Author: Jefferson Elsdon
This post (edited for publication) is contributed to our blog as part of a series of work produced by students for assessment within the module ‘Public International Law’. We offer this module in the second year of Bristol Law School’s LLB programme. It is led by Associate Professor Dr Noelle Quenivet. Learning and teaching on the module includes the use of online portfolios within a partly student led curriculum. The posts in this series show the outstanding research and analytical abilities of students on our programmes. Views expressed in this blog post are those of the author only who consents to the publication.
The above mentioned article, written while Trump was still president-elect, discusses which protectionist measures he might implement during his administration to strengthen the US economy.
This video outlines the basic concepts of protectionism. It is possible to protect one’s industry ‘as long as doing so does not violate any commitments they have made in the WTO Agreement’ (Herdegen, Principles of International Economic Law (OUP 2013) 196). Protectionist measures are heavily restricted under the WTO Agreement; if they were not so, stronger economies would make better use of them to the detriment of weaker economies.
It has been suggested Trump will impose a unilateral tax on Mexican imports after President Peña Nieto said Mexico, the US’ third largest trading partner, would not pay for Trump’s proposed border wall. However, Trump is not solely preoccupied about keeping illegal immigrants out but also bringing jobs back in as many companies have moved production from the US to Mexico for cheaper labour, leaving many American workers unemployed.
In this blog, I will discuss how Mexico can enforce restrictions to defend its car industry against two protectionist measures Trump might implement: imposing tariffs and lowering the corporate tax rate.
The principle of non-discrimination ‘ensures equal conditions in competition on national markets’ (Herdegen, Principles of International Economic Law (OUP 2013) 55). This has two ramifications:
1) The most favoured nation (MFN) clause, protected under article I GATT, guarantees that if one party to a treaty is afforded special benefits, other parties should also be afforded such.
2) National treatment, protected under article III GATT, ensures that imported like products are taxed the same as domestic products, and directly competitive and substitutable products are similarly taxed (Japan – Alcoholic Beverages II).
Imposing tariffs on imported cars might tempt American companies to move production back to the US to avoid such.
The US and Mexico are parties to the free trade agreement, NAFTA; therefore, when it comes to tariffs, the US will be subject to that agreement rather than GATT (NAFTA, article 103(1). ‘Member states can impose tariffs on goods, but only to the extent of the rate they have agreed upon’ (Qureshi and Ziegler, International Economic Law (Sweet and Maxwell 2011) 355). Under NAFTA, there are no tariffs on car imports whose parts are of at least 62.5% North American origin (annex 302.2 and article 403(5) NAFTA), therefore, if this requirement is satisfied, Trump cannot impose tariffs.
Trump wants to renegotiate NAFTA and has even threatened to walk away from it which he could do by giving Mexico and Canada six months’ notice and Congress would not be able to stop him but, even then, Trump could only impose a 4% tariff on Mexican imports, the current MFN rate in the US (article I GATT). Furthermore, Trump would not be able to impose a tax on cars produced in Mexico in excess of that imposed on cars produced domestically (article III:2 GATT).
If Trump were to impose tariffs on Mexico after walking away from NAFTA, the only realistic option Mexico would have to safeguard its economy would be to return the favour and impose tariffs on US imports. This is not to be confused with countervailing duties which can only be implemented to offset the effects of subsidisation (article VI GATT). Though this option might soften the blow, it is still unsatisfactory as Mexico is more dependent on the US than the US is on Mexico, therefore, as Mexico imports more of its goods to the US than vice versa, it will naturally suffer a greater detriment. One might suggest that Mexico could raise its tariffs to neutralise this detriment but that is not possible. Firstly, like the US, Mexico has to afford the most favoured nation treatment when imposing tariffs; therefore, it is restricted by the MFN rate current in Mexico. Secondly, as imposing tariffs is not a form of subsidisation, Mexico would not be at liberty to countervail such so as to completely offset any detriment. Regardless, even if it were possible to completely offset any detriment, no one would be better off; if anything, things would get worse as the increase in car prices would result in lower sales, a decrease in share prices and higher unemployment.
Lowering the Corporate Tax Rate
Unlike imposing tariffs, lowering the corporate tax rate is an incentive for companies to return to the US, hoping they will create more jobs and boost GDP. The problem is lowering the corporate tax rate could be construed as an indirect form of subsidisation.
Subsidies exist where there is ‘any form of income or price support … and a benefit is thereby conferred’ (article 1 ASCM). Although funds are not positively conferred, lowering tax would qualify as a form of price support as companies would be saving money, therefore, a subsidy would exist.
Again, Mexico could defend itself by imposing countervailing duties on US imports (article VI GATT). This would set off the effects of a lower corporate tax rate and hopefully persuade American companies to continue the production in Mexico as moving production back to the US would make them no better off and the cost of doing so would make them lose more money than they would save. The problem is that the US is Mexico’s largest trading partner; therefore, the Mexican economy is heavily dependent upon the US market. Although countervailing duties would set off the effects of lowering the corporate tax rate, companies in the US could earn more profit by increasing trade with markets which have not imposed countervailing duties and decreasing trade with those which have which could seriously impair the Mexican economy.
In summary, there is very little Mexico can do to defend itself against protectionist measures implemented by the US, the world’s largest economy, without harming itself.