07 June 2019
Julia Magntorn Garrett is a Research Officer in Economics at the University of Sussex and a fellow of the UK Trade Policy Observatory.
On Thursday last week (May 30) President Donald Trump threatened to levy tariffs on all US imports from Mexico. The UK should take note, as this has implications not only for Mexico, but for the UK as well.
If implemented, tariffs of 5% will be levied on all Mexican imports, starting on June 10. The tariffs will increase monthly in steps, up to a maximum of 25% tariffs by October 1, unless Mexico takes ‘effective actions’ to alleviate what the White House refers to as the ‘illegal migration crisis’. These tariffs would not only be in violation of the USA’s commitments to Mexico under NAFTA, but would also violate the USA’s WTO obligations.
The USA has at least two WTO obligations relevant to these tariffs:
Article II of the General Agreement on Tariffs and Trade (GATT) requires that its tariffs do not exceed the levels it has committed (bound) in its GATT schedule, and
Article I requires that it’s actual (“applied”) tariffs be the same for all WTO members (except where a comprehensive trade agreement lowers them).
About 75% of US tariff lines have bound, and applied, tariff rates of less than 5%.[1]Thus, a 5% tariff on all of Mexico’s imports, would breach US bound rates for around 75% of product lines. If the tariffs rose to 25% then the US would breach the bound rates on roughly 99% of tariff lines.
However, even where bound rates are not exceeded, the USA may still be in violation of its non-discrimination obligation. For example, the US bound rate on dental floss is 8.4% but its applied rate in 2018 was 0%[2]. Although a 5% tariff would therefore not breach the USA’s bound rate, levying it only against Mexico would be discriminatory. Dental floss may not be Mexico’s biggest concern, but it illustrates the point that WTO obligations concern both bound and applied rates.
If Mexico brought a case against the US to the WTO, the US would likely invoke the national security exception contained in GATT Article XXI. A recent case[3]at the WTO delivered the first verdict of when Article XXI can be applied and it was not good news for the US. The US has argued that Article XXI is ‘self-judging’, meaning that no review is needed, indeed permissible, about whether its actions are justified or not. However, the Panel ruled that the WTO does have the power to decide whether a trade restriction falls under Article XXI. Further, it stated that measures must meet a minimum standard of plausibility and had to represent “a fundamental change of circumstances which radically alters the factual matrix in which the WTO-consistency of the measures at issue is to be evaluated”. It seems highly dubious whether immigration concerns would be defensible under this article.
Although by now, the world has grown accustomed to Donald Trump’s fondness of tariff threats, last week’s announcement still caught many by surprise. Not least as it came only two weeks after the US, in an effort to get the renegotiated version of NAFTA (the USMCA) ratified, agreed to remove its steel and aluminium tariffs on Canada and Mexico, which had been in place since 2018. It also quashed any hopes that Trump’s tariff war would be somehow contained to ‘only’ China. In fact, the tariffs now proposed on Mexico would affect more trade (about $350 billion worth of US imports) than the tariffs currently in place on China (about $250 billion of imports).
The Trump administration’s systematic weakening of the multilateral trading system is well-documented and is a source of concern to the whole world. But its latest actions also show that having a trade agreement with the USA doesn’t necessarily put you in a safe zone.
In a No-deal Brexit the UK would be relying on precisely the rules that Donald Trump is currently undermining. In addition, while relying on a US trade agreement to fill the gap of lost EU trade was never plausible, the latest action surely reinforces this. Businesses need certainty to invest in tradable activities, and neither the WTO nor a trade agreement with the USA, currently provides this.
Footnotes
[1]Based on WTO tariff data at the HS 6-digit level.
[2]HS 6-digit code 330620
[3]Russia–Measures Concerning Traffic in Transit”(WT/DS512/R)
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The US action also matters to the UK because it demonstrates that the US are prepared to violate not only the WTO obligations but also their obligations under trade agreements. The US forced its NAFTA partners to renegotiate and then, when the negotiation was over, imposed these additional tariffs on one of ite members. Any country that is comptemplating entering into a trade agreement with the US should realise that once it has become dependant on the US market, this dependance can be used by the US as a means of imposing its policies upon it.