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Economy

Removing All the Existing Tariffs: Why is it a Big Deal?

Jul 29 , 2019
  • Zhou Xiaoming

    Former deputy permanent representative of China’s Mission to the UN Office in Geneva

When negotiators from China and the U.S. eventually meet for trade talks, they will once again be confronted with a key issue: the fate of the existing tariffs. It was a bone of contention that occupied many days and nights in previous talks.

Beijing has stressed all along that any trade agreement should be conditional on removing all the levies imposed during the one-year trade war. Without such action, it insists, there can be no agreement. In a word, eliminating all the added tariffs has been, and will continue to be, China’s bottom line in the negotiations.

However, Washington has resisted China’s prodding, refusing to roll back all the levies it has imposed on Chinese products. Instead, it remains adamant that some of its tariffs should be preserved in order to keep pressure on China to deliver its commitments. Clashes over the issue contributed to the breakdown of the talks in early May.

Why is scrapping all the existing tariffs such a big deal?

When Chinese President Xi Jinping and his U.S. counterpart Donald Trump met in Buenos Aires on December 1 last year, they agreed to end the trade tensions between the world’s two largest economies. The punitive tariffs on both sides imposed on goods worthy of hundreds of billions of dollars caused and perpetuated the trade war. For the bilateral trade relationship to return to normal, it would be both necessary and right to lift those duties in their entirety. Such a measure ought to have been part and parcel of the negotiations, a minimum goal that negotiators from both countries arduously worked for.

Conversely, preserving some of the tariffs, as demanded by Washington, would defeat the very purpose of the negotiation. Such an outcome would amount, at best, to a trade truce. It will not be a trade deal that will put an end to the trade war. On the contrary, it would signify that the trade tensions keeping many business executives awake at night linger on and that the cloud of uncertainty will continue to hang over the global economy. The effect of such an outcome is so grave that the corporate community in America, whose interests Trump’s trade war against China is supposed to protect, has voiced serious concerns. In late April, top U.S. business groups such as the National Retail Federation, the Consumer Technology Association, the Information Technology Industry Council, and the U.S.-China Business Council demanded in a letter to Trump the “full and immediate removal of all added tariffs” on Chinese goods. They further warned that anything less would be a “loss for the American people.”

Since mid-2018, the U.S. has slapped punitive duties on 250 billion dollars of Chinese products, while China has retaliated with its own tariffs on 110 billion dollars of U.S. imports. As a result, growth in global trade has slowed sharply, causing significant short-term damage to the world economy. According to an IMF report released last week, last year’s levies will result in a 0.2% hit to global GDP, and the recently threatened U.S. tariffs on Chinese goods are expected to cut global GDP growth by a further 0.3% next year. Clearly, lifting the existing tariffs, together with abandoning the possibility of more tariffs, would remove a threat to a stable world economy.

The U.S. position on maintaining some of its punitive tariffs is additionally untenable because it violates the rules of the World Trade Organization. To start with, Article II of the General Agreement on Trade and Tariffs prohibits the arbitrary increase of tariffs. In the WTO, members have ceilings on customs tariffs and these bindings are not supposed to change, except under strict conditions. These conditions do not apply in the U.S.’s case. By slapping punitive tariffs that far exceed its commitment to the tariff level, the U.S. contravenes the GATT’s principles of most-favored nation and tariff restriction. Moreover, by maintaining some of those duties, it will perpetuate the breach.

The U.S. demand is also inconsistent with Article 23 of the Dispute Settlement Understanding of the WTO. The rules require members to bring disputes to its dispute settlement mechanism if they think their rights under the WTO arrangements are being infringed. Members are banned from taking unilateral actions.

It is obvious that the U.S. approach to its trade dispute with China does not comply with the fundamental principles of the WTO, ultimately undermining the rule-base order and sidelining the WTO. Removing all the existing tariffs amounts to rejecting a deal that is inconsistent with WTO rules, thus preventing further damage to the multilateral trading system. For the U.S., it means meeting WTO obligations. For China, it means meeting its pledge to safeguard the rule of law and free trade. Failing to do so, China would risk being accused of colluding with the U.S. in undermining the multilateral trading system.

The U.S. insistence on keeping some of the tariffs alive stems from it wanting the right to implement “unilateral action” against China. Having such an “enforcement mechanism” would mean that if Washington thinks that China has breached the agreement, it can re-impose the punitive tariffs, while China would have to forgo any retaliation to those measures, including slapping tariffs on U.S. goods and challenging the U.S. at the WTO.

Preserving some tariffs would serve no good purpose, it would merely remain “a blueprint for bilateral instability”, as the Financial Times put it. Given the U.S. strategy on China, as outlined in its 2017 National Security Strategy, no one should be under the illusion that calm will prevail following the conclusion of a trade deal. In Washington’s attempt to thwart the rise of China, a deal that includes the strong-arm enforcement mechanism will provide Washington with a ready tool to revive the tariffs at will. The temptation of such a deal would be irresistible to China hawks in Washington, fueling new tensions between the two nations.

The Trump administration has demonstrated its willingness to act according to political expedience and whims. In a short span of two and a half years, it has, to the dismay of much of the international community, withdrawn many important international agreements including the Trans-Pacific Partnership, the Paris climate Accord, the United Nations Educational, Scientific and Cultural Organization, the Iran Nuclear Accord, and the United Nations Commissions on Human Rights. Whatever China does to implement a final trade deal, Washington will not hesitate to cry foul and bring back the tariffs as long as it suits its political expedience. For this reason, scrapping all the added tariffs would not just do away with an seed of discord between China and the U.S., but it would also rid the global economy of a destabilizing force. Indeed, it is a big deal for the two countries, and the world.

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