US Reciprocal Trade Act: Where’s the reciprocity?

The Trump Administration’s trade agenda of “free, fair, and reciprocal” trade may appear innocuous, but it poses an existential threat to the WTO-led international economic order.

Under reciprocity in trade negotiations, WTO signatories need to offer adequate trade concessions in order to receive similar concessions from their trading partners. Over time, the concept of reciprocity acquired a new colour and texture, but only for the good. The participation of developing and least-developed countries in trade negotiations called for a dilution or tempered understanding of this concept.

The idea of “less than full reciprocity” became an integral element in trade negotiations and development policy debates in the last few decades.

However, the revised meaning of reciprocity only permitted a differential treatment of developing and least-developed countries at the hands of the developed world; reciprocity in itself abjured any “specially negotiated deals” among developed countries inter se . The twin goals of expansion of trade and an inclusive international economic order could not have occurred if trade arrangements were only driven by self-interest.

However, some of the recent developments, especially in the US, are worrying and have the potential to undo the remarkable progress the international trading nations have made in the last seven decades.

The introduction of the “United States Reciprocal Trade Act” in the US Congress on January 24 is the most recent example of trade unilateralism couched in a fairly misleading title. The Bill was introduced by Wisconsin Congressman Sean Duffy. According to Duffy, the aim of the legislation is to give “the President the tools necessary to pressure other nations to lower their tariffs and stop taking advantage of America”.

A spreadsheet which is annexed to the Bill shows certain products where the US has lower tariffs than certain other countries. According to Duffy, foreign tariffs higher than US tariffs on any of the items in the US tariff schedule amounts to “robbery”.

Three products from India — cut granite, motorcycles and whiskey — have found a place on this spreadsheet.

How will the legislation work?

The legislation, if enacted, will permit the US President to unilaterally increase the existing US tariffs for those products where the US’s trading partners have imposed higher tariffs or higher non-tariff barriers. In practical terms, it provides the Trump Administration an opportunity to cherry-pick products of certain trading partners for differential or, perhaps, retaliatory tariff treatment.

The Bill reflects the changing attitude or a growing lack of respect amongst legislators and policymakers in key economies towards international trade rules. Since the formation of the GATT/WTO the world has largely traded on the rules-based framework provided by the multilateral trading system. Tariff concessions were based, by and large, on the principle of reciprocity.

However, the concept of reciprocity in the GATT/WTO had a different meaning and was never a bad word. It was a tool to incentivise greater trade liberalisation and achieve the overall balance of concessions.

Reciprocity did not require parity of treatment on a product-to-product basis. By narrowing the scope of this principle, Duffy’s Bill conveniently overlooks the trade concessions provided by a member, say on Product ‘X’ for maintaining higher duties on Product ‘Y’.

Also, the Bill is an obvious violation of the Most-Favoured-Nation (MFN) concept.

If the President raises tariffs on a product of a particular country as is provided in the Bill, the US would be discriminating against that country vis-à-vis others.

Such a treatment will strike at the roots of the non-discriminatory MFN-based WTO system.

Similarly, the Bill fails to distinguish between WTO consistent and WTO inconsistent non-tariff barriers. If enacted, this Bill could seek to convert non-tariff measures such as anti-dumping, technical standards and intellectual property protection regime of US’s trading partners into numerical figures which could form the basis for cherry-picking tariff treatment.

The worrying aspect of the Bill is that it completely undermines the rights granted under the WTO agreement and provides a grossly distorted idea of reciprocity.

The Bill also permits the US President to breach the sovereign commitments given by the US in bilaterally negotiated trade deals. The overall concern with the Bill is that its intent and object are admittedly a naked disregard of the WTO rulebook. It is a recipe for a tit-for-tat retaliation by other trading members as well.

Nedumpara is Professor and Head, Centre for Trade and Investment Law, Indian Institute of Foreign Trade, and Chandy is a Research Fellow.

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