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More Tariff Increases Possible as U.S. Considers Revising WTO Commitments

Tuesday, June 23, 2020
Sandler, Travis & Rosenberg Trade Report

Recent comments by U.S. Trade Representative Robert Lighthizer that the U.S. will “seek a broader reset at the WTO” with respect to member countries’ tariff commitments suggest that more U.S. tariff increases, along with retaliatory measures by U.S. trading partners, could be on the horizon.

Current WTO tariff commitments “no longer reflect Members’ policy choices and economic conditions,” Lighthizer said during recent congressional hearings, and as a result “many countries with large and developed economies maintain very high bound tariff rates, far above those levied by the United States.” In response, the U.S. “must ensure that tariffs reflect current economic realities to protect our exporters and workers.” This comment suggests that the U.S. may seek to revoke the special and differential treatment that allows some countries to maintain higher tariffs and/or increase its own bound tariff commitments.

Mark Linscott, a former assistant USTR for WTO affairs, said in an article published by the Atlantic Council that Lighthizer could be preparing to submit to the WTO an Article XXVIII notification, “which provides unilateral authority to permanently increase tariffs following consultations with affected suppliers.” If the U.S. does not reach agreement with those countries on compensation for such a move, they “can retaliate by raising their tariffs in response.” While this provision “has been used sparingly in limited circumstances in the past,” Linscott said, current speculation “suggests that the Trump administration could use Article XXVIII on a massive scale with the general goal of raising U.S. tariffs to levels the United States views as reciprocal to high tariffs of major trading partners.”

On the other hand, Lighthizer’s remarks during the hearings suggests that, despite occasional assertions from President Trump that the U.S. should withdraw from the WTO altogether, the U.S. plans to remain a member of the organization. That apparent position sat well with the senior Republicans on the Senate Finance and House Ways and Means committees, who voiced support for continued U.S. involvement. Ways and Means Ranking Member Kevin Brady, R-Texas, said the WTO “is not perfect” but does serve “the interest of American farmers, workers, and businesses by tearing down barriers abroad, establishing rules based on our system, and forcing countries to comply through rigorous dispute settlement.” Senate Finance Chairman Charles Grassley, R-Iowa, said WTO rules on services, agriculture, procurement, and intellectual property “are vital for our workers and businesses” and “reflect decades of persistent American leadership.” He added in a recent op-ed that the U.S. response to the COVID-19 pandemic was aided by “global supply chains, facilitated by WTO rules, which made it possible to quickly source the needed components.”

However, all three also emphasized that reform of the WTO is necessary. Lighthizer called the organization “a mess” and said it needs “radical reform … in a variety of areas” because it has “failed America and has failed the international trading system.” He indicated that China should be a major focus of WTO reform efforts, noting that “an extremely large state-run economy cannot be disciplined under the current WTO rules.” Brady added that the WTO needs “new and more modern rules to tackle distortions created by state-owned enterprises, technology theft, and subsidies,” problems the U.S. has largely raised with respect to China.

Brady and Grassley said WTO members should work to ensure that dispute settlement and Appellate Body panels focus on enforcing existing rules instead of creating new ones. Lighthizer went further, asserting that the Appellate Body has been “working against the interests of the United States” and stating that he feels no “compulsion to have it ever come back into effect.” The EU and other WTO members have agreed on a temporary dispute resolution process while the Appellate Body is not functioning, and while the Trump administration has not been particularly supportive of that effort Lighthizer did indicate an openness to considering alternatives.

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