By Dr Palitha Kohona
The writer was the Former Sri Lankan Ambassador to China and one-time Permanent Representative to the United Nations.
COLOMBO, Sri Lanka | 28 April 2025 (IDN) — We may very well be witnessing the flickering embers of a painstakingly assembled global trading system being callously extinguished by President Trump with brutal and selfish indifference. This may be a deliberate and calculated ploy to bring the trading nations of the world under the hegemony of the United States through a network of bilateral trade agreements or a badly conceived game plan that has gone horribly wrong.
The imposition of tariffs on imports from almost all countries by the US, friend and foe alike, and the call for bilateral deals to facilitate access to the lucrative US market has all but shattered the GATT/WTO based world trading system which had functioned since 1948.
The major trading partners of the US, including Canada, the EU and China, have responded with retaliatory tariffs, all but ensuring the end of the multilateral trading framework. As Economist Nobel Laureate Paul Krugman has observed, Trump “has set the stage not just for his own tariffs but for retaliatory tariffs by other countries. That is, he has started a global trade war.” Paul Krugman is not alone. Nobel laureate Joe Stiglitz and Columbia’s Geoffrey Sachs have echoed similarly agonizing sentiments. The normally cautious Barak Obama has been similarly scathing.
The current economic chaos confronting the world was set in motion by the unilateral imposition of sweeping tariffs worldwide by the US on imports, including from uninhabited Heard and MacDonald Islands and sparsely populated Norfolk Island, both controlled by Australia.
The US action, ostensibly implemented to address the persistent US trade deficit with most of its trading partners, and reminiscent of the US actions following the Smoot-Hawley Tariff Act of 1930, which is mostly blamed for deepening the Great Depression, has rattled not only global trade relations but also financial markets causing sharp drops in global stock exchanges and increased volatility in US treasuries.
GATT
The General Agreement on Trade and Tariffs (GATT), which entered into force in 1948, was the comfort zone mechanism which served its 166 member states to address trade related concerns, including tariff matters. The GATT was created following the end of World War II mainly to address the concern that global trade disputes and unilateralism were a key contributory factor that precipitated the War.
The US played a lead role in establishing the GATT designed to address trade and tariffs issues in an orderly regulated manner in a multilateral context. The International Trade Organization, which was expected to provide the institutional framework for the GATT never materialized and the GATT secretariat took over its role.
The persistently felt need to address the many shortcomings of the GATT, led to the establishment of the World Trade Organisation (WTO) in 1995 on the conclusion of the Uruguay Round of Trade Negotiations and the signature of the Marrakesh Agreement in 1994.
The US was always a leading party driving forward the GATT principles of lowering tariffs, trade liberalisation and globalisation. In this respect, the US role in the GATT and later in the WTO has been seminal with the US leading from the front championing trade liberalization and dragging the recalcitrants towards the free trade ideal.
It was the US that persistently pressured the EU and Japan to reduce restrictions on the free flow of trade, particularly on the trade in agricultural products. With the US regressing into bilateral deals, the lead role in the GATT has been taken over by China, which joined the WTO only in 2001 as its 143rd member.
Chinese accession
The implications of the Chinese accession to the WTO were phenomenal for the US. In 2024, China exported USD 433.7 billion worth of goods to the US and ran an impressive surplus. But the US has also done well. Agricultural exports to China surged by 1000%, between 2013 and 2015, Boing delivered more aircraft to China than it did to US customers and in 2015 the bilateral trade supported 1.8 million jobs.
US services, banking, legal, entertainment, etc, found a ready market in China while thousands of Chinese students paid high fees to study at US educational institutions. Today the Chinese economy is second only to the US (just under USD 29 trillion in 2024) with projections suggesting that it would overtake the US in this decade.
The brutal departure from its long standing ideal and the unilateral resort to punitive tariffs by the US has shaken the global trading system to the core. WTO contains a carefully crafted dispute resolving mechanism designed to provide a structured avenue for resolving disputes, including tariff disputes and there was no effort to resort to the WTO by the US as President Trump loquaciously announced the sweeping new tariffs.
The US’s reliance on unilateral action to resolve alleged shortcomings in the international trading system threw into chaos the very structure that the US was mainly instrumental in creating and nurturing. Today countries, which can react to US pressure, have resorted to retaliatory actions, including China, Canada, and the EU. China has gone toe to toe, eyeball to eyeball, imposing 125% tariffs on imports from the US, seriously disrupting US agricultural exports to China.
Deliveries of planes by Boing have been stopped. The US has slapped 145% tariffs on Chinese products entering the US. Many other countries, dependent on the US market and incapable of retaliating in kind, are lining up (over 70 according to the US, including Sri Lanka) to conclude bilateral deals, which prompted President Trump to gloat (“They are lining up to kiss my ass”).
Unilateral action
The use of unilateral action gives rise to a dispute under the WTO/GATT. The WTO dispute resolution mechanism provides a structured opportunity to address any trade disputes among the 166 parties to the WTO. Instead of resorting to this mechanism, the US has relied on unilateral action relying on the exception/excuse of national security requiring emergency action. Unfortunately, the WTO dispute resolution mechanism is stymied by the US refusal since 2018 to nominate its member of the Appellate Tribunal.
China has also filed a suit with the World Trade Organization, saying the U.S. tariffs were “a typical unilateral bullying practice that endangers the stability of the global economic and trade order.” So has the EU. There appears to be still some hope left for the world as some of the affected parties have dutifully invoked the WTO dispute settlement mechanism more as a means of raising awareness than to resolve the mess.
In any event, it is pertinent to remember that in the contemporary world, the implementation of international judicial determinations depends largely on the willingness of the disputants to comply with the resulting decisions, especially when one protagonist is powerful and believes that it is right whatever the circumstances (that might makes right).
Even well-developed international norms are left adrift by great powers. There are many examples of this happening around us. This is an unavoidable weakness of the international system we have which we all were taught to respect at law school.
The firestorm of tariffs unleashed by the US have attracted a pained and calculated response from other global players. Many others have adopted a wait and see attitude or humbly rushed to Washington, including India, to explore bilateral arrangements, prompting Trump’s comment, “They are lining up to kiss my ass”.
The impact on world markets, whether by design or not, was overwhelming. Stocks tumbled from Chicago to Shanghai seriously impacting on the hard-earned savings of middle-class families, especially in the West, orders were delayed or cancelled, prices began to creep higher, impacting on the wallets of middle-class families and retaliatory tariffs were having an impact on export orders of US farmers.
But more alarmingly, some countries with major holdings of US treasuries were beginning to unload their reserves, impacting on interest rates. Perhaps all these consequences were anticipated and were part of President Trump’s larger game plan to re-order the world trading system and tightly knit the world’s trading nations into a web of America’s own design.
After all, the US (per capita income of USD 80,000) with around 5% of the world’s population continues to consume 25+% of the world’s production and will remain the World’s biggest economy for the foreseeable future.
China, in addition to imposing a 125% tariff on US imports, has also prohibited the export of strategic minerals of which China controls the dominant (73%) share in mining and refining. China for its part, playing the role of the mature international model, has cozied up to Japan and South Korea and President Xi has undertaken a tour of friendly ASEAN countries. (ASEAN major trading partner is China with the bilateral trade exceeding one trillion USD).
Retaliatory actions
These retaliatory actions and the disruptions to the global economy may have prompted the US to institute a 90 day pause in the implementation of the new tariffs, except in the case of China. Against this tumultuous background, the options of the Sri Lankan delegation in Washington seeking a bilateral deal seem daunting. Singapore had alerted the American authorities and clarified its position and has been subjected only to a mild 10% tariff.
Sri Lanka’s delegation will need to convince the US authorities that, Sri Lanka would be able to accommodate some imports from the US at a lower tariff rate. Given that Sri Lanka’s economy at hardly USD 85 billion and currently in the process of recovering from bankruptcy, opening up excessively may result in other economic challenges.
Almost 30% of Sri Lanka’s exports go to the US supporting over one million jobs, and it will be difficult to find alternative markets in the short term. Sri Lankan exporters, especially those in the garments sector will be compelled to look for other markets, especially in Africa, the Middle East, ASEAN, China and India.
While Sri Lanka already has a free trade agreement (FTA) with India, the long-delayed FTA with China looks increasingly inviting. Sri Lanka will need to leave its comfort zone and aggressively look for alternative markets elsewhere.
Emphasizing bilateral deals, is likely to revert the world to a dark age of power based international trade relations and scuttle the patiently constructed, albeit still imperfect, international system of norms. [IDN-InDepthNews]
Image: WTO Building. Credit: WTO
