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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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.
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[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
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Author
Deborah Elms
Dr. 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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