The US plan to impose reciprocal tariffs is a game changer. If you ask The Economist, Trump’s tariffs “really mean chaos for global trade”. We submit that, if managed well, the opposite could be true: a new balance in global trade and the revival of the World Trade Organization (WTO). We understand that the trade dimension is just one part of a broader global discussion. Yet, we consider that trade policy is one of the key bricks needed to rebuild the wall of global cooperation.
So far, Trump tariffs targeted specific countries (China) or products (steel and aluminium). These tariffs were enacted to protect an industry at home, or as leverage to change something abroad. They were temporary, ad hoc.
Tariffs under the proposed US reciprocal tariff plan, on the other hand, will presumably hit all major trading partners and all products. Because they are expected to be used as a much-needed source of revenue, they are also likely here to stay. The US tariff on, for example, cars would no longer be 2.5% for everyone (except countries with whom the US has a free trade agreement). Instead, the US car tariff would mirror whatever tariff a trading partner imposes on US cars. Today that means 10% for European cars, 15% for Chinese cars and 75% for Indian cars. These variable rates for one and the same product depending on origin would fly in the face of a key principle of the global trading system that has been in place for close to 80 years: the so-called non-discrimination or Most-Favoured Nation (MFN) rule.
Chaos for global trade, and the end of the WTO? Perhaps, but it does not have to end this way.
Within days of the announcement of the US reciprocal tariff plan, nations scurried to pledge tariff reductions to avoid being hit by President Trump’s reciprocal tariff. Both India and the EU are looking into lowering their tariffs on cars. But there is a wrinkle: unlike the US, the EU remains deeply committed to the WTO. So technically, if the EU reduces its car tariff from 10% to 2.5%, it should grant this benefit not just to US cars but to cars from all WTO members including, for example, Chinese cars. For the EU and most other countries willing to lower their tariffs, this creates a serious free-rider problem. China, in the case at hand, would benefit, without giving anything in return.
What can be done?
Instead of hurried, bilateral discussions between the US and its major trading partners such as the EU, aimed at avoiding the immediate imposition of a US reciprocal tariff, all major trading nations ought to sit around the table and reassess the balance of trade concessions agreed upon most recently--which was more than 30 years ago in the lead up to the creation of the WTO. Though trade concessions were considered to be on balance “reciprocal” in 1994, the world has dramatically changed. Yet, no update or re-adjustment to this balance has happened since.
It is not just President Trump who seeks reciprocity. The WTO itself was fundamentally built on a reciprocal balance of trade concessions. It was only once all WTO members considered the exchange of trade concessions (including non-tariff concessions such as protecting intellectual property rights and special considerations for developing countries) to be sufficiently reciprocal that MFN obligations kicked in. MFN does not operate in a vacuum. It is preconditioned on reaching a state of rough equivalence in trade concessions, understanding the different economic status of various countries. But once this reciprocity is seriously out of kilter, applying MFN no longer makes sense.
The problem is that many consider the WTO to be hopelessly blocked from reaching a new consensus on even small items, much less a fundamental rebalancing of the terms of trade.
The good news for the WTO and for President Trump is that a procedure already exists that permits a single country to trigger a re-negotiation of current tariff levels. It is Article XXVIII of the General Agreement on Tariffs and Trade (GATT), pursuant to which any WTO member can unilaterally change its tariff commitments, subject to negotiating compensation with those countries that are most affected by the tariff change (in effect, countries representing 10% or more of imports). Although the US has not triggered Article XXVIII, that is exactly what it is doing in practice: telling other nations that it wants to pull back US tariff commitments and replace them with a new balance of concessions.
Instead of purely bilateral discussions with (and retaliation threats against) the US, the EU and other major trading nations should coordinate a broad-based Article XXVIII re-negotiation process. If managed properly, this could, in effect, turn into the biggest tariff negotiation round since the creation of the WTO in 1994, with the potential to create a fairer and more enduring result.
These tariff negotiations will likely differ from those in the past in one key aspect: tariffs could not only go down, but they could also go up (as against all WTO members or only some). Indeed, the US reciprocal tariff plan calls for putting a tariff on imports not just to match the tariffs imposed on US products abroad, but in addition, to add to that tariff the cost of certain non-tariff barriers. To do this, non-tariff barriers, other forms of discrimination, subsidies and regulations or state interventions that put foreign producers or products at a disadvantage will be “priced” and those prices will translate into tariffs on goods exported to the US. Imposing such “priced-in” tariffs would in most instances lead to the US raising their tariffs, rather than lowering them.
The difficulty for the WTO is that it was created on the assumption that economic models (even that of China) would converge around the Washington Consensus, including its principle of reducing trade restrictions, privatizing state-owned enterprises, and abolishing barriers that restrict competition or foreign direct investment. Under this model, tariffs should only go one way: down.
We are no longer living in such a world. The reality today is that the political and economic organization of states varies dramatically and that many or most of these differences are here to stay. To enable trade between such differently regulated states, interface mechanisms are needed. One such interface is to put a price on the major differences. Think of the competitiveness impact of certain forms of state intervention or regulation, or the lack thereof, including major differences in social or environmental regulation, competition policy, or even free speech. These are all sensitive topics that a world trade organization should not attempt to iron out. What it should do instead is bring countries around a table to discuss what it would take to have a roughly balanced trade regime (starting with reciprocal tariff levels) that takes these major differences into account. This “tariffication” of the cross-border spill-overs of major divergencies cannot and should not be calculated to precision. Political agreement on an overall, reciprocal balance would suffice. Defusing major divergencies between the US and China, the EU and the US, the EU, the US and India, and others, by putting a “tariff price” on them would also take the sting out of national security exceptions and even trade remedies, which are now being used (often unsuccessfully) to address problems that go beyond what these safety-valve instruments were designed for.
Such a re-set or de facto new “round” of tariff negotiations would take some time. But under the WTO rules, it cannot be blocked by any one country. When Article XXVIII negotiations over a tariff line fail, the country proposing the change can implement it unilaterally. In response, the major exporters of the product concerned can withdraw equivalent concessions. Agreement or no agreement, reciprocity is the rule. The US may, at first, prefer to re-set reciprocity through bilateral negotiations. With time, it may realize, however, that the WTO is ultimately built on the same reciprocity principle and that working within the WTO structure would enhance the value of bilateral deals by multilateralizing and stabilizing them under one roof.
The WTO leadership has a key role to play. The Director-General of the WTO should immediately start consultations with WTO members to mobilize the energies of members with a view to address in an orderly fashion a number of imbalances which have triggered the radical reactions of the new US administration. The EU faces major challenges similar to those that motivated the US to push for a new reciprocity approach. Those imbalances need to be urgently tackled after 30 years of immobilism. It should be agreed that discussions and negotiations amongst members should be finalized within a limited horizon of 6 months. If no agreement is reached, individual WTO members can unilaterally modify their tariffs in line with GATT Article XXVIII.
There are several other very important issues that WTO members need to address, including trade and inclusiveness, the rise of industrial policies and subsidies and improving the deliberative function of the WTO. It would be impossible to practically deal with them during such a short period of time. Yet, a revitalized WTO following a positive outcome on reciprocal tariffs would create the conditions for better international cooperation on these matters too.
If this could materialize, instead of chaos for global trade and the death knell of the WTO, Trump’s reciprocal tariff plan could be a boost for WTO reform and the creation of a new, fairer balance in global trade.
Hervé Jouanjean, former Director-General at the European Commission and Senior Trade Expert at Cassidy Levy Kent (Europe)
Jennifer Hillman, Professor from Practice, Georgetown University Law Center and former US Ambassador, General Counsel at the USTR and Member of the WTO Appellate Body
Joost Pauwelyn, Professor, Geneva Graduate Institute and Partner, Cassidy Levy Kent (Europe)
(This essay was written in the authors’ personal capacities)
