Reciprocal Tariffs under the World Trade Organization

Introduction

The World Trade Organization (WTO), formed in 1995, plays a crucial role in shaping global trade via its agreements and tariff policies. Being a global organization responsible for setting rules for international trade, it performs numerous roles such as regulation of trade barriers, setting rules for governing international trade, providing a platform for negotiations and helping states resolve disputes among themselves.

As India and the United States of America have been signatories to the World Trade Organization, the policies pertaining to tariff among both the countries is governed by the WTO Agreements among which the General Agreement on Trade and Tariff (GATT) which came into effect in 1994 plays a major role.

Policy of Reciprocal Tariffs

As an instrument of international trade, reciprocal tariffs refer to a policy wherein tariffs are imposed by one country on goods imported from another country at the same rate at which another country imposes on its exports. Therefore, when the policy of reciprocal tariffs is adopted by one country, its aim is to match the tariff rate which has been placed upon its own exports. The threat of reciprocal tariffs can also be used as a negotiating tactic to encourage the other side to come to the table and discuss tariff reductions.

How Reciprocal Tariffs Function

1. Policy of Most Favoured Nation (MFN): Based upon the principle of equal trade treatment to all countries under Article 1 of the GATT, the members of WTO are obligated to provide the same trade benefits and advantages to all the members of WTO unless any specific exception is applicable. For instance, if any tariff has been applied by the US upon Indian exports, India can also reciprocate the same in order to retaliate.
2. Anti – Dumping Safeguards: Anti-dumping is a trade strategy in which a business sells a product to a foreign market at a price that is less than its typical value, frequently falling below the production cost. As per Article XIX of the GATT Agreement on Safeguards, the U.S or India have been permitted to impose higher duties but only as a response to the actual surge in imports which pose a serious threat to the domestic industry. Such an action also needs to be justified under the GATT or the Agreement on Subsidies and Countervailing Measures (SCM).
3. Retaliatory Tariffs and National Treatment: The principle of National Treatment under International Trade Law stipulates that imported goods in an economy should not be treated any inferior to the domestically produced goods, thereby forming a parity between both. In accordance with Article III of GATT, it has been stipulated that imported goods should be treated in equality with the domestically produced goods once they have entered the domestic economy. Retaliatory measures may be adopted keeping in mind the dispute resolution rules of the WTO. For instance, India had resorted to counter measures against the tariffs applied by the USA on steel and aluminium in 2018.

The reciprocal tariffs can be challenged as per the WTOs regime wherein a country that has been affected with the higher tariffs can file a complaint with the WTOs Dispute Settlement Body (DSB) under the Understanding on Rules and Procedures governing the settlement of disputes. For instance, the Indian Government had filed challenges against US Tariffs on aluminium and steel under the World Trade Organization in 2018 stating that there was a form of protectionism instead of legitimate measures of national security.

Exceptions to WTO Rules

Although the WTO seeks to encourage equitable and unrestricted trade, there are specific exceptions within its regulations that permit member nations to implement actions that could be seen as breaches. These exceptions are typically designed to tackle particular policy goals or unusual situations. Below are some of the main exceptions:

1. National Security – Provided under Article XXI of the GATT, the United States has provided legal justification to its tariffs imposed on Aluminium and Steel by stating that it is necessary to ensure security of the nation.
2. Retaliatory Tariffs – They are the tariffs authorised by the WTO to be imposed upon another country once one country has failed to compensate for the damage caused due to its policies and taken unfair trade actions. The aim of these tariffs is to provide a level playing field and encourage the delinquent country to comply with the regulations in order to promote free and fair trade.
3. Resolution and Enforcement – In case the WTO has favoured one country in accordance with its rules, the other country has the choice to either remove its tariffs or to negotiate compensations or to face retaliatory measures. For instance, the EU had imposed tariffs on goods imported from the European Union after winning the case on Boeing Subsidies.

Conclusion

WTO as a regulator in international trade is the nodal agency for regulating the trade relations between India and the United States of America. Therefore, all the reciprocal tariffs and retaliatory measures must be compliant with the norms of WTO and stand the scrutiny of its provisions. Moreover, the idea of imposing reciprocal tariffs or retaliatory measures is to ensure that a level playing field is created which disrupts the economic relations between any two nations. Therefore, such measures should also be used as a deterrent to ensure that any two nations do not violate the terms of WTO and abide by its provisions.

Moreover, the enforcement of WTO norms is slow and requires participation of both the parties. Therefore, international politics and relations can play a massive role along with political negotiations and reforming trade policies in order to suit the demands of both nations and promote amicable relations in trade between nations. However, the possibility of reciprocal tariffs being used as a negotiating tactic or in response to specific trade actions cannot be entirely ruled out.

King Stubb & Kasiva,
Advocates & Attorneys

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