Why Is the U.S. Renegotiating Its WTO Commitments?

(Bloomberg) -- The latest U.S. salvo against the World Trade Organization is aimed right at the core of the global trade body’s mission to keep a lid on tariffs and prevent them from gumming up global commerce. Each country that joins agrees to cap its import levies at so-called bound rates, which establishes a ceiling for the range of tariffs that nations may legally impose on each other. That means some WTO countries have higher tariffs than the U.S. and some have much lower ones, a system the Trump administration says is no longer fair. While U.S. trade officials say their goal is to reduce all WTO members’ tariffs down to zero, critics worry the plan could trigger tit-for-tat measures that disrupt trade at a time when the world economy least needs it.

1. What’s a bound tariff rate?

Bound tariff rates are the maximum duty levels that governments apply to imports from other WTO members. Each country agrees to these commitments when they join the WTO. Nations are permitted the flexibility to apply lower tariff levels to certain imports but they may not exceed their bound limits.

2. What’s the problem?

President Donald Trump and his senior aides have long complained that the U.S. is treated unfairly because it’s bound by higher tariffs and its trading partners are unwilling to reduce them. The average U.S. bound rate is 3.4%, among the lowest for major developed countries and virtually unchanged for more than a decade. By comparison, the average bound rate for India is 51% and Brazil’s is 31%. U.S. officials argue that steeper European passenger-car duties and Indian motorcycle tariffs are evidence that global trading rules are tilted against America.

Why Is the U.S. Renegotiating Its WTO Commitments?

3. Why did the U.S. agree to such low rates in the first place?

Following World War II, the U.S. and some like-minded nations sought to create a global trading system that could help foster peace and prosperity through greater economic integration. This effort spawned the General Agreement on Tariffs and Trade (GATT), which required its members to bind their tariffs at lower levels and apply them in a non-discriminatory way (meaning if you give a concession to one country, you give it to them all.) U.S. policy makers argued that decreasing tariffs would foster predictability in global trading, reduce prices for consumers and help businesses make long-term decisions about how to invest and operate abroad. In 1995, a group of 123 nations bound their tariff levels even lower when they established the WTO. The U.S. and other developed nations agreed to deeper cuts to their tariff rates than poorer nations in order to broaden the WTO’s membership and create a near universal set of trade rules. Since the WTO was formed, the value of world trade has nearly quadrupled and the real volume of world trade has expanded by 2.7 times the level from a quarter-century ago.

4. What has changed?

In a word -- China. The Trump administration argues that it is not fair for the world’s second-largest economy to enforce higher trade restrictions on U.S. exports than the U.S. imposes on Chinese goods. (China’s average bound rate is about 10%.) But the sentiment also applies to other trade partners including India and the European Union. “Current WTO rules have perversely institutionalized a system of unfair and non-reciprocal tariffs that severely penalizes American workers and manufacturers even as non-reciprocal tariffs spike the U.S. trade deficit and act as a drag on growth,” said Peter Navarro, the director of the White House Office of Trade and Manufacturing Policy.

5. Can the U.S. change its bound tariff rates?

Yes, by triggering Article 28 of the GATT, which allows a nation to select products whose tariff rates it wants to lift above the levels it agreed to upon joining the WTO. The purpose is to give countries the opportunity to address shifts in trade flows that are harming their national interests. A country must notify WTO members that it intends to raise specific bound tariff rates, provide three years worth of trade statistics for each renegotiated tariff line and encourage any nation with a substantial trading interest to begin negotiations to obtain trade concessions in return. Any member affected can ask the U.S. for compensation to address the loss of trade concessions, which are not limited to tariffs and can include non-tariff barriers such as rules covering food or animal safety and other technical regulations. Any agreed upon concessions would be granted to all other WTO members on a non-discriminatory basis.

6. How long would it take?

If the U.S. triggers an Article 28 renegotiation this year other countries would have until the end of 2020 to try to negotiate compensation for the shift. Negotiations can be extended if they cover a lot of tariff lines or if data on the imports under the tariff lines being changed is unclear. If members can’t reach an agreement on compensation by Dec. 31, 2020, the U.S. can unilaterally set its new bound tariff levels. There is nothing to stop the U.S. from imposing new bound tariff rates under an uncertified schedule. Any aggrieved nations have the right to retaliate by imposing tariffs or other trade restrictions on the U.S..

7. What does this mean for the WTO?

A broad renegotiation of bound tariffs would be the most significant shift in U.S. trade policy over the past quarter century and would have myriad implications for all of the WTO’s 163 other members. Most immediately it would put more pressure on WTO members to sit down and reach a mutually agreeable solution with the U.S. The Trump administration argues that this effort is part of the administration’s broader goal of reforming the Geneva-based trade body.

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