to the World Bank and the IMF – but this could change as a result of a global trade war.

A global trade war could erode the current world order that has existed since the end of WWII. What would such an erosion look like? President Trump’s actions show a disregard for the rules-based trade system that has prevailed since the signing of the GATT in 1947 and the creation of the WTO in 1995. Thus far, countries’ responses to the new U.S. tariffs have all been in line with the tools and strategies that the WTO provides in the event of violations by a member state – non-U.S. WTO members have stuck by these rules, even as the U.S. flouts them. Multiple countries, including India, have initiated proceedings against the U.S. in the WTO dispute settlement system, a lengthy process that can take up to three years.

As other countries have increased their tariffs on certain goods as retaliation, they have only increased these tariffs up to their bound rates, or the maximum tariffs that can be charged on a good as set in obligations that a country has made to the WTO. But the WTO is widely considered to be a part of the post-World War II global order built by Western countries, particularly the U.S., and the institutions that are a part of this global order continue to legitimately function today partially based on the continued commitment of the still-powerful founding countries. However, if the U.S. continues to take actions in violation of a system that it helped to build and that, many would argue, is uniquely advantaged to its trading practices, there is cause for concern that the system will not stand. If the U.S. does not view the WTO as having legitimate rules, will the rest of the global community continue to believe that its rules ought to be followed? While the global response to the trade war has, thus far, stayed within the boundaries of WTO rules, there is no guarantee in a global trade war that countries will remain within the restraints of the WTO rules.

Beyond the possibility of the breakdown of the WTO, President Trump’s broader actions might herald decreased influence of other institutions created by the post-WWII global order, including the World Bank and the IMF, the counterparts to the BRICS’ NDB and CRA, respectively. Aside from the WTO, President Trump has demonstrated flippancy and disdain for other international organizations created to promote global cooperation, as shown, for instance, in his decisions to remove the United States from UNESCO and the U.N. Human Rights Council. Therein lies the opportunity for the BRICS group.

Any breakdown in the institutions long championed by the United States means space for other institutions to flourish. Particularly, if those countries establishing the new complement institutions demonstrate themselves to be committed to a rules based system, then they will be able to exercise increased power. The U.S.’s actions will not, by themselves, completely shatter institutions such as the IMT or the World Bank, but these organizations do not have to fail completely for the BRICS institutions to gain. Rather, even if the IMF and World Bank simply diminish in power, this can increase the relative power of initiatives such as the NDB and CRA such that they are true complements to the IMF and the World Bank, as is their stated goal.

To this end, BRICS must stay committed to the rules of the WTO (and other international organizations of which the BRICS members are a part), even as world trade relations continue to break down. Such commitment will maintain and increase its appearance as a group of reliable leaders in global politics and advance its own institutions and solutions. Further, a drop in the perceived influence of the IMF and the World Bank could induce governments to seek membership in the NDB; many experts view expanded NDB membership as a necessity for its survival and growth. The BRICS should take advantage of the current decrease in global faith in the U.S. to more strongly encourage its fellow U.N. members to become members of the NDB.

Further Recommendations

Even as individuals and groups within the U.S. normally supportive of President Trump’s economic decisions speak out against his actions with regard to trade (for example, the business lobbying group U.S. Chamber of Commerce), there is no indication that he will change his positions anytime soon. In addition to efforts to grow the NDB and CRA, BRICS should take this moment to strengthen the group through increasing “people-to-people” cooperation on the education and labor levels. It should also focus strongly on internal issues, including the intra-BRICS trade imbalance between South Africa and Brazil vis-a-vis the rest of the BRICS group, that could challenge the group’s future growth. In the case of the NDB and CRA, BRICS should pay close attention to calls to ensure all development programs funded through the institutions ensure that human rights are upheld and that projects are sustainable and that negative environmental impacts of projects are mitigated.

These are particular two areas in which the World Bank has failed; BRICS can thus use a successful incorporation of these two issues into their projects to champion their institutions as unique and positive complements to the World Bank and IMF. Even as the individual BRICS economies examine how to cope with the impacts of the U.S.’s actions, here lies a unique opportunity to capitalize on a moment of uncertainty in global politics, if only the BRICS can seize it.

This article was originally published by the RIAC and is reproduced with their kind permission

Anna Berger

Anna Berger is an MA candidate at the Johns Hopkins University School of Advanced International Studies, where she studies international relations and international economics. Her interests include trade policy, migration, and post-conflict development.