Most Favoured Nation Is Dead
And We Have Killed It
So the US President has set in motion his plan for so-called reciprocal tariffs.
We’ve discussed this before (See: Reciprocity for me, not you), but the crux of the proposal is that, subject to terms and conditions, the US will raise its tariff on imports from any country that imposes a higher tariff, or equivalent tax and regulatory barrier, on US exports.
But, as per Trump’s Truth Social post above, there is an escape clause:
“… if a Country feels that the United States would be getting too high a Tariff, all they have to do is reduce or terminate their Tariff against us …”
Simple.
So, assuming you’re okay with removing your own tariffs (and other measures Trump doesn’t like), how do you go about doing it?
To my mind, there are three broad categories of options: legal tariff reduction; semi-legal tariff reduction, and not at all legal tariff reduction.
But first, what rules am I talking about breaking?
Most Favoured Nation (MFN), of course!
As well as, more famously, being the name of this newsletter, MFN is one of the core principles of the world trading system and littered through the various treaties that hold it together.
Here is MFN in the WTO GATT agreement:
In summary, MFN requires that, subject to terms and conditions (as ever …), all WTO members treat other WTO members the same. By which I mean, it prevents, say, the UK from unilaterally lowering a tariff on imports from the US, but not from other countries too.
You can probably see where I’m going with this …
Anyway, back to the matter at hand: how to dodge Trump’s reciprocal tariffs.
Legal tariff reduction
This is the most boring of the three options, so I won’t linger on it for too long.
Unilateral. You could unilaterally remove or reduce your tariffs to the same level as the US’s, but do so on a non-discriminatory/MFN-compliant basis. For example, the EU could reduce its 10 per cent MFN tariff on imported cars to 2.5 per cent to match the US 2.5 per cent tariff. In this example, because the EU has reduced the tariff to 2.5 per cent for all imports there is no discrimination and all is well. You could even argue that Trump has done the entire world a favour.
Bilateral. You could negotiate a comprehensive free trade agreement with the US. So long as it covers “substantively all trade” (we’ll return to this in a second) then it is fine to do a deal that removes or reduces tariffs on imports from the US, but not other countries. For example, the EU could negotiate an FTA with the US that sees the EU reduce its car tariff to 2.5 per cent, and it would be under no obligation to offer this lower tariff to car imports from other countries.
Semi-legal tariff reduction
This is where it gets more fun, at least for me (maybe not trade lawyers …). What do you do if you kinda don’t want to breach your international obligations but you’re willing to play things a little more fast and loose in order to give benefits to Trump/US exporters but not other people? Well …
Unilateral. Here there is some evidence of countries being slightly cute. While they are obliged to apply the same tariff to all imports, no matter their origin, what if you only reduce/remove tariffs on products that originate the US? To take it a step further, what if you create customs codes that artificially differentiate between otherwise identical products that do and do not originate in the US. If this sounds a little far-fetched, may I remind you that this happened under Trump 1.0.
On 16 December 2020, in agreement with the US, the EU removed its MFN tariff on imported lobsters.
See:
The catch? The specific species the MFN tariff applies to—“Homarus Spp”—is native to North America. So, while the tariff removal is technically non-discriminatory, in reality it only applies to imports from the US (and Canada).
This time around, it sounds like this kinda approach may be adopted by India in other sectors. Is it legal? Ummm, ask a lawyer.
Bilateral. As mentioned above, for an FTA to be compliant with a country’s WTO obligations, it must cover “substantially all” trade. In practice, who even knows what that actually means? [WTO/trade lawyers, I’m sorry. You can argue it out in the comments if it makes you feel better.] So, you could possibly do a deal with the US that removes/reduces your tariffs on a select few products in order to equalise them with the US tariffs. The upside of this approach is that you wouldn’t have to unilaterally offer the same liberalisation to the rest of the world, too.
Again, there is a quasi-example of this from Trump 1.0. In September 2019, Japan agreed to reduce tariffs on US products such as pork and beef as part of a mini deal. In return, the US removed some tariffs on some Japanese imports, such as flowers, soy sauce and musical instruments.
Did this agreement cover “substantially all” trade? Ummmmmmm. Ask a lawyer.
Not at all legal tariff reduction
I don’t think we need to overthink this one. Under this approach a country would just say “to hell with my international obligations, I’m going to match my tariffs with the US’s for the US and for no one else. Whatcha gonna do about it?”
And, well, what is anyone else actually going to do about it? (In the first instance, probably ask a lawyer, to be fair …)
Non-tariff barriers to trade
As per the Truth Social post above, Trump’s team aren’t just going to be looking at tariffs. They will also be trying to put a tariff price on foreign regulatory barriers to trade.
In an accompanying fact sheet, the White House lists EU restrictions on crustations as an example of unfair trade barriers.
How shellfish.
Anyhow, if you want to get a sense of what other foreign regulatory measures the US might be looking at, may I recommend reading my favourite annual report: the USTR National Trade Estimate Report on Foreign Trade Barriers.
It includes such classics as restrictions on hormone beef, maximum pesticide residue limits, and the MFN fan favourite, EU restrictions of “traditional terms” when labelling wine:
[The observant among you will have noticed I’ve linked to the 2023 report, rather than the 2024 iteration. This is because the 2024 version had loads of stuff on digital trade restrictions stripped out to bring it more in line with Biden’s doemestic agenda and … yeah, I don’t think that’s very representative of the concerns of the Trump administration.]
Return of the Mac
With trade wars back in the news, Chad Bown and his excellent podcast, Trade Talks, is back. Follow him on Bluesky here.
Infographic of the week
There are many different ways of mapping out which countries are most exposed to Trump’s trade antics. I previously did the MAGA Index, for example. On that note, I enjoyed Simon Evenett’s ‘Red Flag’ analysis this week. As the name suggests, it uses a few different metrics to assess which countries might attract Trump’s wrath.
Read the analysis HERE.
Best,
Sam