sunset from behind the wire

sunset from behind the wire

Monday, December 30, 2019

Most Favored Nation?

It's a trading status that traditionally rewards mutually beneficial relationships with a bonus consisting of the best trading terms, the fewest trade barriers or import quotas - if any. Endowing each other with these benefits was the key reason that the World Trade Organization was founded. 

If you look at the map (right), you'll see that the members are represented by the color green, the blue states are members which are part of the EU, yellow are observer states and the few red dots (places like North Korea, Palestine, Turkmenistan, etc.) are not members.

Why is there a WTO again? Oh yes, everybody treats everybody else equally and it's a brave new world. Except that's complete hogwash. 

The WTO is a paper tiger, and I'm being very kind. More realistically, it's a Potemkin Village.

What would be the consequences for US tariffs if the United States withdrew from the WTO during President Trump's second term? The president has the legal authority to pull the United States out of the organization without congressional approval.

On the orders of the president, the administration drafted a bill—entitled the United States Fair and Reciprocal Tariff Act—that would do away with the most-favored nation (MFN) clause, which requires the United States to treat all WTO members equally in terms of the import duties applied to their goods. Such a step would allow the president to increase tariff rates, even rates “bound” (fixed) in previous trade negotiating rounds. Given that the president withdrew the United States from the Trans-Pacific Partnership (TPP) and from the North American Free Trade Agreement (NAFTA),  now replaced by the US, Mexico and Canada Trade Agreement (USMCA), the WTO may be the next domino to fall. 
Context and Precedent: Congress last set rates of import duty in the Tariff Act of 1930, in what is commonly known as the Smoot-Hawley tariff. But from that point on, the president has, through executive order, reduced import duties—first as a result of reciprocal trade agreements reached in 1930s, then through the lower tariffs negotiated at the first General Agreement on Tariffs and Trade (GATT) meeting in 1947 as well as subsequent multilateral rounds - etc. So, in a nutshell, Congress ceded that power to the president.
The World Trade Organization became a weaponized trade tool utilized by China and Old Europe, most notably, to cheat the United States. President Trump changed that in fundamental ways with bi-lateral or smaller multi-lateral trade deals (such as USMCA). Essentially, whatever value the World Trade Organization may have had is now passed. It's time for the US to officially remove itself, and let the rest of the world do whatever it would like. I think that you'll see this happen after President Trump's re-election in 2020.