The New US Trade Measures and their Consequences

Donald Trump has started implementing his trade policy and is suggesting that there is much more to come.  How will this unfold and how can other countries be expected to react? What will this mean for the future of world trade?

The Trump Trade Agenda

Our New York office has published a first blogpost describing the US trade action so far.  The America First Trade Policy issued on inauguration day mandates nine government agencies to prepare reports and propose action to address a variety of perceived trade problems by 1 April. This has not delayed more immediate tariff action as the press has amply reported.

The US Administration has relied, at least initially, on an existing authority from Congress to respond to "national emergencies" with sanctions, to impose tariffs immediately rather than after recourse to traditional "trade defence" type measures based on the Trade Act that require an investigation to be conducted, and measures designed, to respond to identified problems in a proportionate manner.  As our New York office points out, the declarations of emergency needed to justify such action can be terminated by Congress, but this appears unlikely.

As we noted in our earlier blogpost, US tariffs are bound at the WTO and cannot simply be increased on a whim.  Under WTO rules to which the US has agreed. changes can be made but need to be negotiated and defensive action is authorised only after investigations complying with agreed standards have been conducted to establish violations of rules and consequent injury.  However, the current US administration is ignoring these rules.

The Immediate Responses

Trade partners of the US are perplexed about the intentions and objectives of the new US trade policy and are uncertain how to react.  They express a willingness to negotiate but most realise that they cannot propose concessions in exchange for a simple return to legality, especially when they do not know what concessions are being sought.    

Canada, Mexico and China were the first to announce retaliatory measures.  The announcement of retaliation by Canada and Mexico, together with other sweeteners, have led to the US tariffs being suspended for a month, allowing negotiations to take place.  China has also retaliated and commenced WTO action but there is no sign of any suspensions or negotiations.

Subsequently, the US has continued with the implementation of its new tariff policy by replacing the Section 232 Trade Act tariffs imposed by the first Trump administration on steel and aluminium with more wide-ranging and higher tariffs on all steel and aluminium imports without providing for exemptions. These will apply from 12 March 2025 to the whole world, including in particular the EU and the UK.

The EU has decision-making procedures that are normally rather slow and cumbersome but has some immediate options available to respond to the latest tariffs.  When the first Trump administration originally imposed duties on steel and aluminium on 8 March 2018, the EU applied its Enforcement Regulation and relied on Article 8 of the WTO Safeguards Agreement to impose rebalancing duties, including on a series of "iconic" US goods such as Harley Davidson motorcycles, Levi jeans and Bourbon whiskey relatively quickly (by EU standards) on 20 June 2018.  These retaliatory duties were subsequently suspended in 2020 when the US granted exemptions to EU steel and aluminium under tariff rate quotas. As part of that deal, the EU and the US agreed to enter into negotiations for a Global Arrangement on Sustainable Steel and Aluminium to be concluded within two years. Those negotiations failed but the exemptions and suspensions were prolonged at the end of 2023.

Importantly, the EU suspensions of its retaliation were time-bound, and the current suspension ends on 31 March 2025.  Since the new US tariffs on steel and aluminium effectively remove the tariff rate quotas granted to the EU, all that is needed is for the EU to decide not to prolong the suspension for the retaliatory duties to re-enter into force.

The UK was applying EU law when the rebalancing measures against the US steel and aluminium duties were introduced and continued to apply them following Brexit.  Instead of temporarily suspending those measures, as had the EU, the UK terminated them.  However, given the broad powers contained in the UK Taxation (Cross-border Trade) Act 2018, they could be re-imposed rapidly.

Other countries around the world (the most important of which also had various forms of exemption from the earlier measures) can be expected to also retaliate against the newly reinforced US tariffs on steel and aluminium.

Further Possible Developments

Unless there is domestic resistance to the use of emergency powers to achieve trade and other objectives in the US, there will be many more similar measures imposed, and many other countries will be bound to retaliate as well as to attempt to negotiate.  They can of course resort to WTO dispute settlement and would often be guaranteed to succeed in their complaints, but the US is unlikely to be deterred.

One approach that we mentioned in our earlier blogpost and still appears to be planned is for the US to adopt some kind of “reciprocal tariff” that would allow the US President to increase the tariff on any imported good from a third country to equal that imposed by the third country in question on the same good when imported from the United States.

An instrument that is likely to be deployed in the EU to respond to expected tariffs from the US is the Anti-Coercion Regulation that allows investigations to be opened by the Commission into attempts at economic coercion by third countries against the EU and its Member States.  As described in some detail in another earlier blogpost, the Anti-Coercion Regulation sets out a multi-stage process that can lead to the adoption of various forms of "response measures". 

Under the Anti-Coercion Regulation, an investigation is opened and conducted by the Commission, which may then propose to the Council the adoption of a decision determining the existence of a situation of economic coercion, requesting that country to cease the economic coercion and, if appropriate, compensate for the injury that the EU or its Member States (including their economic operators) incurred.  The ball is then passed back to the Commission to conduct negotiations and possible international dispute settlement to achieve a resolution of the problem.  If this does not lead to a satisfactory result, the Commission can adopt "response measures" following a relatively rapid "examination procedure".

These response measures must be appropriate and proportionate to the economic coercion found and be drawn from a relatively long list of possibilities set out in an Annex that include:

• The suspension of any applicable tariff concessions;
• Restrictions on access to EU-funded research programmes;
• Import and export restrictions;
• Measures affecting trade in services;
• Measures affecting foreign direct investment;
• Restrictions on registrations and authorisations under EU's sanitary and phytosanitary legislation;
• Restrictions on intellectual property rights protection;
• Restrictions on participation in public procurement tender procedures;
• Restrictions on registrations and authorisations under EU's chemicals legislation; and
• Restrictions on access to EU's financial market.      

The breadth of these retaliations has led to speculation that if retaliatory tariffs were imposed on goods from the EU (or a Member State) to prevent the enforcement of EU competition rules or digital services or data protection legislation, for example, the EU could respond by suspending certain intellectual property rights.   

Such "cross-retaliation" could significantly broaden the trade war, especially if it were to be emulated by other countries around the world.  As we commented in our previous blogpost, developing countries, in particular, often have limited means to retaliate with tariffs against a powerful trading partner but much greater scope to do so with restrictions on services and intellectual property rights.

It is clear that the trade war has only just begun.  It appears to be the objective of the new Trump administration to fundamentally change the basis on which trade is conducted to the advantage of the US.  It seems inevitable that this will mean less trade and impose economic costs. The question is where they will fall?