Legal principles on international trade and tariffs were well settled through the General Agreement on Trade and Tariffs (GATT) and the creation of the World Trade Organization (WTO). The legitimacy of these new tariff measures is doubtful, as they defy the basic premises under which GATT was signed. The WTO agreements that followed were signed when I was graduating as a lawyer. In the legal circles at that point in time, the Marrakesh Agreement and international trade were widely debated. Both GATT and WTO agreements are based on the principles of free trade. These systems of rules were dedicated to open, fair, and undistorted competition. Competition is the foremost tool for achieving efficiency, and unregulated tariff measures hinder free competition and therefore must be curtailed. A globalized economy fosters efficiency by providing equal opportunities for international business, minimizing state interference, encouraging competitive enterprises, and ensuring the free flow of goods and services. With stability and predictability on tariff and non-tariff measures, investment is encouraged, jobs are created, and consumers fully enjoy the benefits of competition.
Since GATT’s creation in 1947, there has been demonstrable evidence of tariffs (customs duties) being lowered on imported goods. For instance, industrial countries’ tariff rates on industrial goods had fallen steadily to around 4% by the mid-1990s as a result of negotiations. The WTO operates on a few basic principles, one of them being the most favored nation (MFN) treatment, i.e., treating businesses from every member country equally. Any advantage, favour, privilege, and immunity granted by one country in relation to any product from another country shall be accorded immediately and unconditionally to the like product originating or destined for the territories of another contracting state. In short, no state shall be less favorable than the other. Another principle is national treatment, i.e., treating foreigners and locals equally. In short, the product of a territory while imported into the territory of another contracting state shall not be subject to directly or indirectly any internal taxes in excess of those supplied to the domestic products. The third principle is the elimination of quantitative restrictions that prevent the creation of quotas, import or export licenses, or other measures on importation of any products into the territory or for exportation.
GATT has limited exceptions to free trade based on predictable rules that include the ability to impose anti-dumping and countervailing duties. Similarly, some restrictions may be placed to safeguard the balance of payments. It also mandates a mechanism for consultation for trade-related disputes.
USA, Canada, and China are signatories to both the 1947 and the Marrakesh agreements, and this being the legal order for international trade for the last 75 years, a sudden abandonment of these agreed principles is quite surprising. These kinds of unilateral measures grossly undermine international law and its sanctities. It is interesting to note that none of these countries have made any effort to withdraw from the WTO before making such drastic tariff measures (Article 15 of the WTO Marrakesh Treaty permits and provides a mechanism for withdrawal).
Generally, a country can impose tariffs only through a legislative process. For example, Article 265 of the Indian Constitution says: Taxes are not to be imposed save by authority of law. The same is the case in most developed jurisdictions having a rule of law. The executive arm of the government cannot unilaterally impose tariffs or taxes of any kind. However, some select countries allow the delegation of this power. The USA is one such country. However, the extent of the delegation and the way such delegated powers are to be exercised cannot be unreasonable. The sudden action of the US President arbitrarily declaring tariffs has given an opportunity to legal researchers to explore the extent of delegatory powers on the imposition of tariffs.
Apparently, Section 232 of the Trade Expansion Act of 1932, coupled with Sections 301 and 122 of the Trade Act of 1974, the International Emergency Economic Powers Act, and Section 338 of the Tariff Act of 1930, gives such powers to the US President. However, it seems unlikely that such wide arbitrary powers could be accorded to the president while completely disregarding the Congress as well as the international conventions and agreements signed by the USA.
Many argue that the imposition of such tariffs is equally disastrous for the US domestic industry on many accounts. It is protectionism and anti-competitive; it may create inflation, it may distort competition, and it may eventually force consumers to use or purchase substandard products at a higher price. Domestic protectionism is an area widely debated all through the last few decades, and economists have arrived at a consensus that any protective measure is detrimental to the overall economic growth. Is it time now to revisit this? Did President Trump and his advisors consider these aspects while taking such drastic trade measures?
From a political perspective, many have written that the Chinese economy has benefited the most under the WTO regime. It helped Chinese companies expand globally and sell their products and services freely across the globe. If we look at the dispute resolution mechanism under the WTO regime, we further observe that a significant number of cases have been filed against China under anti-dumping, countervailing, and safeguard measures. Many say that the Chinese economy is highly regulated and controlled, where there are fewer labour regulations and environmental regulations, and where global trade is aided by the government. One thing is sure: the sociopolitical environment in China gives Chinese companies an advantage compared to companies in the western world, where the cost of manufacturing is higher due to the increased compliance costs under labour and environmental laws. This advantage was hugely capitalized on by Chinese companies. They enjoy a trade surplus with most trading partners. If you look at many emerging segments, China has supremacy and monopolistic control in semiconductors, EV batteries, critical minerals, etc. Such a dominant position is not encouraging or desirable. It could affect the sovereign powers of other countries and disrupt the day-to-day functioning of the rest of the world. From a political perspective, it is appropriate to have some measures to control this dominance. After all, the sovereignty of each country is paramount, and protecting national interests is a superior obligation to international trade agreements. This leads us to think that the time has arrived for a new world order completely deviating from the WTO regime.
In short, the recent actions of President Trump and the retaliatory actions of the affected countries are a good case for students of law, economics, and politics to rethink the law and practice of international trade. The academic community all over the globe will bring up a very interesting perspective on all these aspects in the days to come.