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US-China trade


LEAST FAVORED NATION: WHAT IT MEANS IF THE US REVOKES PNTR WITH CHINA


DEBORAH ELMS

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Published 27 February 2024

> There is growing enthusiasm in Washington to revoke Most Favored Nation status
> for Chinese imports. Aimed at curbing China’s economic prowess, this radical
> change in US trade policy could unleash catastrophic damage to the
> multilateral order and significantly reset the playing field for businesses
> everywhere.

There is growing enthusiasm for a radical change in trade policy circulating in
Washington. This specific change, aimed at curbing China’s economic prowess,
could unleash catastrophic damage to the global trade regime and significantly
reset the economic playing field for businesses everywhere.

The idea is to alter China’s current trade status vis-à-vis the United States.
Instead of treating China like the other 165 members of the World Trade
Organization (WTO), the United States would unilaterally move China into a
different category. It would take away unconditional Most Favored Nation (MFN)
status for Chinese goods imports.

All WTO members are granted MFN as part of the process of joining the WTO. In
the United States, this is now called Permanent Normal Trade Relations (PNTR).
Without PNTR, the United States could apply whatever tariff rates it wants on
imported goods. This move has not been tried before, largely because it runs
directly counter to a bedrock principle of the global trading system:
non-discrimination.

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Without WTO membership, members can be subject to a wide range of discriminatory
actions. This is one of the most important reasons why countries like Timor
Leste and Comoros joined the organization this week at the WTO Ministerial
Conference (MC13).1 Once they are members of the WTO, other members promise not
to discriminate against their goods and any scheduled services by, for instance,
charging significantly higher tariffs, singling out their products for special
inspections at the border, automatically rejecting trade paperwork, or insisting
on unique licensing or qualification requirements.

To be clear, a pledge of non-discrimination does not mean that any product
manufactured or produced in another WTO member must be accepted without question
at another’s border. The rules allow economies to, for example, protect human,
animal, and plant life and health. But a bedrock principle means that members
are not supposed to apply different tariff rates to WTO partners. As an example,
a 4% tariff into member A on pineapple tarts is meant to be imposed on all
pineapple tarts arriving in member A from all WTO members.

Members create their own tariff schedules for pineapple tarts and other goods as
part of negotiations in the WTO and its predecessor General Agreement on Tariffs
and Trade. The rates for tarts, therefore, are not automatically the same in
every WTO member. The rate could be 0% in one member or 30% in another. Repeated
rounds of negotiations have often led to additional tariff cuts. A member’s
final WTO schedule or list of tariff commitments is the result of agreement on
the specific rates for pineapple tarts and all other tariff lines by all WTO
members.

Once locked in place under a WTO schedule, members are not allowed to raise
tariff rates above these scheduled, or bound, rates. They can use a different
rate at the border only if it is lower than the bound rate. Applied rates must
be granted consistently under Most Favored Nation (MFN) to all WTO member
imports. In other words, once a member has agreed to a 4% MFN rate, all its WTO
members are charged 4%.

There are two loopholes, however. If the exporting firm is part of a free trade
agreement (FTA) and the qualifying rules of origin for the agreement are met, it
may be that the tarts can enter Economy A duty-free or at a lower tariff rate as
negotiated in the FTA. Pineapple tarts might also face higher tariffs if certain
types of trade remedies are in place, such as anti-dumping duties.

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These were, broadly, the only exceptions that WTO members used. During President
Donald Trump’s administration, however, a wide range of products were subject to
tariff rate increases as high as 25% as part of a broader Section 301 finding of
unfair trade practices under the Trade Act of 1974, or against specific members
and products as part of national security provisions under US Section 232 of the
Trade Expansion Act.

These uses of unilateral tariff policies and the justification for actions taken
under national security were – and remain – highly controversial.

But a potential plan to change China’s trade status goes far beyond these
actions. It would, in effect, remove China’s MFN tariff rates for every single
product sent from China to the United States. Of course, it is unclear what
rates would be applied to Chinese goods, as unilateral removal of MFN means that
any rate is possible. It could be, for instance, that every current exclusion to
Section 301 tariff increases is removed, resulting it at least 25%
across-the-board tariff levels. Or, as Oxford Economics has suggested, it could
be that Chinese imports face the same tariff rates as those applied to Cuban or
North Korean products.2 Or, as Trump has suggested on the 2024 presidential
campaign trail, at least 60% for every product.

Revoking PNTR is the first recommendation from the US Congressional Select
Committee on the Strategic Competition Between the United States and the Chinese
Communist Party. The bipartisan committee said in the report, "We acknowledge
that granting the PRC PNTR did not lead to the benefits expected for the United
States nor did it lead to the structural reforms in the PRC that Congress
expected. Instead, it has ceded critical U.S. economic leverage in our
relationship with the PRC."3

The report recommends moving China to a different tariff column in the US tariff
code.4 It remains to be seen how effective this committee is in implementing the
more than 150 recommendations in their Reset, Prevent, Build report. However, a
recommendation to adjust China’s MFN treatment was already introduced in a bill
to Congress last year.5

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There are other US-China economic issues, of course, that are of direct interest
to members of Congress and the White House, including trade in technology
products, dependence for critical materials, and a growing set of worries about
trade for the future including electric vehicles and batteries.

For now, Congressional focus for the Select Committee has been strictly on
Chinese tariff treatment. However, removal of MFN or PNTR could trigger a wider
range of discriminatory actions against trade in services or changes in the
protection and enforcement of intellectual property rights. There are a handful
of studies that have begun to investigate the implications to the United States
of a decision to revoke PNTR, including estimates of gross domestic product
(GDP) losses of US$1.6 trillion over five years and American job losses of
744,000.6 These estimates assume no retaliation from counterparties.

The suspension or revoking of MFN treatment is rare. In April 2022, the Group of
Seven (G7) members mobilized to suspend the Russian Federation’s MFN access as
part of the WTO’s general exceptions provisions for times of conflict. India
removed Pakistan’s MFN treatment in February 2019.

An American effort to revoke PNTR for China could be dramatically accelerated in
the wake of US elections in November. The likely US Republican nominee, Trump,
has also recommended the wholesale adjustment of American tariffs to include an
across-the-board 10% tariff on every imported item plus tariff rate increases of
60% or more for Chinese products.7

Most of the focus in the trade policy community in the wake of the release of
the Committee’s report in late December has been on the implications for the
United States and China. But discriminatory treatment of China will also deliver
a serious blow to the multilateral trading system. While the Congressional
Committee seems relaxed about the prospects for retaliation or response from
other WTO members, the unilateral revocation of a core principle will not stay
unilateral for long.

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It is not just China that is likely to respond. Once the genie is out of the
bottle by even considering such an action, it is highly likely that other WTO
members will follow suit in whole or in part by imposing a range of new tariff
restrictions against each other. Pressure may rise for the government to slap
higher tariffs against specific goods or services. The United Auto Workers
(UAW), for instance, requested the US Trade Representative to consider
unilateral increases in MFN tariff rates for autos and auto parts earlier this
year.8

Regardless of MFN, firms have always faced a range of discriminatory actions in
different markets, particularly with inconsistent application of non-tariff
measures, unequal licensing requirements, or generally unfair trade treatment.
However, these measures are often quite restrained compared to what will happen
in the absence of MFN. Even with all its apparent faults, WTO members have
largely continued to uphold existing commitments.

There is little reason to assume that WTO members that are trying to hold the
line in preserving the institution will be able to do so effectively. With the
WTO dispute settlement system in disarray after the collapse of its Appellate
Body and limited consensus on how to rebuild or restructure it, there are few
checks on unilateral actions, even against core principles like MFN or national
treatment.

Of course, even a robust dispute settlement system would struggle to constrain
the behavior of a member that was determined not to follow the rules. This is
especially true for large, powerful members. There is simply no tool or
mechanism to redress problematic economic measures taken by such members.

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TRADING SYSTEM

Daniel Ikenson
26 October 2022

The prospect of significant pressures on the WTO ought to be sufficient to
galvanize members to work much harder and with greater urgency to update the
system. WTO reform was one of the issues on the table for MC13. Unfortunately,
the reform agenda is proceeding at a glacial pace with many members satisfied
with just tinkering around the margins, working on getting paperwork more
efficiently shared, or tightening up meeting agenda.

Moving China to a new tariff "column" is just the first recommendation from the
Select Committee. The rest of the report contains additional sharp challenges to
the operation of multilateral rules. Even if only a fraction of the ideas
proposed by this bipartisan committee are ultimately taken up and passed through
legislation in the United States, the tensions in the trade system are going to
rapidly increase. WTO members and companies globally should start preparing now.

***
[1] Their applications were formally approved, although entry into force takes
place only 30 days after each completes domestic ratification procedures.
[2] See the November 2023 Oxford Economics study, commissioned by the US-China
Business Council, The impact of PNTR Repeal, accessed at:
https://www.uschina.org/sites/default/files/the_economic_impact_of_china_pntr_repeal.pdf
[3] Page 14,
https://selectcommitteeontheccp.house.gov/sites/evo-subsites/selectcommitteeontheccp.house.gov/files/evo-media-document/reset-prevent-build-scc-report.pdf
PNTR was originally granted in 2000. For details, see the State Department press
release, May 24, 2000,
https://1997-2001.state.gov/regions/eap/fs-china_pntr-wto_000524.html
[4] The current tariff schedule applies MFN rates to every WTO member in column
1, which also notes exceptions because of free trade agreement (FTA) and other
preference programs to certain tariff lines. Belarus, Cuba, North Korea, and the
Russian Federation are listed under column 2. Although the US Select Committee’s
report is not entirely clear, it appears their suggestion is to open a new
column 3 for China-specific tariffs.
[5]
https://www.cotton.senate.gov/news/press-releases/cotton-colleagues-introduce-bill-to-end-chinas-permanent-normal-trade-status
[6] See, especially, Oxford Economics, which was commissioned by the US-China
Business Council to produce a report in November 2023
(https://www.uschina.org/reports/impact-china-pntr-repeal-and-increased-tariffs-us-economy-and-american-jobs);
Cato Institute, December 12, 2023,
(https://www.cato.org/blog/china-raises-real-concerns-revoking-permanent-normal-trade-relations-would-address-none-them);
and American Action Forum, September 27, 2023
(https://www.americanactionforum.org/research/estimating-the-impact-on-the-u-s-economy-of-revoking-permanent-normal-trade-relations-for-china/).
[7] https://www.washingtonpost.com/business/2024/01/27/trump-china-trade-war/
[8] See the UAW submission to USTR on automotive trade, January 17, 2024. See
the file at: https://www.regulations.gov/comment/USTR-2023-0013-0013


© The Hinrich Foundation. See our website Terms and conditions for our copyright
and reprint policy. All statements of fact and the views, conclusions and
recommendations expressed in this publication are the sole responsibility of the
author(s).

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Author


DEBORAH ELMS

Dr. Deborah Elms is Head of Trade Policy at the Hinrich Foundation in
Singapore.  Prior to joining the Foundation, she was the Executive Director and
Founder of the Asian Trade Centre (ATC). She was also President of the Asia
Business Trade Association (ABTA) and the Board Director of the Asian Trade
Centre Foundation (ATCF).

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