President Trump announced that the US would apply tariffs of 10 percent and 25 percent on all imports of aluminium and steel, respectively. The announcement has been derided for being “protectionist” and damaging to the US economy, and likely to trigger a global “trade war.” Professor Ken Shadlen‘s concerns lie elsewhere; the measures’ likely effects on the US economy can be debated, and the likelihood of a global trade war is certainly something to study. This article focus on the implications of this move for the economic development strategies of developing countries.
To understand the main concerns, a quick review of trade jargon and the World Trade Organization’s (WTO) rules is essential. When we talk about tariffs we usually talk about two different types. The main tariff is a country’s applied tariff (otherwise known as “most-favoured nation” or “MFN” tariff). This is the tax that the importing country applies to exports of a given good from all WTO countries. The US applied tariffs on aluminium and steel are low: for aluminium, the highest applied tariff is 5.7 percent, and most are below that; for steel most applied tariffs are also less than six percent, though here there are roughly ten tariff lines that are higher, a handful of these at 10 or 12.5 percent. If the US wants, it can raise the applied tariff level, without compensation or justification, solely as a matter of national policy choice, to the level of the “bound” tariff. The bound tariff level is just that, an upper bound – it constitutes a statement that the importing country is giving to the world about the maximum level that the tariff will go. The US bound tariffs for aluminium and aluminium products are 5.7 percent and below; most tariff lines are bound at rates below 5 percent. For steel the US bound rates range from zero to 12.5 percent, with the overwhelming majority of tariff lines bound at 5 percent or below. (A third type of tariff is a preferential tariff, where, as part of a trade agreement, a country taxes imports at a level that is below the MFN rate. This is relevant too, because the largest source of steel in the US is from Canada, and Canadian exports of aluminium and steel enter the US market duty-free as agreed under NAFTA).
The signals sent by bound tariff levels are important. WTO members, and exporters of aluminium and steel operating in countries that are WTO members, know not only what the US applied tariffs are today, but also, whatever happens within the US that affects trade policy, what the maximum level of the applied tariffs will be. The applied tariff may reach the bound level, but it will not exceed it.
Raising applied tariffs above the bound level, as the US is threatening, has serious implications. The WTO, which was the product of 8 years of negotiations in the late 1980s and early 1990s (the “Uruguay Round” of trade negotiations), oversees a set roughly 60 different agreements that impose obligations on virtually all aspects of countries’ economic policies. Of the many agreements, countries like some rules and obligations more than they like others; they may regard some rules and obligations as onerous, but concessions to be made to obtain benefits in other areas. The “Uruguay Round Bargain” is an exchange, or a series of exchanges. As WTO members, many countries adopted policies they would not have otherwise adopted (e.g. introducing new and substantially stronger intellectual property regimes because of the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights, for example, or the elimination of export subsidies because of the Agreement on Subsidies and Countervailing Measures, or the curtailment of investment regulations because of the Agreement on Trade-Related Investment Measures, and so on), under the understanding that they were obtaining benefits in exchange, and one of the main attractions is stable access to the US market.
How is stable access to the US market delivered? By having low bound tariffs in the US. Tariff binding is technical and may seem exotic (yawn….), but it is important. WTO rules mean that countries know (or thought they knew) the bound level of US tariffs, so what the upper level would be. The “Uruguay Round Bargain” would have been a much different bargain if US import tariffs in aluminium and steel (and other sectors) were bound at high levels, or unbound. If the US raises applied tariffs above the bound level, as Trump proposes, it is reneging on its side of the “Uruguay Round Bargain.” This seems unfair, particularly to do this now, two decades after the agreements went into effect. Indeed, the USA would be taking away precisely one of the carrots that made WTO membership attractive, and that made otherwise undesired and usually unpopular policy changes palatable.
Indeed, compounding the unfairness is hypocrisy, in that the US is not just expecting other countries to abide by their WTO obligations, but exceed them. That is, at the same time as the Trump Administration is announcing tariff increases that exceed the bound levels, the US Government is engaged in the annual Special 301 process on national practices in intellectual property rights, prodding countries to not just abide by but exceed their TRIPS commitments. This means that the US is declaring that it will offer less market access and predictability than what it committed to in the Uruguay Round, at the same time that it is demanding that countries offer more protection of intellectual property than they agreed to and committed during the Uruguay Round.
To be sure, if the US were to follow through and raise applied tariffs above the bound tariff levels this would appear to constitute a violation of WTO rules, and countries could pursue a legal case via the WTO’s dispute settlement understanding. In doing so they might win, securing a ruling against the US, and then, after a couple of years of consultation, hearings, and appeals, be given the right to retaliate — if the US were to persist even in the face of a ruling by the WTO’s Appellate Board. (If the US were to respond to such a ruling by removing the violating policy, no retaliation would be authorized).
But countries pursuing a case against the US may not win. In fact, and this further worsens the problem, the Trump Administration very well may be engaging in an act that appears to be a violation of WTO rules in a way that shields the US from the WTO’s dispute resolution system.
The way the US is getting around the problem of violating WTO rules but in a way that does not violate the rules is not by invoking a special safeguard or by basing this as a trade remedy in response to “dumping” by other countries (both of these appear to have been dismissed by trade officials as being insufficiently broad, the former because the tariffs could only last a short period of time and the latter because they would not be applied to exports from all countries), but rather by invoking a “national security” exemption. The “national security” clause allows countries to do things they ordinarily would be unable to do, such as raise their applied MFN tariffs above the bound level. Here the notion of forbearance is important. Countries can do all sorts of things on the grounds of “national security,” but they tend not to. In a sense, if we factor in the nearly unlimited rights given to countries if they invoke national security, and if we expect it to be used, then, in effect, no countries have bound tariffs; countries may declare their tariffs to be bound at a certain level, but if they want to raise them higher they simply invoke national security and the constraint goes away. The stabilization of expectations that are delivered by the WTO, in particular the binding of tariffs, depend on the implicit expectation that national security exemptions will be invoked only in exceptional circumstances — that, while countries can do this as they wish, that they will demonstrate forbearance and refrain from doing so. Once countries forego forbearance and begin exploring this loophole, the stabilization of expectations is gone. If the bound level is not really a ceiling, but a thin veneer that can be punctured at any time, then it loses its purpose.
Ultimately, then, the US tariff increases are worrying from a development perspective in two ways. First, they represent the world’s largest economy backing out of its side of the bargain that it entered into and that has undergirded more than two decades of economic policy and development policy making in many countries. Second, the foregoing of forbearance strips the WTO of one of its principle benefits, namely the provision of predictability and the reduction of uncertainty that comes from the system of bound tariffs.
Ken Shadlen is Professor of Development Studies in the Department of International Development of the London School of Economics and Political Science. He is currently Head of Department (September 2017-2020). Ken works on the comparative and international political economy of development, with a focus on understanding variation in national policy responses to changing global rules.
The views expressed in this post are those of the author and in no way reflect those of the International Development LSE blog or the London School of Economics and Political Science.