05/03/2025

On Tariffs

As the only economic activity that generates wealth, trade has always been subject to the greed of intermediaries, raiders, and those in power. Nation-states appeared and were strengthened through mercantilist practices, the excessive use of measures to protect budding industries, the importation of raw materials at reduced costs, and the accumulation of precious metals to sustain the luxury of royal courts and finance war efforts.

Mercantilism, the dominant doctrine in trade, so to speak, was imposed by colonial powers in the 16th and 17th centuries, stifling the growth of their colonies. By the 18th century, however, with the Industrial Revolution in England and international cooperation embodied in agreements inspired by the theories of Adam Smith and David Ricardo, mercantilism was rejected in favor of regimes more oriented toward price formation based on the balance between supply and demand.

Over the years, the ad valorem tariff, or import duty, became the primary instrument for sustaining prices, providing manufacturing industries with better competitive conditions against imported products in their domestic markets. It was, and still is, the mechanism that accounts for the difference between production costs in the exporting country and those in the importing country.

Mostly for political, then eventually for social and even cultural reasons, high tariffs were often imposed erga omnes on specific products, leading to trade shift, inflation, unemployment, and reduced productivity. The Smoot-Hawley Tariff Act of 1930, the most notorious example of a "beggar-thy-neighbor" policy, deepened the crisis in the United States following the New York Stock Exchange crash. To a significant extent, it was responsible for a 66% decline in international trade between 1929 and 1934.

Efforts to reverse the damage caused by reactions to U.S. protectionism were interrupted by World War II, which, in turn, spurred economic growth in countries far from the theaters of war, such as Brazil and Argentina. These efforts were only resumed after the signing of peace treaties and the creation of multilateral institutions aimed at fostering collective security and economic interdependence among nations.

The draft charter for an International Trade Organization (ITO), approved at the Havana Conference in 1948, was never ratified. However, in October 1947, 23 participants had already signed a provisional agreement, the General Agreement on Tariffs and Trade (GATT), which effectively implemented the trade policy chapter of the ITO Charter. The first round of negotiations under the auspices of the GATT produced a package of rules and 45,000 tariff concessions, covering $10 billion in trade, approximately one-fifth of global commerce at the time.

With the increasing liberalization of the markets of manufactured goods, thanks to the Most Favored Nation (MFN) clause, the early years of GATT saw a rapid expansion of trade among Contracting Parties and the globalization process. However, agricultural goods and natural resource-based products were not subject to the same liberalization. From the 1950s through the 1960s, these sectors were increasingly affected by protectionist policies and subsidies imposed by major importing markets.

The GATT was never truly free trade-oriented but rather anti-protectionist, as it accepted tariffs as the sole instrument of trade policy. These tariffs were intended both to level the playing field in terms of competition and to allow emerging or struggling industries, affected by dumping or subsidized imports, to adjust to unfavorable competitive conditions.

This led to asymmetries and discrimination that have characterized, and continue to characterize, the treatment of agriculture by industrialized countries, stemming from their persistent efforts to ensure that their farmers maintain a standard of living comparable to that of other professional groups. This is achieved through support policies aimed at both price sustainability—passing the cost of protection onto consumers—and the provision of public subsidies, in which taxpayers cover the difference between the price society guarantees to farmers and international market prices.

Other labor-intensive industries and sectors, which were similarly harmed by imports from developing countries, also managed to secure quantitative restrictions from their governments. These measures, although formally prohibited under Article XI of GATT, were implemented to preserve jobs without disrupting trade flows.

The so-called "reciprocal tariffs" that the Trump administration has unilaterally threatened to impose on imports from U.S. trading partners constitute a prima facie violation of both the Most Favored Nation clause and the multilateral commitments made by the world’s largest importing country. This could herald a scenario similar, not to the 1930s, but to the 1980s, when the GATT dispute settlement system lacked the enforcement power to mandate the removal of measures deemed inconsistent with agreed obligations. Under these conditions, and in an effort to maintain imports of “sensitive” products at levels that ensured competitive domestic prices, nations resorted to Voluntary Restraint Agreements (VRAs)—notorious trade restrictions banned from 1995 onward following the conclusion of the Uruguay Round negotiations.

Despite sporadic violations, especially due to questionable anti-dumping duties or countervailing measures, the multilateral trade system, strengthened by stricter rules and, above all, by a binding dispute settlement system with a final appellate court, the Appellate Body, functioned effectively until 2001.

With China's admission to the WTO in 2001, coinciding with the launch of the Doha Round, global trade expanded significantly, as did disputes between China and its major trading partners, particularly the United States. Nearly all such disputes, after being resolved by panels, were referred to the Appellate Body. Despite being overburdened, the Appellate Body not only fulfilled its function but evolved into a de facto tribunal, issuing rulings that often challenged methodologies and procedures used by, for example, the U.S. Department of Commerce to prove dumping.

In 2016, even before President Trump took office, the U.S. Trade Representative (USTR) began blocking the appointment process for a successor to Ricardo Ramírez of Mexico on the Appellate Body. This obstruction continued with each new vacancy until, by 2019, the Appellate Body was effectively shut down due to lack of quorum.

The effects of imposing "reciprocal tariffs" on global supply chains are still unpredictable. It is also unclear which sectors and which countries might still have room for negotiations, whether on market access or non-trade issues. Undoubtedly, changes will occur in the statistical indicators measuring compliance with the fundamental principle of non-discrimination—the foundation of GATT. According to recent studies, more than 80% of global trade transactions are conducted under the Most Favored Nation (MFN) status.

It also seems likely that countries facing unilateral tariff increases on exports to the U.S. will seek some form of bilateral agreement, at the very least to mitigate damage and support trade flows, even if at reduced levels. This is because, with the WTO Appellate Body inoperative, there is no guarantee of compliance with panel rulings, even after lengthy dispute resolution processes.

The "reciprocal tariffs" are set to take effect on April 2, giving trade diplomats one month to try to influence the final policy package. The United Kingdom is reportedly taking the lead in these efforts.

José Alfredo Graça Lima is the vice-chairman of the Brazilian Center for International Relations (CEBRI). Diplomat, former ambassador, he dedicated his career to trade diplomacy and negotiations. As Brazil’s chief negotiator during the Uruguay Round, he played a key role in redesigning the multilateral trade system and in the creation of the World Trade Organization (WTO).