According to President Trump, yesterday was “Liberation Day”. It was the day of “American economic independence”. What it certainly was is a stark departure from previous US trade policy for several decades. (For a thoughtful discussion of US trade policy and tariffs view these Doug Irwin‘s interviews here and here). From a broader perspective, the Executive Order on reciprocal tariffs (see also the White House’ Fact Sheet and the USTR’s statement) is a policy which significantly differs from the trend which started with the GATT in the 1940s, i.e. the progressive, negotiated reduction of tariffs.
That was the main raison d’être of the GATT 1947 which was spearheaded by the United States.
We can make various, certainly general and initial only, comments about these reciprocal tariffs. We can talk about their legality, about their economic soundness, their political implications. We can also talk about the underlying concerns and motives that have led to them.
Whether these reciprocal tariffs are sound economic policy (for the US) is not for me to say. The jury is out and it is mostly constituted of economists and other analysts. (For some initial analysis see here.) The same does apply for the political implications of this policy. We largely have to wait and see since, even in this respect, we are walking in unchartered territory. Economic and political history can certainly help us, through the analysis of previous experiences, but perhaps only to some extent.
Legality first. The standard here is obviously the rule-book of the WTO, the multilateral system on trade which binds 166 nations. In fact, there is not much to say here, because clearly, these tariffs are illegal. First, if the US is increasing their tariffs beyond the committed, bound level included in their schedule, they are breaching Article II of the GATT. No doubt about this. Secondly, to introduce differential tariffs vis-a-vis different trading partners is also breach of Article I of the GATT, the MFN principle, the cornerstone of the GATT bargain. Again, no doubt about this. And, don’t be fooled by the reciprocity idea which may be perceived as a just principle shaping the policy. This is not a legal criterion to use in a legal assessment (for an analysis of Trump’s notion of “reciprocity” and how it differs from concepts prevailing in WTO law you can read Petros Mavroidis here). (It is, incidentally, interesting to note that US tariffs are intended to reciprocate other countries’ “tariffs” but, in the design of the executive order, foreign “tariffs” include non-tariff barriers which are clearly difficult to calculate with precision and which, from a legal perspective, are not tariffs and are subject to different disciplines.)
If reciprocal tariffs breach WTO law, there are, however, various exceptions in the system: the general exceptions of Article XX of the GATT and the security exception under Article XXI of the GATT. At least in principle – and clearly I am not passing any judgment here because the legal analysis needs to be properly substantiated and made according to the relevant specific requirements – these exceptions could be put forward by the US to justify their breaches of the GATT. It can easily be anticipated that countries aggrieved by these tariffs will commence disputes at the WTO soon. Against the clear breaches of the law, it can also be anticipated that the US will raise this/these defence(s) and thus contribute to a pattern which is quickly forming whereby the key focus of the legal debate is not really about the breach of the obligations but the availability of justifications for these breaches. Importantly, at least in principle, the said exceptions under GATT Articles XX and XXI can justify any breach of the GATT obligations (and perhaps even beyond that specific agreement to cover other covered agreements on trade in goods: see the blog post of yesterday “Back to the GATT!”). This, obviously, includes, a breach of tariff concessions and MFN. (Rob Howse suggests that GATT XXVIII, which introduces the procedure for the re-balancing of tariff commitments, or even a waiver could hypothetically represent other possible avenues to legalize Trump’s “reciprocal” tariffs.)
To repeat the general legal point just made. It seems that, from the perspective of legal policy and analysis, the key issue is quickly becoming whether and how these exceptions can and should be used. Lacking significant developments in law reform reshaping the rights and obligations of the parties, the good old exceptions drafted in the 1940s are attracting attention. WTO law is becoming a law of exceptions.
The answer about the possible applicability of GATT exceptions is clearly not exclusively based on a self-assessment by the Members adopting the relevant policy measures (or of other Members) but, in case of conflict, may end up before the dispute settlement of the WTO, currently mostly represented by three-member Panels (and, for those that signed it, by a temporary arbitration system on appeal: NB: the US is not a party). For various reasons, this delegation is not ideal and, as the experience of the Appellate Body shows, rather than clarifying the law and diffusing tensions may generate uncertainty and end up in further conflict. But, this is the only option on the table now.
The final comment regards the concerns and overall motives underlying this executive order, and perhaps many other policies by Trump and indeed by other countries and blocs. This is truly the broader context of current geopolitics concerning economic policies.
The core concern which underlies these policies is: “We are losing ground. We are losing competitiveness. They are ripping us off!”
The whole GATT/WTO system aims at reducing trade barriers and fostering free trade. But, once you do this, international trade and transactions do not happen in a neutral ground. What comes out (a novel Baldwin’s “tide metaphor”) is the huge diversity we have in domestic policies of whatever types. Ecosystems differ, political systems and preferences differ. Standards and regulations differ. Taxation differs. Costs and opportunities differ. (By the way, my understanding is that this diversity is what triggers the famous comparative advantages which, according to page 1 of Economics textbooks, are the engine of the economy …) This has a significant impact on investment and trade flows. This means that there are huge opportunities for wealth creation, that there will be winners but, inevitably, also losers.
Now, in political and legal parlance, once this diversity generates cross-border spillovers and domestic producers or citizens feel the effects of this diversity, this scenario is tagged as unfair. More competitive foreign trade and policies are tagged as unfair. And, since the playing field is not even (query: Was it ever so? Can it really be so? Should it really be so?), there is a need to level it to ensure competitiveness. Various (e.g. adjustment, economic and industrial re-orientation) policies can be adopted to address this real or perceived problem.
In the end, many countries largely share the same concerns and motives. Competitiveness, level playing field and unfair (foreign) policies are the buzzwords of our times. Actions may, but not necessarily, be similar.
Certainly, the premise of all this buzz at the domestic policy level is that the multilateral system, in our case, the multilateral trading system, does not address these differences and their effects. On the one hand, the system simply aims at “negative integration”, i.e. removing obstacles to trade, not at “positively” integrating by addressing the said differences in the various economic and political systems and harmonise them. (At the cost of over-simplifying, to replace different standards with a common one is a hugely difficult political exercise with at its core significant trade-offs.) On the other hand, for its nature, the multilateral system does not provide for efficient adjustment mechanisms. Re-distribution is not its goal (on this, despite the dramatic changes in the very recent years, I still very much agree with Tomer Broude‘s response to Greg Shaffer).
Against this scenario, Trump’s reciprocal tariffs are intended to be the nuclear option. In various respects, they represent the pinnacle or prototype of Trump’s policies. It is the muscular attempt to remedy the situation of US’ lack of competitiveness. (Following this tune, you may want to listen to Chad Bown interviewing the Paul Krugman).