An Overreach Conundrum – Jindal Forum for International and Economic Laws
Introduction
The recent announcement of US President Donald Trump’s regarding reciprocal tariffs against the least developing countries (LDCs) and developing countries (DCs) such as India, Brazil, Canada and China have stirred the controversy that it undermines the basic principle of World Trade Organisations framework as well as the General Agreement on Tariffs and Trade (GATT) provisions. The WTO is established with a view to ensure fair trade to address the inequalities prevailing between the developing and developed countries. The WTO agreement and GATT ensures fair and equitable treatment of all member countries and promotes trade and development through its provisions regarding progressive liberalization.
The member countries at the Uruguay rounds have undertaken certain obligations to uphold fair trade and to protect the interests of the DCs and LDCs. The US imposition of reciprocal tariffs not only violates the WTO and GATT framework but also infringes the general principles of fair and equitable trade. The authors argue that the present measures are violative of bound tariffs rates agreed by US in Schedule of Concessions and the discriminatory application of these measures infringes upon the general principle of most favoured nation treatment obligation (MFN). The article further argues that even if the US is facing economic losses due to the tariffs imposed by other nations, reciprocal tariffs are, nonetheless, not valid measures without fulfilling the suspension of obligations requirement under Dispute Settlement Understanding.
Reciprocal Tariffs: Antithesis to Article II of the GATT
The United States promulgated a comprehensive plan for fair trade relationships and countering or neutralising non-reciprocal trade obligations and agreements. The aim of this plan is to reduce the trade deficit with other trade partners and to improve the economic and national security by encouraging the establishment of production units within US territory. The instance of unjust tariffs imposed against the US, according to the President, is that the US levied 5% Average tariffs on agriculture products as against 30% average tariff charged by India. The above measure of the US to impose reciprocal tariffs violates its obligations undertaken under Article II of GATT, 1994, which mandates contracting parties to accord treatment no less favourable than that they provided in its schedule of concessions. The Schedule of Concession contains the maximum bound tariff rate or maximum duties undertaken by the WTO members which can be imposed as a tariff measure on the traded goods of other WTO members and moreover, it is in the nature of concessions given to developing and least developing countries due to differentiated capacities.
The WTO Panel in EC-Chicken Cuts has laid down a three-step test to determine the violations of Article II of GATT–the panel need to ascertain, firstly, what treatment is prescribed for the product at issue under the schedule; secondlywhat treatment has been accorded to the product at issue in the applied measure at issue; thirdlywhether the outcome of the measure at issue results is in “less favourable” treatment of the product at issue when it compares to the treatment prescribed in the schedule or, more importantly, whether that measure at issue imposes more duties and condition on the product at issue than that prescribed in the schedule.
The US measure of imposing the same rate of interest as imposed by other countries towards its products prima facie violates Article II of GATT, as it breaches the maximum duties that can be imposed by it as per obligations under schedule of concessions. The US final bound tariff rate on agricultural products is 4.8%and, if reciprocal tariffs are applied by the US on these products, then, when the above test is applied, such tariffs will violate Article II. After imposition of the measure, the tariff rate for the other country would be the same on the product at issue that is imposed by it. Therefore, the treatment accorded to the products at issue will result in less favourable treatment of the products as compared to that in the Schedule. Resultantly, the tariff would exceed its committed limits. Hence, the imposition of reciprocal tariffs is violative of Article II of GATT as the tariffs are more than US obligations under the goods schedule.
The Discriminatory Imposition of Tariffs: A violation of Most Favoured Nation Principle
The non-discrimination between the countries is a fundamental principle of WTO to uphold the idea of equitable and fair trade. The Article I of the GATT provides for MFN treatment which mandates that all the measures imposed concerning any advantage, favour, privilege or immunity accorded by any contracting party should be accorded immediately and unconditionally to the like products in a uniform and non-discriminatory manner to all other contracting parties. The Appellate Body in the case of EC-Seal Products has held non-discrimination obligation as pervasive and a cornerstone of the GATT 1994. The primary issue amongst others is the discriminatory imposition of reciprocal tariffs by the US against certain contracting parties and not against all the contracting parties of the GATT.
The Appellate Body in EC-Seal Products has laid down elements to determine whether a measure is violative of MFN Treatment or not. It explained that following elements must be demonstrated to establish inconsistency: (i) Whether the measure at issue is a measure covered by Article I:1; (ii) Whether the measure grants an any advantage, favour, privilege or immunity; (iii) Whether the products concerned are ‘like product’ (products identical to products under consideration or closely resembles characteristics)’ within the scope of Article I:1; and (iv) Whether the advantage at issue is accorded ‘immediately and unconditionally’ to all like products concerned, irrespective of their origin destination.
The US measure of imposing reciprocal tariffs on the products originating from India while imposing the bound tariff rate of 4.8 % on agricultural goods undertaken under schedule of concessions on other countries is discriminatory due to difference in tariffs between India and other countries and thus measure is violative of Article I GATT. Furthermore, the present measure is also inconsistent with the above-mentioned four-limb test as the measure imposed by the US against the tariff duties imposed on the US are covered under Article I:1. The inconsistency arose because the tariffs imposed are “on or in connection with importation and exportation” and such discretionary imposition of reciprocal tariff against certain countries, including India, grants ‘advantage and favour’ to other contracting member countries. Additionally, the US reciprocal tariffs as retaliatory measure will certainly be inconsistent as it has not imposed such tariffs on every contracting party. Moreover, the measure at issue is ‘immediate and unconditionally’, as reflected in Trump’s Speech which reads that on “April 2nd, reciprocal tariffs kick in. And whatever they tariff us — other countries — we will tariff them.” Thus, the US measure is discriminatory and violative of MFN Treatment Obligation under Article I:1 of the GATT.
Dispute Settlement Understanding and Reciprocal Tariffs: A Dilemma
The Dispute Settlement Understanding (DSU) of the World Trade Organization governs the trade disputes through a dispute settlement body which is responsible for resolving disputes according to the established rules and procedure. The DSU ensures compliance with the WTO agreements and addresses the unilateral retaliatory measures undertaken by the countries beyond the WTO framework. Article 22 of the DSU provides for compensation and suspension of concessions which can be undertaken if the recommendations and rulings are not implemented within a reasonable period of time and only upon prior DSB authorization. The US has unilaterally imposed the reciprocal tariffs which amounts to suspension of concessions agreed by it under Article II of GATT. Such tariffs have been imposed without adhering to the proper procedure as it has not approached the dispute settlement body for authorization before suspending its obligations. The present US measure has also undermined the DSU framework by weakening the WTO authority and shifts the trade system towards power based rather than rule based. Thus, it not only violated the Dispute settlement understanding process but also created an arbitrary trade war situation.
Way Forward
The WTO framework is established to ensure equitable and fair trade through non-discrimination and to maintain the economic balance among least developed, developing and developed countries by regulating the conduct of contracting parties through certain obligations such as bound tariff rates. The US imposition of reciprocal tariffs in an arbitrary and discriminatory measure defeats the very purpose of the WTO framework. It mandates the countries to unwillingly lower the tariffs rates which ultimately affects their domestic industry thereby restricting the economic growth of LDCs and DCs. The imposition of the reciprocal tariff, even though the US is facing the trade deficits, is not a valid measure as it should have followed the due procedure laid down in the WTO framework for suspension of concessions.
Before imposing arbitrary tariffs, the US could have, firstly, undertaken modification of its schedules under Article XXVIII of GATT through negotiation and agreement with the contracting parties. Secondly, it could have suspended its obligations under Article II of GATT by raising the issue before DSB for its authorization and then impose such reciprocal tariffs to maintain its trade deficits as a valid measure under Article XXII of DSU. Thirdly, the US, by mutual consultation with the trade partners to which it is facing trade deficits, should have opted to settle the dispute. This is because the tariffs are not the primary cause behind these deficits, rather US’s low imports level (15.3% of the GDP) is also a cause of high tariffs levied against it. These recommendations will provide legitimacy to the US measures and will prevent the retaliatory tariffs that can be imposed upon it.
Additionally, due to the change in dynamics of geopolitics the US may face building a coalition against its unilateral actions and to potentially prevent this collective retaliation, it could justify its measures under the WTO frameworks through adopting the required procedure. Hence, the US must not impose such tariffs without following the WTO rules as the same will lead to tensions between the countries and will have a larger impact on the economic growth of the LDCs and DCs. Moreover, the trade between countries will shift towards power based trading order from rule based trading order.
Abhay Gupta and Harshit pathak are undergraduate student at Dharmashastra National Law University, Jabalpur.
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