Leibowitz: Taxing Imports—Are the Rules Irrelevant?

These two approaches are not irreconcilable. But the devil is in the details, and there currently scant details as of now.

There is also movement on subsidies. The US and the EU are at loggerheads over provisions in the Inflation Reduction Act that subsidize the production of electric vehicles as action against climate change. The EU claims (not without justification) that American subsidies discriminate against European competitors, in violation of World Trade Organization (WTO) rules.

In fact, the WTO rules condemn all these approaches. Two of the bedrock principles of the global trading system are 1) “most favored nation” and 2) “national treatment.”

The first principle essentially requires a WTO member to treat all other WTO members the same regarding import barriers. This entails not setting tariffs or other controls based on production methods. However, certain exceptions are allowed for such things as prison, forced or child labor, but not emissions. Likewise, some exceptions exist for tariffs. For example, the antidumping, countervailing duty and safeguard laws permit countries to impose tariffs selectively. In general, however, this discrimination is against the rules.

The second principle requires countries to tax imports and domestic producers on an equivalent basis. Ordinary tariffs, of course, apply only to imports. But subsidies, which are government financial benefits, may not discriminate against imports by excluding them from these supports. Again, there are exceptions—but no exceptions seem to apply to the electric vehicle tax credits.

So, what we have now are the two leading advocates for global trade rules discussing actions antithetical to the core principles of the global trading system. In the economic area, these moves (though far less violent) remind me of the challenge to the global geopolitical order coming from Vladimir Putin. Orders can, of course, be challenged. But any challenger has the burden of both 1) that the status quo is untenable and 2) that there is a better system that can be put in place.

The US and EU proposals on steel proceed from two premises. First, that the current situation is untenable because of “global overcapacity.” As readers will remember, I’ve pointed out before that “overcapacity” is not really the problem—it is overproduction. Second, the status quo is considered untenable because of climate change, requiring major initiatives to curb carbon emissions.

The first premise is basically a price argument—steel prices are too low. Low prices are not caused by overcapacity, but overproduction. Maybe a case can be made for setting production ceilings, which would bring supply and demand into closer balance. There are dozens of problems with this tactic, but at least it addresses the oversupply problem.

As for climate change, new methods of producing steel are clearly needed. The most effective carbon-reduction measure that has been tried is electric-arc furnace (EAF) production. Three-fourths of the steel made in the US is electric furnace production. If 90 percent of steel production were EAF, emissions would be lower. Government action would be far less effective in achieving that increase than letting the market work.

As for foreign “unfair trade” practices, the antidumping and countervailing duty laws are specifically intended to address those practices (underpricing and subsidies). Apparently, these laws don’t work very well, or there would be fewer complaints—which means we need to change them.

US hostility to global trading ratcheted up considerably on Friday, with the release of the WTO dispute settlement decisions against the Section 232 tariffs on steel and aluminum. The US government argued before the WTO panel that any actions by a WTO member in the name of national security are entirely “self-judging,” and therefore not reviewable in a WTO proceeding.

The WTO decision firmly rejected the US argument. Article XXI(b)(iii) of the General Agreement on Tariffs and Trade (GATT) permits actions otherwise violating WTO rules only in time of war or “emergency in international relations.” The panel ruled that the situation described in the Section 232 proceedings did not rise to such a level.

The US reacted with a vehement rebuke of the panel decision, and vowed not to end the Section 232 measures as a result of the WTO decision. That leaves open the possibility of reform or scrapping of the Section 232 tariffs and quotas for other reasons.

Hope springs eternal. Taking all the above developments together, both the US and the EU have parted company with the WTO. That is unfortunate, because neither the US nor the EU have developed a better system of dealing with global trade issues than the system created out of the chaos of World War II called the WTO.

Lewis Leibowitz

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