If there were any lingering doubts about the US under President Donald Trump posing a significant threat to the rules-based international order, these were removed with the White House memorandum of February 13 titled ‘Reciprocal Trade and Tariffs’. The memo introduces the Fair and Reciprocal Plan (the Plan) to counter “non-reciprocal trading arrangements with trading partners by determining the equivalent of a reciprocal tariff with respect to each foreign trading partner”.
Implementation of the Plan will brazenly violate many provisions of the WTO and is likely to result in asymmetric outcomes tilted against the interests of many developing countries.
What are the main elements of the Plan, why would it run counter to the WTO disciplines and what are its likely implications?
With the objective of addressing large and persistent annual trade deficit in goods and countering other “unfair and unbalanced aspects” of the US trade with foreign trading partners, under the Plan, the US intends to adopt a comprehensive approach to determine the equivalent of a reciprocal tariff with respect to each foreign trading partner.
This would be based not only on the tariffs imposed on US products imported by the partner, but would also include examining the following four aspects of non-reciprocal trade relationships: first, value-added tax and extra-territorial discriminatory taxes; second, non-tariff and regulatory barriers that increase the cost of US businesses operating in other countries, including government procurement, lack of intellectual property protection and digital trade barriers; third, exchange rate policies and practices that make US businesses less competitive; and fourth, any other practice that imposes “unfair limitation on market access or any structural impediment to fair competition” to US businesses.
US gameplan
The end game of the Plan is very clear — compel countries to make changes in their tariffs and regimes related to government procurement, digital economy, subsidies, IPR protection etc., to promote the interests of economic operators of the US — with the WTO rules counting for nothing. How would the reciprocal tariffs break WTO rules?
First, since on the same product the US is likely to impose different tariffs on different countries, this would go against the most favoured nation requirement of WTO rules.
Second, it is also likely that in many cases the reciprocal tariffs would exceed the commitment made by the US not to exceed the negotiated tariff ceiling in respect of various products, popularly called bound rates.
Third, WTO rules permit countries to impose non-discriminatory value-added tax on imports as well as domestically produced goods.
Fourth, under WTO rules most developing countries are allowed to bend in favour of their domestic producers and service suppliers and discriminate against imported products procured by their government for non-commercial purposes.
Finally, WTO rules prohibit the US from taking any unilateral action for any perceived violation of its rights.
Overall, the proposed reciprocal tariffs would not only be illegal, but would also represent a slap on the face of the WTO as an institution.
How should WTO members, particularly developing countries, respond to the threat of reciprocal tariffs?
Given the overwhelming dependence of most developing countries on the US market for their exports, they are likely to be compelled to come to the negotiating table and accommodate the US interests.
Pushback options
However, larger developing countries may hold some cards to pushback the US. First, they could point out that the US itself maintains high import barriers through imposing non-ad valorem (NAV) tariffs — an important aspect that is rarely acknowledged by the US and its cheerleaders.
To illustrate, ad valorem equivalents of NAV tariffs in the dairy sector is likely to be prohibitively high and in the range of 65-140 per cent. Second, they could also point out that high subsidies targeted to specific farm products in the US have tilted the playing field against imports into the US market.
Some of the products in which subsidies in the US in some years exceeded 50 per cent of the value of production include the following: rice (82 per cent); canola (61 per cent); sugar (66 per cent); cotton (74 per cent); mohair (141 per cent); and wool (215 per cent).
Third, if these countries lower their tariffs for the US, they must demand that this be accompanied with firm and enforceable commitment by the US to transfer technology in some of the emerging sectors.
If some of the larger developing countries are unable to strike a fair and balanced bargain for preventing the US from imposing reciprocal tariffs against them, they should not hold back on the most potent counter-action against the US. These countries should consider not respecting the intellectual property rights of US holders of intellectual property, a step that might induce a rethink by President Trump.
Further, in the pharmaceutical sector this could action could actually facilitate production of generic products, thereby enhancing access to affordable medicines.
In conclusion, global trade and trade rules are at a turning point. Implementation of reciprocal tariffs would tear into pieces the WTO rulebook. The US intends to use it as a leverage to compel other countries to advance its economic interests by reducing their tariffs and making comprehensive changes to their regulatory regimes.
In addition, most countries are unlikely to enhance their exports in the US market after granting concessions to the US: the agenda of Make America Great Again is likely to diminish the rest of the world.
It remains to be seen whether larger developing countries muster the political will to pushback the US, or they keel under the US pressure.
What the US and other developed countries could not achieve through WTO negotiations, is now sought to be achieved through reciprocal tariffs.
The writer is an expert on international trade. Views expressed are personal
