Free comment, Latest news, WTO crisis and reform

US tariffs: unbound

As ‘green room’ meetings take place in Geneva this week to – likely unsuccessfully  – secure progress on the World Trade Organization’s Appellate Body crisis, the US administration’s ongoing project to give trade wonks an aneurism may be about to enter a new chapter: the US is considering raising their WTO bound tariff rates. What’s going on, and what do you need to know?

What are WTO ‘bound rates’?

These are the maximum tariffs in each type of product WTO Members have committed to ever charging. So if the EU’s WTO bound tariff rate for passenger vehicles is 10%, it agrees it won’t charge a greater than 10% tariff on passenger vehicles.

Importantly, these bound rates aren’t what tariffs are, they’re just what they can legally be. That means practically speaking, this action alone won’t change any commercial realities, only introduce more uncertainty.

What is the US considering doing?

The US is considering using a procedure called “Article XXVIII” to notify the WTO Membership of its intent to raise an undisclosed number of bound tariffs by an undisclosed amount.

How does this work in practice?

Article XXVIII works like this:

  1. A WTO Member decides it wants to raise a bound tariff;
  2. It formally notifies the WTO Membership of its intention (circulates a memo, really);
  3. It actively participates in negotiations with WTO Members on how it will compensate them for this change;
  4. If no deal on compensation can be reached, impacted Members may be authorized to ‘retaliate’ by raising their own tariffs an equivalent amount.

So there’s a procedure and the US is going to follow it, what’s the big deal?

There’s a few unique things about what’s being floated here.

First, there’s the context. The US is currently waging a dubiously WTO-compliant trade war, has put the appellate body in a potentially terminal coma, is mulling an exit from the WTO Government Procurement Agreement, and almost blocked adoption of the organization’s annual budget. There’s an unambiguous direction of travel here, of which this is a disturbing next step.

Second, there’s what is being contemplated. Historically, governments have sought to modify their bound rates either when undergoing a significant transition (like EU enlargement or Brexit) or because they wanted to raise a specific, applied (actual) tariff beyond its bindings. The US is instead flirting with raising its bound rates apropos of nothing. That’s unusual.

Third, there’s the US reasoning. Article XXVIII is meant to be an almost apologetic procedure. It’s a government saying, “Yes, we signed up to this limit and yes we broadly stand by It, but we need to change it a bit and if that causes you commercial harm, let’s talk about whether we can do something to address that.”

The US, you’ll be unsurprised to learn, is not being apologetic. Reporting suggests they are approaching this issue as a fundamental problem with the balance of their concessions (how low their bound rates are) compared to those of their competitors. They’re not looking to do a bit of necessary keyhole surgery on their tariff limits, they’re reaching for a chainsaw.

Fourth, as Bloomberg reports, the US may well be more interested in getting into a fight than modifying its limits. By notifying an intention to raise its bound tariffs, the US knows it will trigger a wave of objections and consultation requests from the WTO Membership. It can then point to these protests as signs the organization is unfair to US interests.

Does the US have a point, are their limits unfair?

Kind of. It’s complicated. Sorry.

On the one hand, the US has bound rates significantly below those of large economies such as Brazil, China and India. On the other, it agreed those rates of its own volition and is generally considered to have received the ability to shape the rules of the trading system in exchange for doing so.

Complicating matters is how much has changed since the US agreed those tariffs:

  • Around the time the original GATT 1947 was being negotiated, Chinese GDP was 0.2% of what it is today. The global marketplace is simply a very different competitive landscape;
  • The US thought it could compensate for its lower tariff rates by using “Trade Defense Instruments” like anti-dumping tariffs to protect itself. The Appellate Body has repeatedly struck down the US approach and methodology for doing so;
  • The US has a stronger bipartisan consensus around the benefits of liberalization and tariff predictability
  • The current administration does not believe the international rules based trading system the US tariff concessions helped create is working in the country’s interest.

So, what happens next?

Possibly nothing.

There’s a world of difference between USTR contemplating a move and it becoming US policy.

Moreover, even if the US does go down this route it doesn’t necessarily mean that changes to actual US tariffs will follow, at least before the US election which could change everything (or nothing).

For businesses and policymakers however, this is yet another potential roundhouse kick to the already bruised ribs of the international rules-based trading system. For better or worse, tariff concessions from the US (and Europe) were foundational to the current order. You can’t take foundation stones back without rocking the house.

 

In his exclusive Borderlex blog series, ExplainTrade founder Dmitry Grozoubinski (@DmitryOpines) takes a relentlessly pragmatic look at the World Trade Organization with one question in mind: “You’re busy, what do you need to know?”

Leave a Comment

Your email address will not be published. Required fields are marked *

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.