The deal will spell the end of WTO’s system of setting tariffs by consensus, which has been in operation since the inception of the world body in 1995. It will usher in a new era in which Washington alone will set tariff rates.
May 8 was a dark day for the multilateral trading system. On that day, President Donald Trump of the United States and Prime Minister Sir Keir Stammer of the United Kingdom announced a “historic deal” that marked a breakthrough in Trump’s bid to reshape the global trading order and signaled the death of the World Trade Organization.
The trade pact was the first deal to endorse Trump’s so-called “reciprocal tariffs,” with the parties agreeing to keep in place a 10 percent baseline tariff — Trump’s levy on all imports to the U.S. The acceptance of the central piece of Trump’s trade policy by a major trading nation gives a boost to his effort to tax American importers for products they bring from the rest of the world. By lending legitimacy to his tariff scheme, the deal is expected to reinforce Trump’s commitment to it and potentially pave the way for its wider adoption.
Indeed, the imposition of Trump’s “reciprocal tariffs” represents a giant step into a new world in which the rule of the jungle prevails.
The WTO provides a level-playing field for all its members, both big and small, according to former Singaporean Prime Minister Lee Hsien Loong. As a result, “small countries enjoy the same market access as big countries” and benefit from the bargaining power of bigger ones. Trump, however, sees the system as one that led to the U.S. being ripped off by every country in the world. It is a myth, however, that in an international organization the U.S. helped create (and has dominated even since) that Uncle Sam has been so ill-treated even by the world’s weakest economies, such as Lesotho and Cambodia, that Trump believes tariffs of more than 40 percent are justified.
Trump’s so-called reciprocal tariffs are designed to alter all this. They ditch the WTO’s multilateral tariff-setting mechanism and replace it with a unilateral approach by Washington — i.e. dealing with other countries on a one on one basis. Bilateral talks will enable the U.S. to take full advantage of its economic might and market size. Consequently, tariffs for all the countries in the world will be set in Washington, rather than Geneva. And, by extension, America’s trade and economic ties with other countries will be based on power, rather than rules. Washington will dominate trade negotiations and even dictate terms to its trading partners while those partners will find it impossible to safeguard their interests as they are left at Washington’s mercy. This situation, in which Trump revels, is one he describes as other countries begging to make a deal and “kissing my ass.” It may well become the new normal.
In addition, if Trump pushes through his reciprocal tariffs, there will be no such thing in the world as the trade dispute settlement mechanism developed under the WTO. To be sure, Uncle Sam will always emerge as the winner in any dispute between the U.S. and its trading partners. Is it coincidental that both Trump and Biden kept the appellate body of WTO’s dispute settlement system in a state of paralysis?
The U.S.-UK trade framework also undermines the WTO’s most-favored-nation principle. The cornerstone of the multilateral trading system requires WTO members to treat each other equally. In other words, members must offer the same tariff rates to all countries. However, the new trade pact stipulates that the preferential tariff concessions that the U.S. and the UK offer to each other will not be extended to other countries. Since the deal has no way to be qualified as a free trade agreement owing to its limited sectoral coverage, the pact will amount to an act of discrimination against other members.
Every WTO member has a “bound rate,” or ceilings on its customs tariff rates. Under WTO rules, an increase in the bound rate requires consultations and agreement by all other members. Trump’s reciprocal tariffs will see America’s bound rate soar from 3.4 percent to double digits. Imposing them without the concurrence of all other members amounts to depriving them of their right to determine each other’s tariff rate in a collective manner.
In short, this move will spell the end of WTO’s system of setting tariffs by consensus, which has been in operation since the inception of the world body in 1995. It will usher in a new era in which Washington alone will set tariff rates. To the detriment of the multilateral trading system, this will in turn result in two conflicting playbooks at the WTO: While 165 members will share a common set of rules, the U.S. will play by its own, which are odds with the others.
Moreover, in what some trade observers call a “poison pill” arrangement, the U.S. deal with the UK is intended to serve as a geopolitical tool in Washington’s bid to keep China down. It obligates Britain to “work to promptly meet U.S. requirements” on supply chain security and the “ownership of relevant production facilities” in the steel and pharmaceutical industries. It also commits the U.S. and the UK to collaborate on issues such as export controls, restricting access by China to dual-use technologies, coordination on non-market policies and addressing forced labor in supply chains. All of these reflect Trump’s attempt to cut China out of important supply chains.
It is most unfortunate and deplorable that the UK found it fitting to go along with Trump’s trade policy, which is anathema to existing multilateral trading rules. It struck the deal at a time when China and the European Union were disputing U.S. actions at the WTO, and many other countries were holding out. The UK’s image as an advocate of free trade has thus been severely tarnished. As Alan Beattie of the Financial Times put it, “The promise that post-Brexit Britain would prove to be an unshakeable anchor of the rules-based international trading system looks weaker today than it did before.”
Regrettably, the often-hyped “special relationship” between the UK and the U.S. did not save the UK from Trump’s reciprocal tariffs. Rather, it was exploited by Washington to pursue its geopolitical objectives, the same as happened when the UK joined the U.S. in the Iraq war.
Moreover, the UK’s acceptance of Trump’s terms will ratchet up pressure on other countries to follow suit. It is no surprise that Trump touted the deal with London as a model of the kind of “fair” arrangement he seeks from China. In stark contrast to the UK, which acquiesced to Trump’s baseline tariff without imposing the same on U.S. goods, China insists that Trump’s reciprocal tariffs be totally scrapped. Despite agreeing to a 91 percent tariff cut on U.S. imports after the U.S. committed to do the same for China, a 10 percent duty on U.S. goods stays in place as a response to Washington’s intransigence on this so-called baseline tariff. China also seeks to remove the remaining 24 percent tariff which was paused for 90 days on May 14.
Although Downing Street congratulated itself on winning reductions to punitive tariffs on its car and steel exports, the UK is likely to end up being a loser economically. As a country heavily reliant on trade, the UK — thanks to its alignment with Trump’s trade unilateralism — has more to lose than most countries when the WTO is no longer in a position to provide a stable and predictable trading environment.
Meanwhile, the UK’s yielding to U.S. security demands on supply chains and ownership (a reference to China) will likely stymie London’s efforts to improve economic and trade ties with the world’s second-largest economy. It may even invite retaliation from Beijing if the UK follows through with those provisions.
As wartime British Prime Minister Chamberlain found out, pacification only buys respite, not respect or economic prosperity.
