Trump’s Game of Tariff
On the day of his inauguration, the United States President Donald Trump has stated that he was going to prioritize America, and that “Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families.’’ These caviling words say a lot on where the wind is blowing politically in the US and around the world.
Following his statement, President Trump has made several trade strategies. One of them is to withdraw the US from the Trans-Pacific Partnership (TPP). TPP, dubbed as a ‘’high quality, twenty-first century’’ agreement encompassing twelve countries, has been signed last February 2016 in Auckland, New Zealand. To date, it has not yet been entered into force.
Before his inauguration, prior to stating the US’ withdrawal from the TPP, President Trump also made other trade actions aimed at car manufacturers located outside the US. He threatened German car manufacturers with an increase of 35 percent tariffs to enter the US market, due to their failure to produce more cars domestically.
Like most of other car manufacturers, German car manufacturers choose to manufacture their cars in Mexico, as it offers lower taxes and wages compared to the US. The North American Free Trade Agreement a trade agreement between the US, Canada, and Mexico, has eliminated most tariffs on trade including tariffs on automobiles. NAFTA has been implemented since January 1994, and aims to encourage economic activity between the three countries. However, President Trump stated that he will begin renegotiating the NAFTA with the leaders of Canada and Mexico.
Although at the time being President Trump has only intended to increase the tariffs, the probability that it happens remains real. Based on the Harmonized Tariff Schedule of the United States 2015, the tariff for motor cars and other motor vehicles principally designed for the transport of persons (including station wagons and racing cars) is 10 percent. The question is, is it possible for President Trump to legally increase the tariff up to 35 percent?
All of the World Trade Organization (WTO) members, including the US, have committed to cut their tariffs. After the Uruguay Round negotiations in 1994, most of the tariffs imposed by developed WTO members are bound to certain levels that are difficult to raise, known as bound tariffs. Nevertheless, Article XXVIII of the GATT 1994 allows WTO members to modify or withdraw from the agreed bound tariffs through negotiation and agreement with other related WTO members first. In a case where a WTO member decides to increase the tariff exceeding its bound tariffs without undergoing any negotiation and agreement, such WTO member might violate Article XXVIII of the GATT 1994 on Modification of Schedules and Article II:1(b) of the GATT 1994 on Schedules of Concessions, where “The products described in Part I of the Schedule relating to any contracting party, … be exempt from ordinary customs duties in excess of those set forth and provided therein.” It resonates that imported products may not be imposed tariff exceeding the bound tariffs. In addition, non-discriminatory rules, namely the most-favored-nation treatment and national treatment, must not be overlooked either in determining certain trade policy.
A country’s policy on trade might give ripple effects to other countries, and if carried out without prudent and care, might create unnecessary trade loss and harm to the global value chain that we are all trying to build. As such, President Trump’s intention to increase the import tariff might impact other countries that are directly or indirectly having trade relations with the US. When it comes to Indonesia, although the country does not produce and export its own local cars at the moment, Indonesia is the second biggest automotive manufacturer in Southeast Asia after Thailand. Many car manufacturers, especially the Japanese, have invested and expanded their car manufacturers to Indonesia.
Such investment on automotive has opened various job opportunities in Indonesia and has absorbed numerous labors. Indonesia has also gained special benefits from the transfer of technology and knowledge in the automotive industry sector. It is clear that the high investment has made automotive as one of Indonesia’s main commodities for export, and the US is also one of Indonesia’s export destinations. With an increased tariff of 35 percent as intended by President Trump, Indonesia might also feel the impact which might cause economic loss to its automotive industry.
Increased tariffs for cars produced outside the US is one of many illustrations of how certain trade strategies aimed to protect domestic producers might also be detrimental to other countries. The next question is, how about other products beside cars? Currently, Indonesia has many of its main commodities being exported to the US, which among others include textile and product textile, electronic, rubber, footwear, cocoa, and coffee. Although we might go as far as to assume that such Indonesia’s export commodities might also face the same risk of getting the increased import tariffs from the US, Indonesia’s President Joko Widodo is optimistic with Indonesia and the US relations, stating that it will be better and we should benefit each other.
International Trade, Tariff, American Law, Trade Law
Published in Antara News, 12th January 2017
By Jessica Callista and Bhirawa J. Arifi
Members of Trade Practice Group of Bahar & Partners Law Firm