While the US supreme court ruling on Donald Trump’s “Liberation Day” or reciprocal tariff might have been a shocker to some, it was clearly written on the walls. The US federal court on international trade had already ruled the tariff illegal, which was later confirmed by the US high court. It was obvious that the supreme court would uphold the judgement for the simple reason that tariffs imposed under the International Economic Emergency Powers Act (IEEPA) can only be done with the blessing of Congress and not by a Presidential executive order. Trump was well aware of the possible set back. He had a plan B ready. Tariffs are not just at the core of his economic agenda. It has become a crucial political instrument, a powerful tool that he uses indiscriminately against friends and foe alike. This time though, he is using trade policy instruments over which his administration has competence. But still, there is a catch.

Trade Policy Instruments

There are several trade policy instruments at the disposal of the President. First and foremost, Art XII of the GATT which has been mirrored in Art 122 of the US 1974 Trade Act. This Art allows the US President to impose tariffs of up to 15% in response to large and serious balance of payment (BOP) deficit to an extent that the US cannot pay for essential imports or service its foreign debt. It is supposed to apply in a situation when a country cannot borrow from abroad, or there is a depletion of foreign exchange reserves or a sudden and swift capital flight. There is therefore a necessity test to be carried out to determine whether the conditions exist that warrant the invocation of the balance of payment provision. As per WTO rules, measures taken for balance of payment problems are to be temporary, transparent, and limited to controlling imports. It now begs the question whether the US meets these criteria. It looks unlikely. In fact, when invoking Art XII, the services of the IMF may have to be factored in to analyse whether BOP crisis exists. The WTO must also be notified and Members are expected to review the notification to determine whether trade restrictive measures are justified. So, while the US has already imposed the 10% for BOP reasons, there is nether predictability nor certainty as to the justification of this measure. We may expect the 10% tariff to be challenged in US courts in the days to come.

Section 232 of the Trade Expansion Act of 1962 which allows the US President to impose tariffs or quotas on imports deemed to threaten national security. This section mirrors Art 21 of the GATT on security exceptions. The President has already imposed tariffs on a number of products such as steel and aluminium under this section which are here to stay and may be extended to include other products.

The President may also initiate investigations under the WTO trade remedies provisions such as safeguard, dumping and subsidies which have been transposed in Art 301 of the 1974 Trade Act. In the case of safeguard, the investigation is meant to determine whether increased imports are causing, or threatening to cause serious injury to the US domestic industry. Likewise, investigation may target subsidies provided by foreign Governments to assess the negative impact of such measures on the domestic industry producing like products. In the affirmative, countervailing measures in the form of additional tariffs may be imposed to neutralise the impact of the subsidies. Investigations may also be initiated by the President where there is the likelihood of dumping, i.e. goods being imported into the US at a price which is less than the normal value of the products concerned. If a positive determination is made, antidumping duty may also be imposed in the form of tariffs.

It is clear from the foregoing that the US President has several trade policy instruments at his disposal. Although there are strict procedural requirements and an absolute necessity to establish a causal link between the imports and unfair trade practices by exporters, the extensive use of these instruments will add additional layers of uncertainty and impact global trade, bearing in mind that the US remains by far the largest importer of goods in the world with a value of some 3.5 trillion USD.

New Uncertainties

At the press conference following the Supreme court ruling, President Trump announced a global tariff of 10 % on all countries, in addition to the existing tariffs. In other words, if the existing tariff on garments, for example, is 12%, then the new tariff will be 22%. But hours later, he revised it to 15%, but to finally set it at 10 again. No clarity, therefore, whether it will increase to 15% allowed under Art 122 of the 1974 Trade Act for a maximum period of 150 days. He further mentioned that he will work with congress to extend it beyond 150 days. Congress may or may not agree, even if republicans are a majority. Some members of his own Party are against his tariff policy.

A number of products have been excluded from Art 122 tariffs, including pharmaceuticals, certain electronics, passenger vehicles, certain agricultural products, goods imported under the US-MEXICO-CANADA Free Trade Agreement as well as textiles products under the Central America-Dominican Republic Free Trade Agreement.

The question now is whether the agreements already concluded between the US and several countries, including the EU, Bangladesh, Vietnam, Indonesia, Taiwan, UK will be exempted? There are total confusion and countries concerned are completely in the dark. India which had announced the impending conclusion of an ambitious bilateral agreement has put on hold the negotiations. In the face of uncertainty, they prefer to await and see the next move of the US President. It is not clear what China will do. Their first reaction is that Trump must abandon his tariff policy in the light of the Supreme court ruling. The case of Bangladesh is telling. It had managed to obtain duty free treatment for a range of textiles and clothing and some other products and a tariff of 19% on the rest. In fact, Mauritius could have negotiated an agreement based on the Bangladesh model to secure dutyfree treatment for our key exports. But with the new tariff, Bangladesh exports to the US are expected to be taxed at the prevailing MFN tariff + the 10% tariff.

What about Mauritius?

Mauritius and the other AGOA beneficiaries may be in a more comfortable position. In theory, given that AGOA has been extended for one year, they will be taxed only at 10%, by virtue of being exempted from MFN tariffs. It might give our products a competitive edge if our competitors are to be taxed at MFN+10% additional tariff. On the understanding that this is the case, it’s a favourable situation we must harness to the maximum: be more aggressive in terms of marketing and trade promotion and target new buyers. Nonetheless, we should continue to explore the conclusion of a mutually beneficial comprehensive Economic Partnership Agreement with the US, either bi-laterally, regionally or continent wide, one based on solid legal foundations that is predictable and provide certainty. These are important prerequisites for trade and investment.