Talking Trade blog
Trump’s unilateral trade toolkit
Published 19 February 2020
A report out by Bloomberg last week sent chills down the spines of many trade watchers. It suggests that US President Donald Trump has more unilateral actions in mind that will fundamentally alter the global trade regime. His team appears to be reaching into the unilateral tool kit and finding another big hammer.
Trump has complained for years about the essential “injustice” at the heart of the international trading system, represented by the World Trade Organization (WTO). He believes that the system is unfair because the United States has different rules than others in the organization.
The specific point of his ire at the moment is that some countries have different allowable tariff levels than the United States.
He believes that the US should have the ability to match tariff rates for tariff rates. In other words, if Country A charges 10% tariffs on a product at the border, the United States should also have 10% tariffs on the same product for imports from Country A.
Trump is correct that not every WTO member has the same tariff rate for each item.
Why is this the case? Why can’t members simply have “matching” tariff rates?
There are at least three reasons why this approach has been rejected since 1948.
The first reason is philosophical. At the start of the global trade system, back when the WTO was called the GATT, countries had lots of different tariff rates and most were set quite high. Tariffs were the primary method of keeping out foreign products.
The Great Depression illustrated the problems of operating in a world of high barriers to trade. The more some members built walls to keep out foreign products, the faster global trade collapsed without markets to sell into or get imports from, leading to more demands for higher walls to protect what was left of domestic industries. This negative spiral had to be stopped before it happened again.
But getting members to drop their tariffs was also a challenge. Why?
Because the ideal outcome for an individual member is to sit sheltered behind barriers while everyone else practices freer trade. My firms can then access the wider markets and not worry so much about domestic competition.
Since every member has the same incentives, it was hard to get coordinated action to lower barriers to trade. This had to be done simultaneously and with sufficient confidence that everyone else would follow through on their pledges to drop tariffs.
Therefore, everyone basically promised to act in unison. Tariffs would be dropped to every member country at once, leaving every GATT member with the same tariffs in place for each member.
Note, however, that members did not agree to give the same levels of tariffs—only that whatever tariff was eventually agreed upon after negotiations would be automatically extended to all other members. In other words, if your country got permission from the group to leave tariffs on a specific product like a table at 10%, every member would receive 10% tariffs on tables for your market.
My country, however, might not have had sensitivities in furniture, so I could set my tariff at 5% instead. Every member would then pay 5% tariffs to enter my table market.
In some other area of more importance to me than tables, like pharmaceuticals or rice, I might have higher tariffs than other members. The overall goal is to leave the negotiations basically satisfied that we have gotten and received reciprocal benefits (not equal benefits): an overall package that works and balances my needs and specific sensitivities with the demands of others.
This process of setting tariffs in negotiations and then extending the offer to every other member is called Most Favored Nation (MFN) treatment. Members got consistency in trade with lower barriers to trade than non-members. Members were prohibited from discriminating against other members in a variety of ways, including charging differential tariffs. These are core principles embedded into the global trade regime that would be fundamentally altered under Trump’s latest plan.
The second reason tariffs are not “matching” like Trump is demanding is practical. The MFN system was also a solution to the problem of negotiating tariff schedules on more than 5000 individual product lines with an increasing number of members (now 164 in the WTO). If, after bargaining, no one objects to my 5% tariff rate on a table, this is locked in and extended to all without the need for specifically working with 164 members on every single one of 5000+ tariff lines.
Finally, the system brought welcome stability, more certainty and lower risk. The GATT/WTO process captured the highest level of tariff on each product that could be charged. Many members applied a lower tariff rate at the border, but firms can be confident that tariffs will not rise above the rates locked in or “bound” at the GATT/WTO.
Trump’s plan would upend all of this. Firms could be faced with a shifting and complex set of potential tariffs with no certainty on the top level of tariffs that might be charged at any time.
To see how this matters it can be easiest to just view imports first. The table manufacturer can now make tables knowing that the wood for legs will face a consistent tariff no matter where they are sourced. The screws can be imported from anywhere, with the same tariffs in place.
But if Trump gets his matching tariff scheme, the table company would need to know exactly where the legs are coming from, as the tariff on wood could vary widely from WTO member to WTO member. Screws from one country might arrive without any tariffs at all, while the supplier the table firm has traditionally used would need to pay 10% tariffs.
[There are, it should be noted, some challenges in the operation of the trade system just described. Free trade agreements (FTAs) discriminate and give members better benefits than non-members, including lower tariffs. Certain types of trade remedies, like anti-dumping duties, can affect trade on specific products.]
But the basic point is that the GATT/WTO system brought welcome stability and consistency to most trade. Trump’s proposed action would upend this system. Firms would suddenly have to grapple with inconsistent and discriminatory tariffs. The complexity of managing trade and the costs associated with ensuring compliance would skyrocket. Smaller firms, especially, would be at a serious disadvantage.
By taking a hammer to the bedrock foundations of the trade regime, the Trump plans would destroy the global trade system as it has been set up for decades. The end result is unlikely to be viewed as more “fair.”
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