Most Favored Nation Rule Hurts Importers, Limits U.S. Trade

May 31, 2017

Chad P. Bown and Alan O. Sykes’s “The Trump Trade Team’s Vocabulary Problem” (op-ed, May 15), while arguing to the contrary, points out exactly why the Most Favored Nation (MFN) clause at the World Trade Organization impedes free trade, rather than fostering it.

[Wilbur Ross] May 25th, 2017 [The Wall Street Journal]

The authors admit that because American auto tariffs are so much lower than those of other countries, the only way U.S. trade negotiators can get trading partners to reduce their tariffs is by giving concessions against other U.S. industries. This, then, requires the government to pick winners and losers in our own economy. Worse yet, we must do so in the context of tariffs that we’ve unilaterally lowered repeatedly in the past. This is the reality U.S. negotiators face in contrast to the convenient hypotheticals put forward in the op-ed.

MFN also interacts with Free Trade Agreements (FTAs) in unfortunate ways. The U.S.-Mexico FTA eliminated all automotive tariffs in both directions. Mexico’s separate FTA with Europe eliminated tariffs on auto exports to the EU, and Mexico has similar deals with dozens of other countries. Because the U.S. doesn’t have an FTA with Europe, the EU collects a 10% duty on American automobile imports. These tariff differentials are $4,000 on a $40,000 car exported to Europe—far more than the $1,500 labor savings in Mexico. Unlike the simple hypotheticals posed in the op-ed, these trading inequities are a reality. MFN is of no help. If instead we could tell the Europeans that unless they drop their tariff on autos from the U.S. to our rate of 2.5%, we will raise the tariff on their autos to match their 10%. The likely result will be a 2.5% tariff in both directions. Since MFN prohibits this, it is a barrier to free trade, not a help toward achieving it, as suggested in Monday’s piece.

The U.S. has no tariffs on steel imports. China’s steel tariffs average 4%-5%. The result: Our only defense against subsidized foreign steel imports is to bring specific trade cases against individual foreign producers with the hope of prevailing years later.

But then when the U.S. does win a trade case, the country dumping the steel can often bypass the remedy. It can process the steel in a slightly different manner, allowing it to be relabeled in a product category not subject to duties; it can make transshipments to the U.S. through other countries or it can otherwise camouflage its exports.

Even though the U.S. has successfully prosecuted 152 steel cases, the dumping hasn’t stopped and there are an additional 33 steel-trade cases now pending. MFN is no help against serial dumpers.

An ideal global trading system would facilitate adoption of the lowest possible level of tariffs. In this ideal system, countries with the lowest tariffs would apply reciprocal tariffs to those with the highest and then automatically lower that reciprocal tariff as the other country lowers theirs. This leveling technique could be applied product by product or across the board on an aggregated basis. Such a modification would motivate high-tariff countries to reduce their tariffs on imports.

A second modification would be to suspend MFN rules for countries that repeatedly dump products onto the global market. If a country successfully prosecutes five or more cases against an individual trading partner for a class of similar products, then MFN should be suspended for those products lines for an initial period of five years. In sum, the existing MFN clause was intended to bar untoward behavior by importers, and it did so effectively. But it also encouraged inappropriate behavior by exporters.

The conceptual approach at the WTO of favoring the interest of exporters over countries overwhelmed by imports is rampant and unfair. The WTO’s most recent annual report laments the increasing number of trade cases as being a global shift toward more protectionism, ignoring the fact that rule-breaking behavior by exporters is the reason more cases are being filed. The WTO should be independent, not biased toward exporters as it is now.

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