MFN

Revoking Normal Trade Status

Revoking Normal Trade Status

In short, there are at least three ominous implications of revoking PNTR.  First, the United States would be reversing a bedrock principle of the global trading system—to avoid discrimination.  While regular readers certainly know that the system has been under tremendous pressure, it has continued to function as a brake on all kinds of otherwise possible unilateral actions by all World Trade Organization (WTO) members.  This brake will be gone if the US explicitly opts for discrimination. Second, while some supporters of revoking PNTR seem to suggest that this action will be limited to China, once the brake is gone, it is gone for all.  There is little reason to think that others will not opt to do something similar, including against the United States.  Hence, businesses should be extremely concerned that their “foreign” products and services in markets around the world will suddenly be targets for all sorts of actions, starting with unilateral adjustments in tariff levels and moving towards outright discrimination in treatment over foreign products in markets.  Some could argue that firms already face a range of discriminatory actions in different markets, particularly with inconsistent application of non-tariff measures, unequal licensing requirements, or generally unfair trade treatment.  However, these measures are actually quite restrained compared to what will happen in the total absence of MFN. Third, as always, the worst damage is likely to be felt by firms and communities that are already at the margins.  Poor developing countries and small firms are going to be badly hit by adjustments to the global trading rules.  Without a strong network of trade agreements in place to help cushion the blows, sudden adjustments in tariff rates, differentiated customs treatment, denied access to services markets, rejections of licenses or qualifications, and restrictions on movement of business people will make trade increasingly difficult or even impossible across borders. 

Russia’s Not-Normal Trade Relations

Russia’s Not-Normal Trade Relations

Nevertheless, the basic point still stands—products from the WTO are meant to be given consistent tariff rates at the border. Thus, a member with an MFN rate of 10% on eyeglasses can collect 10% in tariffs from every incoming WTO member firm at the border for each pair of glasses. If the eyeglasses are coming from a non-WTO member, then there is no MFN obligation. Members can apply whatever tariffs they want to glasses from non-WTO members. The pool of non-members is steadily shrinking with most remaining outside the WTO currently involved in accession negotiations. Belarus is not yet a WTO member, meaning that members can quite easily apply whatever tariffs or measures they want against Belarusian eyeglasses or any other product. Governments can be quite particular about products that come in from across borders. Thus, although they have agreed to non-discrimination and MFN treatment in the WTO, they do not give such consent in all circumstances. There are a number of exceptions clauses within the WTO that can be triggered, such as in times of crisis. The WTO has an explicit set of national security exceptions. The original GATT was formed in the aftermath of World War II and officials were extremely conscious of trade concerns in times of direct conflict or war. They put into place Article XXI on security exceptions that includes a provision to suspend application of the rules “taken in time of war or other emergency in international relations.” For a long time, the use of national security exceptions remained limited. They were assumed to be for use by direct combatants in war situations. But the norm against invoking these exceptions has sharply weakened in recent years. Some WTO members have now declared that they will apply national security exceptions to revoke Russia’s MFN treatment. In other words, they have reserved the right to make unilateral changes in their treatment of Russian imports such as imposing an across-the-board 35% tariff on all products. The removal of MFN thus far has largely been focused on tariff changes, but discriminatory practices could be taken across a range of possible trade commitments.

Trump’s Unilateral Trade Toolkit

Trump’s Unilateral Trade Toolkit

Finally, the system brought welcome stability, more certainty and lower risk. The GATT/WTO process captured the highest level of tariff on each product that could be charged. Many members applied a lower tariff rate at the border, but firms can be confident that tariffs will not rise above the rates locked in or “bound” at the GATT/WTO. Trump’s plan would upend all of this. Firms could be faced with a shifting and complex set of potential tariffs with no certainty on the top level of tariffs that might be charged at any time. To see how this matters it can be easiest to just view imports first. The table manufacturer can now make tables knowing that the wood for legs will face a consistent tariff no matter where they are sourced. The screws can be imported from anywhere, with the same tariffs in place. But if Trump gets his matching tariff scheme, the table company would need to know exactly where the legs are coming from, as the tariff on wood could vary widely from WTO member to WTO member. Screws from one country might arrive without any tariffs at all, while the supplier the table firm has traditionally used would need to pay 10% tariffs. But the basic point is that the GATT/WTO system brought welcome stability and consistency to most trade. Trump’s proposed action would upend this system. Firms would suddenly have to grapple with inconsistent and discriminatory tariffs. The complexity of managing trade and the costs associated with ensuring compliance would skyrocket. Smaller firms, especially, would be at a serious disadvantage.