Negotiating reciprocal tariffs: five guidelines to preserve the trading system

Donald Trump’s tariff policy has been a horror show, with various tariffs being imposed and then clarified, partially rescinded, paused, replaced and increased, all supplemented with threats and a hostile disregard for the rules of the World Trade Organization (WTO). The pièce de résistance was the reciprocal tariffs announced on 2nd April, which imposed 10% on nearly all partners and much higher - individually (and absurdly badly) tailored - rates on 60 trading partners. The latter element was paused for 90 days on 9th April, except on China, with which an escalating tariff race has resulted in US tariffs of 145% and Chinese ones of 125%!

The problems that these tariff policies have created for other countries (not to mention the US) are huge and very costly. They include massive policy uncertainty, a US economy with higher protection than for a century, and decisions to make about whether to retaliate and how to negotiate with Trump’s US. This blog focuses on just the last of these, which is the most immediate.

The US claims that 75 trading partners are waiting to negotiate with them to avoid the reimposition of the reciprocal tariffs. The 90-day pause gives the negotiations great urgency, although the complexity of the issues suggests that talks may well last longer. While bilateral in nature, these negotiations are critical to the future of the world trading system and governments should recognise that there is a collective as well as a national interest in their outcome.  Moreover, Trump’s preference for bilateralism suggests that the ‘national vs. collective’ dilemma will also outlast the pause period.

The point is that, quite inadvertently, Trump’s pause has taken the US a long way back towards the cardinal rule of the world trading system – non-discrimination among sources of imports with the same tariff for any given product being levied on all countries (the so-called most favoured nation clause). While this does not signal that the US now supports the rules-based trading system, it does offer a better chance to preserve that system. However, that depends on what other governments do next.

We propose five positive steps that trading partners – or at least the major ones – should take to preserve the essence of the global trading system. Collectively, these guidelines essentially apply WTO rules to these negotiations, and while the US may disdain such rules, each partner can make them a condition of their agreement.

1.         Pause retaliation
We would except China from this – no one can ignore a tariff of 145%. Retaliation is likely to be highly costly, may pose risks to the global economy and to the world trading system and may not lead to substantive changes in US policy.  However, retaliation needs to remain an option for now, so governments should ensure that necessary legal instruments are in place and start to consider what the best national and collective strategies will be. Invoking it in the future thus needs to be carefully weighed up.

2.         Make a public declaration of ensuring that bilateral negotiations with the US are WTO consistent and do not explicitly impose costs on other parties.
The bilateral negotiations with the US will be done under duress because the pause can be ended instantaneously for any country, and the Trump administration’s aggressive approach will increase the pressure. Partners must ensure that whatever they agree to is non-discriminatory or at least satisfies the (rather undemanding) WTO rules for free trade agreements. In the many areas in which WTO rules are not defined, negotiators need to ensure that outcomes are not explicitly at the expense of other WTO members.

Governments also need to recognise that having a signed agreement is not perfect protection against hostile US policies (ask the Canadians).

3.         Ensure that the outcomes of negotiations are published as soon as they are completed.
Transparency helps to keep governments honest, and the commitment to publish will help to offset any US pressure for undue favours. If partners wished to keep others informed during negotiations, that is certainly acceptable, but we suspect that committing to this publicly at the beginning of the process would seem hostile to the US and so unhelpful.

4.         Do not be pressured into joining US discrimination against China
It seems likely that President Trump will ‘invite’ partners to join the US in eroding China’s trading opportunities. Governments should deal with China according to their national interest, not as a sop to the US. It is possible that Chinese firms are going to flood other markets with goods excluded from the US and it is reasonable that affected governments should exercise their trade remedies in the usual way in these circumstances. But they should resist stretching or violating their existing trade remedy procedures, and they should steadfastly reject any suggestions that will emulate the US in hitting Chinese trade in other ways. To do otherwise would accelerate further fracturing of the world economy.

5.         Facilitate trade and negotiate through the WTO
Non-US members of the WTO should aim to liberalise trade among themselves – in WTO consistent fashion - and advocate to start a new multilateral round in which US concerns about the trading system could be addressed in a balanced way. This discussion can certainly extend to services. Recall that the Uruguay Round had its origins in trying resolve US concerns and to limit some of its aggressive unilateral policies.

The WTO rules are not perfect, but they help to achieve collective benefits by constraining behaviour at an individual country level. To reiterate: even if the US chooses not to play by them, these rules can preserve a system for the remaining 165 members of the WTO.