By Robert Romano
China ($11.2 trillion) and Japan ($4.9 trillion) combined make up 21 percent of the world’s Gross Domestic Product, according to the World Bank, having benefited from preferential treatment in global trade deals, and are still being treated as “developing” nations under world trade rules.
At institutions such as the World Trade Organization (WTO), developing economies do not have to play by the same rules on tariffs, subsidies and other trade barriers as developed economies like the U.S. The policy, called “special and differential” treatment, has been a mainstay of world trade rules since at least the Tokyo Round of GATT that began in 1973, when developing economies in the Asia-Pacific region argued for special protections. Back then, the concept was called “non-reciprocity.”
It states, “The developed contracting parties do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of less-developed contracting parties.” And specifically, that “the less-developed contracting parties should not be expected, in the course of trade negotiations, to make contributions which are inconsistent with their individual development, financial and trade needs, taking into consideration past trade developments.”
Now, more than 40 years later, President Donald Trump is saying enough is enough. In a speech on Nov. 15 following his recent successful trip to Asia, Trump called for “fair and reciprocal” trade agreements with developing economies.
Outlining the goals of his trip, Trump stated, “to finally — after many years — insist on fair and reciprocal trade. Fair and reciprocal trade — so important. These two words — fairness and reciprocity — are an open invitation to every country that seeks to do business with the United States, and they are a firm warning to every country that cheats, breaks the rules, and engages in economic aggression — like they’ve been doing in the past, especially in the recent past.”
Americans for Limited Government President Rick Manning praised Trump’s approach, stating, “President Trump is exactly right in calling for America’s trade deals to be reciprocal. The concept that America’s interests should be sidelined for the rest of the world is no longer viable or smart. To be clear, reciprocal arrangements are ones which meet the interests of both parties involved and no one should feel threatened by having honest trade deals, which benefit everyone.”
In practice, China’s entry into the WTO in 2001 has resulted in dropping its most-favored nation (MFN) average tariff rate, which applies to U.S. goods, from 24.6 percent to 9.4 percent in 2015, according to WTO data compiled by the World Bank.
Similarly, Japan offers a 3.1 percent average MFN tariff rate.
The U.S., in the meantime, offers a 1.6 percent average MFN tariff rate.
That is the very definition of “special and differential” treatment. In the Tokyo Round of GATT in 1973 the whole point of “non-reciprocity,” whereby developed countries lower their tariffs but developing countries do not reciprocate, was to help the developing economies to grow faster via exports. To help them catch up.
Well, more than 40 years later, and almost 20 years after China has joined the WTO, haven’t they caught up yet?
In the meantime, the advertised MFN tariff rates advertised do not fully take into account tariff and non-tariff barriers to trade. For example, none of that even takes consider China’s artificially low valuation of the yuan owing to the yuan’s peg below the dollar at a fixed rate.
Nor does it account for the stockpiling U.S. treasuries that similarly increase the value of dollar-denominated assets, devaluing other currencies, a practice both China and Japan — the two top holders of U.S. treasuries in the world — engage in.
These currency matters are not currently addressed by current world trade rules.
President Trump is right. It is time for reciprocal trade with China and Japan, which, besides the U.S., have the second and third largest economies in the world. Hopefully, his recent trip has begun moving the global economy in that direction. But to get a good deal for America, Trump and his trade team will need to focus not only on tariffs but other non-tariff trade barriers like currency that disadvantage U.S. exporters.
Robert Romano is the Vice President of Public Policy at Americans for Limited Government.