Negotiating With Different Tariff Levels

Here is something from a speech by Commerce Secretary Wilbur Ross:

We are now constrained by two sides of a WTO pincer.

One is the most-favored nation clause, or MFN.

This rule says that we must apply the same tariff to every nation with which we do not have a free trade agreement.

The second one is the so-called “Bound Rate."

This is an upper limit on the tariffs we can charge foreign nations, even with application of MFN.

The combination of MFN and Bound Tariff Rates prevent us from having reciprocal tariffs because, in most cases, our bound rate ceiling is at or near our very low MFN applied rate, while other nations have higher levels of both.

They, therefore, have little incentive to negotiate.

And yet, countries do negotiate in these circumstances. For example, in the NAFTA, Mexico had high tariffs and the U.S. and Canada had lower tariffs, and the three countries agreed to get rid of virtually all tariffs. Zero tariffs, with reciprocity.

There are agreements in which the U.S. accepted higher tariffs from its trading partners, but I've often wondered whether that was because the U.S. wanted other things instead (e.g., labor or IP provisions).

This is one of the strangest ways of thinking about MFN and bound rates that I've ever come across. There are plenty of other statements in the speech that deserve a rebuttal, but I'll leave that for others.