September 7, 2012 1:29PM

A New Kind of Trade War

In the past, a "trade war" was something to be avoided at all costs.  It meant a spiral of protectionist measures:  one country would adopt some form of protectionism, and its trading partners would respond in kind.  The impact on the global economy could be disastrous.

Today, by contrast, trade conflict often involves a tit-for-tat litigation process in which countries challenge each other's trade barriers before the World Trade Organization.  The result can actually be beneficial, as successful complaints usually lead to the removal of trade restrictions.  As a result, the "trade wars" of today may lead to less protectionism rather than more.

Recent developments related to Argentina's trade policy provide a good illustration.  Last year, Argentina decided to take a much more interventionist and protectionist approach to trade policy, with a goal of encouraging domestic production.  To take an example provide by The Economist, through the use of import licensing restrictions, Argentina effectively required foreign mobile phone makers to assemble and package phones in Argentina rather than exporting them for direct sale there.

Other countries took notice of Argentina's measures, and a number of them spoke up at a WTO meeting in March of this year.  But no formal complaint was filed at that time.

Then in April, Argentina decided to nationalize the subsidiary of a Spanish-owned oil company, YPF.  There was talk of a WTO complaint, but it seemed clear that WTO rules did not have much to say about the issue and no action was taken.  Instead, Spain acted in the manner of a traditional trade war:  it imposed restrictions on biodiesel imports from Argentina (which provided the bulk of its supply of these products).

At that point, though, the emerging trade war began to take a different shape.

Initially, Argentina's reaction was muted.  President Cristina Fernández de Kirchner said:  “If Spain’s government wants its own businesses to pay more for biodiesel, that’s a sovereign decision.”  Argentina would not challenge such measures at the WTO, she added.

But then the tit-for-tat trade litigation began.  The EU moved forward with a challenge to the licensing and other trade restrictions imposed by Argentina, filing a request for consultations at the WTO.  Thus, instead of taking protectionist actions in response to Argentina's behavior, the EU chose to go after Argentina's own barriers.

That must have caused Argentina to re-think its position on challenging the biodiesels restrictions, because in August Argentina asked for WTO consultations in that case.

At that point, the United States, Japan, and Mexico piled on in the trade restrictions case against Argentina, each requesting consultations of its own.

In response, Argentina has now filed complaints against the United States on alleged import restrictions on meat products and lemons.  (As of this writing, there is no word on whether Argentina will challenge any Japanese or Mexican trade barriers.)

The initial response by Spain to restrict Argentine biodiesel imports provides a good contrast between the old and new styles of trade war.  The old trade war involved spiraling trade barriers as countries responded to foreign protectionism with their own protectionism.  The new trade war, by contrast, involves a spiral of legal challenges to foreign protectionism.

Argentina's complaints against the U.S. restrictions were not out of the blue.  There had been lingering trade concerns for years.  But now Argentina had a reason to raise them:  if you are going to challenge us, we will challenge you.

Complaints at the WTO do not always lead to a finding of violation of trade rules, of course.  The rules are complex and every case must be evaluated on its own merits.  But nevertheless, the notion that, in the current version of a trade war, challenges to trade restrictions will be met with challenges to other trade restrictions is a vast improvement over the old-style trade war.  With trade negotiations progressing so slowly these days, we should be happy if trade litigation can bring about some degree of liberalization.

It is worth noting that there are potential pitfalls.  The WTO litigation system could be overwhelmed with cases; and in the search for cases to bring in response, countries might choose to file somewhat frivolous cases that might not otherwise have been brought.  But despite such concerns, a shift away from the old-style trade war is of great benefit to the world trading system and to the cause of free trade.