US President Donald Trump described his reciprocal tariffs as the “big one”. Although he habitually exaggerates his claims, the world could hardly afford to take this one lightly. His tariff policy agenda, which calls for imposing the same tariffs on other countries that they impose on the US, undermines the fundamental principles of the World Trade Organization (WTO), thus posing an existential threat to the multilateral trading system.
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The WTO’s most-favoured nation principle requires that its members treat others equally. WTO members are not supposed to discriminate between their trading partners. So when a WTO member lowers or raises a product’s import duty for any member, it must do the same for all other members. Other than some exceptions, such as arrangements for free trade blocs, a WTO member should apply the same tariff rate for all members for the same product despite facing different rates from other members for its own goods.
Given the different tariff rates WTO members apply, Trump’s reciprocal tariff policy will inevitably result in various rates for different members. Consequently, some members will be discriminated against by paying a higher duty than others when exporting to the US.
Trump’s planned reciprocal tariffs could inadvertently turn other WTO members into accomplices in contravening the most-favoured nation rule. Under American pressure, some countries could lower their tariffs for the US without doing the same for other countries. A case in point is the European Union, which is reportedly considering cutting tariffs for US car imports only to avoid tariffs.
WTO members set “bound rates” for imports, which are ceilings on their customs tariff rates. These rates were negotiated and agreed with all other WTO members. They are therefore legal commitments to the organisation as well as other members. Under WTO rules, no member is permitted to raise its bound rates unilaterally. Increasing rates requires negotiations and agreement among members.
If enacted, Trump’s tariffs would push the US’ actual rates beyond its bound rates. The US has an average bound rate of 3.4 per cent.