Reviewing the WTO Alternatives to Imposing Broad Tariffs

July 3, 2018

Two of the main reasons the Trump administration has given for its broad tariff scheme are China’s intellectual property (IP) practices and its steel overproduction. There is wide agreement that these concerns should be addressed, but the administration’s broad application of tariffs is not likely to change Chinese government policy, and will cause significant harm to the U.S. economy. The World Trade Organization’s Dispute Settlement Process is an alternative way to address trade disputes, rather than imposing unilateral actions, like tariffs, that damage economic growth and invite retaliation.

The Dispute Settlement Process

The dispute settlement process originated from the General Agreement on Tariffs and Trade (GATT), which the U.S. signed in 1948, and it governs the World Trade Organization (WTO). The WTO website says, “WTO members have agreed that if they believe fellow-members are violating trade rules, they will use the multilateral system of settling disputes instead of taking action unilaterally.” There are four phases to the process, and each must be completed within a certain number of days:

1. Consultation: The goal is to solve the issue without further proceeding through discussions. If 60 days pass after the request for consultation without success, the panel process begins.

2. The panel process: This process is similar to an American court. Three panelists decide the case, they consider all the evidence, and they issue a verdict.

3. The appellate process: If a nation is unhappy with the decision it can appeal to the appellate body, made up of seven individuals who serve four-year terms and broadly represent all WTO members.

4. Surveillance of the implementation: If the offending nation does not appeal or the appellate body has ruled against it, it has 30 days to present a plan and a reasonable period (an average of nine months) to change its practices.

Retaliation

If an offending nation does not conform with the decision, the nation being harmed can request authorization for suspension of concession, meaning approval to increase its own tariffs, but only enough to make up for the damages caused. This avoids unilateral punishments and retaliations, because the actions were approved by a global body.

For example, when President George W. Bush imposed steel tariffs in 2002, the WTO ruled in 2003 that they violated GATT and officially allowed the European Union (EU) the option to impose tariffs. The EU planned tariffs on goods such as citrus fruit. The threat of tariffs caused the Bush administration to end its steel tariffs before the EU implemented its plan.

Current tariff policy

The U.S. and the EU have already brought a case against China concerning its IP practices to the WTO. The claim points out that China’s mandatory requirements for the import of technology and the lack of protections against IP theft in China violate trade rules.

The second complaint of the Trump administration, that China is “dumping” steel, could potentially be addressed with an “anti-dumping duty” under WTO rules. If the Chinese government helps its steel industry by making production cheaper, enabling Chinese businesses to export their goods at below-market price, the U.S. government could impose an “anti-dumping duty” on imported steel from China. However, China could try to prove to the WTO that it is not helping its steel industry. Additionally, the duty imposed by the U.S. would have to be relative to how much cheaper Chinese steel is due to government aid.

In contrast to these small, targeted anti-dumping duties allowed under WTO rules, the U.S. has imposed broad steel tariffs on China as well as other trading partners. These tariffs have increased the price of steel in the U.S. and are hurting U.S. businesses. The EU, Canada, Mexico, Russia, India, and yes, also China, have sued the U.S. for its steel and aluminum tariffs. These cases were combined, and are still in the consultation stage, but could result in each of these nations raising its tariffs on U.S. goods with WTO approval. If this is the outcome, the U.S. would have no legal justification to raise its own tariffs in response. Regardless of legal justification, economies will not be made better off by any of these actions, because tariffs reduce trade, incomes, employment, and on net, economic output.

The World Trade Organization’s Dispute Settlement Process should not be overlooked as an effective tool against harmful foreign trade practices. When necessary, the process grants legitimacy to retaliatory tariffs, which robs legitimacy from any tariffs the nation in violation of the GATT might desire to impose in revenge. The U.S. has allies in the IP dispute against China, and even some anti-dumping duties can be defended under WTO rules. But instead, the administration is pursuing a path of broad tariffs that invite retaliation, cause economic uncertainty, and damage economic growth.


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