Collective Economic Security
By Mona Paulsen (LSE Law) and Dan Ciuriak (C.D. Howe (Senior Fellow))
With a flurry of pomp and circumstance, the second Trump administration has reset United States trade with its trading partners. Based on U.S. laws that afford wide Executive discretion towards trade actions owing to concerns of unfairness, security interests, and a declared national emergency in the United States, the new Executive Order rewrites trade relationships owing to a “lack of reciprocity” and “disparate tariff rates and non-tariff barriers.”
For good measure, the new reciprocal tariff plan cautions that should any trading partner “retaliate” in response, they would face punishment in the form of an even higher or expanded scope of tariffs. Conversely, should any partner take “sufficiently” “significant steps to remedy” the alleged lack of reciprocity in their trade arrangements, they would see rewards in lower duties or a narrowed scope of existing duties.
Even though this is a dramatic shift in U.S. trade policy – it is only the beginning. Beyond the announcement of the new U.S. tariff policy remains an unspoken discretionary law that appears to be guiding the new tariff rates, namely a law that accords significant discretion to the President. The tariff rate calculations based on trade deficits with a country and then multiplied by 0.5 were necessary to keep the potential 100 per cent tariff implied by the formula (for trade deficits cannot exceed total imports) to 50 per cent. Without mention, this is the legal limit of Section 338 of Tariff Act of 1930, a never-before-used blunt tool which authorises the President to impose tariffs on duties of up to 50 per cent of the value of products, wholly or in part the growth or product of a foreign country, when the President finds that a foreign country imposes, directly or indirectly, “any unreasonable charge, exaction, regulation, or limitation” on, or discriminates, “directly or indirectly, by law or regulation or practice,” against U.S. commerce. It remains to be seen whether the President will invoke this law in the future. However, with this authority, the President could expand restrictions based on findings of discrimination and assessment of what is in the public interest of the United States.
We argue that it is time for governments to look beyond global economic governance strictly on U.S. terms. This new plan seeks to reset all multilateral trade arrangements on a bilateral, quasi-bartered basis. For most U.S. trading partners that had access to preferential schemes – for example, least developed countries in Africa under the AGOA scheme – such preferential access is now gone. The same is true for countries with bilateral free trade agreements with the United States such as Australia and Korea. For Canada and Mexico, preferential rates remain so long as the products are USMCA-compliant. Even with the carveout for USMCA-compliant products, the fact remains that Canadian and Mexican exports to the United States remain at risk of arbitrary tariffs as long as the state of emergence related to fentanyl drug smuggling remains in force. Moreover, there are consequences from trade diversion as third countries apply retaliatory tariffs on the United States. U.S. goods will seek the path of least resistance, and that will be to Canada and Mexico. The trade war will come to everyone, one way or the other.
What can governments do? Unite.
Small open economies (SOEs) depend on the rules-based trading system for growth and economic security. They are disproportionately vulnerable to economic coercion, divide-and-conquer tactics, and blocking actions to prevent progress on multilateral issues that the large, quasi-closed economies (LQCEs) may be disinclined to support. Moreover, their size difference means their ability to sanction strategic acts of economic coercion/warfare is limited, leaving them to rely on safeguard measures in response.
In a forthcoming paper, we propose that a small open economy caucus (SOEC) be formed within the World Trade Organization (WTO). In that paper, we will explain how the SOEC would preserve WTO rules for their mutual interactions (including acceptance of the alternative appellate system) and would move forward on developing a rules-based approach to harmonise regulatory and administrative approaches to addressing economic security.
But, as a first order of business, once convened, the SOEC must immediately address the reset caused by the United States. The disproportionate, arbitrary actions taken by the United States violate the most fundamental WTO commitment to offer trading partners “most favoured nation” (MFN) treatment, a rule which limits harmful trade diversion.
In simple terms, the United States wants governments to negotiate separately to strike deals in which it always has the upper hand. But in fact, WTO membership binds all economies together. Should the United States wish to renegotiate its tariffs, it can do so under WTO rules that provide for a mutual reduction in the value of trade concessions. Under Article XXVIII of the General Agreement on Tariffs and Trade 1994 (GATT), a Member seeking to withdraw tariff concessions must consult with any other Member with a “substantial interest” in such a concession. While it is true that failure to come to agreement in negotiation does not bar a Member from withdrawing concessions, our point is that collective response is inherently a core part of the multilateral trading system. All changes to tariff schedules require a certification procedure that encourages Members to come together to deliberate upon (and voice opposition to) modifications as impacting the overall balance of concessions. Under the WTO scheme, all Members with an interest in such renegotiation have the opportunity to participate because all Members have committed to share in the creation of ‘reciprocal and mutually advantageous arrangements’ – which means that a negotiation with one is a negotiation with all. This understanding is built into the WTO arrangements to which the United States agreed. And this feature must be safeguarded to preserve the predictability and security of the multilateral trading system.
A corollary of this is that an attack on one is in reality an attack on all. Already, the highly differentiated tariffs imposed unilaterally by the United States imply a significant amount of trade diversion towards the source countries that face only 10% tariffs in the United States. At the same time, a differentiated response internationally to the U.S. tariffs means a significant amount of deflection of U.S. exports towards non-retaliating economies, which could force them in turn to put up safeguards to avoid having their domestic economies flooded by U.S. exports, which as noted will be searching for the path of least resistance. No economy is isolated – firms have developed complex production networks that cross geographical and digital divides. Members must proceed to coordinate and consider collective economic development objectives in this light.
In short, we argue that, in the interest of preserving the multilateral trading system, a collective response to the U.S. reciprocal tariff is essential and, moreover, consistent with the spirit of the single undertaking that formed the WTO. The SOEC could immediately convene to cooperate on collective action – first as between themselves to address the United States’ actions and then a united front to consult with the United States thereafter. A coordinated response would represent a deviation from MFN, but such a deviation is necessary to limit the damage to global trade – the ambition of the caucus would be to open trade and to act collectively to contribute to a balanced, equitable, and expanding world economy. Should any Member seek to meet this commitment, they would be welcome to join. The SOEC would be breaking MFN to preserve it in the future.
