Lighthizer's tariff 'reset' would dramatically change the politics of US trade remedies

Lighthizer's tariff 'reset' would dramatically change the politics of US trade remedies
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Last week, U.S. Trade Representative Robert LighthizerRobert (Bob) Emmet LighthizerGOP senator warns quick vote on new NAFTA would be 'huge mistake' Pelosi casts doubt on USMCA deal in 2019 Pelosi sounds hopeful on new NAFTA deal despite tensions with White House MORE testified before the House Ways and Means Committee that other countries’ “very high bound tariff rates” are unfair to the United States. 

Lighthizer called for a “reset” of tariffs at the World Trade Organization (WTO) to level the playing field. He is right to do so. But a tariff reset would put a new spin on trade remedies like antidumping duties.

If Lighthizer were to get his tariff reset, U.S. exporters would increasingly be harassed by trade remedies abroad. That’s because countries lowering their bound tariffs rates would back fill with measures like antidumping duties. This would dramatically change the politics of trade remedies in Washington.

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First, the problem.

It’s true that many countries have higher bound tariff rates than the U.S. What does this mean? Bound rates are WTO-agreed ceilings on tariffs that countries can levy on imports. But countries don’t typically charge their bound rates. Rather, they use applied rates that are often quite a bit lower. Applied tariffs can fluctuate, but they can’t exceed the country’s bound rates. 

Applied tariffs reflect a country’s domestic politics at a given moment. Consumers, and the retailers that sell to them, want low tariffs. Exporters that use foreign inputs also want low tariffs. But industries that compete with imports want high tariffs. So do countries that depend on tariff revenue for central budget revenue, a reality across the developing world.

Take motorcycles as an example. There are different tariffs for small versus big bikes, as well as for electric ones. Let’s focus on big bikes with engines greater than 800cc. Brazil’s bound rate is 35 percent on these motorcycles, but it currently charges an applied rate of 20 percent. China’s bound rate is 30 percent, as is its applied rate. Egypt’s bound rate is 45 percent, while its applied rate is 30 percent. The U.S. applied rate on 800cc bikes, by comparison, is set at its bound rate of 2.4 percent. 

The problem is even worse in some countries. In 1995, developing countries fell short of binding all of their tariffs, leaving about a quarter unbound. On 800cc motorcycles, for example, India’s applied rate is 100 percent, but it has no bound rate. In theory, India’s tariff on big bikes could go to infinity.

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Similarly, Indonesia’s applied rate is 25 percent, but, like India, it doesn’t have a bound tariff on big bikes. Are Indonesia and India cheating? No. They joined the WTO having convinced all other members, including the United States, to let them do this. 

In short, Lighthizer actually understates the problem. It’s not just that many countries have higher bound rates than the U.S. It’s also the gap between their bound and applied rates. This gap, known as “overhang,” deters trade, since exporters abroad fear volatility in the tariff.

Why would a country want overhang? To respond to imports with tariff hikes in a WTO-legal way. It’s a political insurance policy. 

And that’s why a tariff reset will necessarily turn attention to trade remedies.

There is, in fact, a tariff reset underway. It’s happening through all of those free trade agreements that now dot the landscape of the global economy. The WTO alone covers nearly all trade in goods, however, so a tariff reset in Geneva would matter a lot. 

Suppose, then, that WTO members not only slashed all their bound rates but also agreed to ceilings on all of their unbound tariffs. U.S. exports would surely flourish, given the much greater degree of certainty they’d have about foreign tariffs. This would also promote economic growth in the countries that cut their tariffs. A win-win.

But it would not get at why these countries negotiated high (un)bound rates in the first place. Governments like having a political insurance policy. They need to be able to relieve the pressure of free trade in tough economic times. In 1995, many countries had no choice but to rely on tariffs to do this. That’s because they lacked the capacity to use trade remedies like the United States and other developed countries. 

Trade remedies include antidumping and countervailing duties, and safeguards. These, too, are political insurance policies aimed at foreign firms found to be selling below their cost, getting subsidies from their government, or slowing exports threatening to flood the domestic market, respectively. These measures were largely beyond the reach of developing countries in 1995. No longer. 

Take antidumping duties (ADs), the most widely used trade remedy. The year before the WTO debuted, India didn’t have any ADs in force. By 2018, India had become the most frequent user of ADs, besting the United States by a sizable margin. Argentina, Brazil, China and Turkey are also prolific users of ADs. Others are learning.

U.S. exporters, moreover, are increasingly being targeted by these ADs, notably in China, India and Brazil, the top filers against American firms. Others will follow too. Across the Middle East, for example, countries are building their capacity to wield ADs. Similarly, the U.S. has seen fit to call on Kenya to “establish transparency and due process obligations” on its trade remedy regime, fearful that these measures could harm the benefits of their proposed free trade deal. 

Notice the twist here. Washington typically discusses trade remedies in the context of the U.S. on defense against China, for example. This is the U.S. worried about trade remedies on the offense, looking to strike down misapplied antidumping duties, in particular. 

Lighthizer is right to propose a tariff reset at the WTO. The U.S. will find that it has allies on this. 

But perhaps the most interesting thing about discussing a tariff reset is that one would change the debate in Washington over trade remedies. This debate, like the bound tariff rates that Lighthizer bemoans, is out of date. The U.S. is increasingly on the offense against the trade remedies imposed by other countries. This is what the future holds if talk of a WTO tariff reset gains political momentum. 

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University, a nonresident Senior Fellow at the Atlantic Council, and host of the podcast TradeCraft.