The rampaging coronavirus is likely to help delay a push by the Trump administration to reset what it considers unfairly high tariffs by certain members of the World Trade Organization.
The plan, as discussed in recent weeks, would upend the current tariff structure by attacking the Most Favored Nation principle at the heart of the multilateral trading system.
The plan’s delay is partially due to the current preoccupation with battling the pandemic and its economic fallout. But some administration officials also recognize that it could cause further economic disruption that would not help President Trump’s reelection campaign.
Some sources say that Treasury Secretary Steven Mnuchin and National Economic Council Director Larry Kudlow seem to have pushed back against the tariff approach advocated by Assistant to the President Peter Navarro.
In addition, there seems to be very little political value in a technical tariff issue for the reelection campaign of President Trump.
It is therefore unlikely that U.S. officials will announce a massive tariff redo at the June meeting of the G7, as once thought. But the plan could come roaring back to life later, particularly if President Trump is reelected to a second term.
It is an open question whether it would be as broad as now discussed or scaled back to certain countries’ tariffs. If the U.S. focuses only on certain tariffs in a few countries as unreasonable trade barriers, it could use Section 301 to pressure them to lower these.
Section 301 authorizes the President to enter into binding agreements to eliminate an act, policy or practice that the U.S. considers unreasonable and burdening U.S. commerce.
The Administration has been weighing a proposal by Navarro that foresees the U.S. breaking its tariffs bound in the WTO and now applied across the board based on the MFN principle. This seems aimed at pressuring foreign countries to lower their tariffs or face higher U.S. tariffs reciprocal to theirs.
The tariff reset plan was first reported by Bloomberg News in mid-February, and USTR stated at the time that there are no plans “at this time” to raise WTO bound tariffs.
Senate Finance Committee Chairman Charles Grassley (R-IA) responded to those reports by saying that the administration cannot change bound tariff rates without congressional approval.
He also announced last month that he plans to hold a hearing on the Trump administration’s approach to the WTO in the near term, but without specifying a date. Such a hearing, when it finally takes place, may be a venue for members to explain to Trump officials the trade offs made in the Uruguay Round in favor of the U.S. that underlie the current tariff schedule.
Congress could emerge as an obstacle to the tariff reset given that the U.S. Constitution gives it the ultimate authority over trade. In addition, it seems that many members back the administration on its blockage of the WTO Appellate Body, but do not want to see it destroy the institution altogether.
But it remains an open question whether congressional Republicans have the will to stop the administration on a drastic tariff reset. That would be in contrast to the acquiescence they have shown in the past to Trump’s controversial trade actions.
It could be argued that a wholesale breaking of U.S. tariffs and a renegotiation is a multilateral issue that would fall under the fast-track law which gives Congress the ultimate approval over trade agreements.
That law expires in June of next year, and any administration would have to notify its intent to enter into an agreement subject to fast-track 90 days before then, which would be next April.
U.S. trade law gives a President the power to raise tariffs in certain circumstances and with certain limitations. Section 125 of the 1974 Trade Act allows a president to raise duties after the U.S. withdrawal, suspension or modification of U.S. obligations under a trade agreement.
But this provision does not give the President carte blanche to increase tariffs. Section 125 (c) specifies that the duties cannot be higher than 50% ad valorem above the Column 2 rate in effect on January 1, 1975, or 20% above the applied rate in effect on that date, whichever is higher.
According to Warren Maruyama, partner at the law firm of Hogan Lovells, this could amount to a significant increase. “Since Column 2 was our Smoot-Hawley rate, which by 1975 only applied to Communist/Non-Market economies, it means he could likely jack the rates to 100-110% on average,” Maruyama said.
He noted that if the president wants to negotiate a new trade agreement that would involve duties higher than 50 percent ad valorem above the 1975 Column 2 rate, it would be subject to fast-track procedures. He emphasized that “there wouldn’t be much point in that, since a 100-110% duty would shut down trade and eliminate any need to go higher if the purpose is to pressure the other country.”
Section 125 also stipulates that existing U.S. tariffs should “normally” stay in place for one year after the termination of an agreement. This is to guard against the potentially disruptive economic effects of sudden tariff increases and gives markets time to adjust. But the law specifically allows the president to increase tariffs in less than one year subject to some congressional notification requirements.
The President’s Trade Policy Agenda 2020 sent to Congress on Feb. 28, complains about tariff discrepancies but offers no remedy. It notes that there is “no sunset clause or meaningful mechanism to allow the United States and other Members to address enormous differences” in tariffs, citing India and Brazil as examples.
The trade policy agenda emphasizes that just because the U.S. accepted tariff disparities many years ago, when economic and geopolitical conditions were very different, it should not be expected to tolerate them “in perpetuity.”
The current tariffs are largely the result of the Uruguay Round of negotiations, which formally ended in April 1994. On market access, the U.S. aimed at cutting tariffs for industrial goods by roughly one-third, according to a former U.S. negotiator. It also asked that trading partners bind their rates, which meant they could not be jacked up without offering affected trading partners some compensation.
The President’s trade agenda fails to mention that the tariffs are the result of various trade offs in the Uruguay Round, some of which were difficult for developing countries. This includes the Agreement on Trade-Related Aspects of Intellectual Property Rights that established new obligations for protecting patents, trademarks and copyrights. The U.S. also successfully pushed for the General Agreement on Trade In Services, which laid out new rules for this sector.
But the U.S. also made concessions in the Uruguay Round to developing countries. For example, it agreed to the phaseout of the Multi Fiber Arrangement, which set quotas on textile and apparel trade but did not lower high tariffs in that sector.
The agenda also emphasizes that high tariff bindings are one of several manifestations of the special and differential treatment that developing countries can claim in the WTO. It criticizes “advanced economies” such as China, India, South Africa and Turkey for insisting that they are entitled to special and differential treatment.
When railing against foreign tariffs, President Trump has frequently cited the discrepancy in U.S. and EU tariffs rates on cars, which are 2.5 and 10 percent respectively. But he somehow fails to mention that the U.S. tariff on light trucks is 25 percent, and was imposed as a result of an earlier trade dispute over U.S. chicken exports to France and Germany in 1963.
Trump view of the U.S. as a low tariff country also fails to take into account the tariff peaks in the U.S. tariff schedule on such items as footwear, apparel, and glass ware. In addition, the Uruguay Round implementing legislation gives special protection from tariff cuts to import-sensitive agriculture goods.
Insisting on reciprocal tariffs would mean the U.S. would destroy the MFN principle at the core of the multilateral trading system. Doing so as the largest economy in the world would be a devastating blow to the WTO as it stands now, trade experts say.
It is clear that the MFN principle has already been hollowed out since the Uruguay Round by the number and sheer breadth of regional and bilateral free trade agreements that have proliferated since then. Under the rules of the General Agreement on Tariffs and Trade, trading partners can offer better than WTO market access in free trade agreements that cover substantially all trade.
The Navarro approach would also pose a number of significant logistical challenges in terms of negotiations and application.
Traditionally, tariff renegotiations have been carried out under Article 28 of the General Agreement on Tariffs and Trade. Its rules obligate the trading partner seeking the change to offer compensation to countries with which the initial tariff was negotiated and those that have a “principal” supply interest. If trading partners fail to reach a deal on compensation, the affected party can retaliate within six months.
If the U.S. pursued a massive Article 28 negotiation for all its tariff lines, it would almost certainly fail, a number of sources said.
In the past, Article 28 has been invoked when the European Union expanded to new members who had to increase their tariffs to the level of the Common External Tariffs. The United Kingdom is now engaged in Article 28 tariff renegotiations but these pale in comparison to the number of tariff lines that would be involved in a U.S. negotiation, experts say.
If carried out fully, a reciprocal approach would require different tariff schedules for different trading partners on a given product. Even with additional customs officers, this would be a tough system to manage.