BBC Question Time was wrong about tariffs. It matters.

On January 23, 2020, Fiona Bruce, the host of Question Time on BBC TV, repeatedly and wrongly confused US tariffs on Scotch whisky with the US threat to raise tariffs on cars if Britain taxes digital technology companies.

The mistake matters because UK-US trade talks are likely to feature regularly over the coming months, not least on Question Time. It’s an easy mistake to make: Reuters did it too. But it’s important to get it right.

Bruce cited the tariffs on Scotch at least twice, supposedly as evidence that the US would carry out its threat to raise tariffs on British cars if then-Chancellor Sajid Javid were to tax companies such as Google, Apple, Facebook and Amazon.

But the two tariffs are entirely different in nature. One set comes from “might is right”, the other from the “rule of law”.

One is part of a unilateral trade war waged by US President Donald Trump, which largely ignores the rules. The other is part of an international trading system based on agreed multilateral rules.

The one on Scotch whisky is in the second group, the rule of law. It is the result of illegal action by Britain, not any arbitrary US action in a trade war — unlike the threatened tariffs on cars.

(Here’s a podcast that also explains the difference: “Aircraft Subsidy Disputes: How These Tariffs Are Different”.)

‘Might is right’ tariffs

President Donald Trump has acquired a reputation for flouting international trade rules and exercising US power instead of using multilateral agreements. His main weapon is tariffs, which he has raised to tackle US problems in steel and aluminium, trade conflict more generally with China, and on cars from the EU and elsewhere.

The US does cite international rules to justify this: national security provisions in World Trade Organization (WTO) agreements. But it uses these rules in a way that opponents say was never intended — more or less a blank cheque to take any action and to justify it by, for example, claiming that unemployment or the demise of an industry is a national security issue.

As far as the rest of the world is concerned, these tariffs are arbitrary and may violate WTO rules. Some have been challenged in formal WTO legal proceedings known as dispute settlement.

And this would apply to tariffs raised in retaliation for British taxes on the digital giants. Other than “national security”, there would be no grounds under WTO rules to raises US duty on British cars for this purpose, so long as the British taxes did not discriminate in favour of other companies from Britain and elsewhere.

(And for trade geeks, this would mean raising US tariffs above the ceilings it has legally bound in the WTO since the rates actually applied are the same as the bound ceilings.)

In other words, the US approach on this is more about “might is right” than the rule of law.

‘Rule of law tariffs’

That’s not the case with the tariffs on Scotch. These tariffs are fully authorised by WTO members, under WTO rules and procedures. They were authorised because of illegal action by the UK, not (in this case) by the US.

Here, it’s the UK that’s at fault.

In October 2019, the US announced a package of new tariffs on imports from the EU and four member states — the UK, France, Germany and Spain — including an additional 25% duty on Scotch.

This was not arbitrary. Far from it. It came at the end of years of legal proceedings, in which the EU and those four member states were found to have illegally subsidised Airbus.

Eventually, on October 2, 2019, a WTO dispute settlement arbitration authorised the US to retaliate against the illegal Airbus subsidies.

The amount of retaliation awarded was $7.5 billion ($7,496,623,000 to be precise). There are a number of ways of doing this. The US chose the announced tariffs, designed to cause no more than $7.5 billion damage to the exports concerned.

The US clearly thought it would cause less damage than that and reserved the right to increase the tariffs further. (Some additions were announced on February 14, 2020. See below.)

Let’s be clear. These raised tariffs come at the end of a full, proper, legal process in the WTO.

The process started — as all WTO disputes do — with consultations, continued to a first ruling by a panel of three experts, followed by an appeal (which upheld the finding that the subsidies were illegal, but with some legal modifications).

After the appeal the complicated process continued with the EU trying and failing to show that it had adjusted its aid to make it legal, and the US proposing retaliation which was then reduced by arbitration.

In other words, the US tariffs on Scotch (and a host of other products) are fully legitimate, multilateral, rules-based actions. Not arbitrary. Not part of a trade war, just some legal skirmishes over aircraft subsidies.

The US is not at fault. The UK, France, Germany, Spain and the EU are.

That is, as far as Airbus subsidies are concerned. How about Boeing subsidies? Well that’s another epic.

Carousel tariff retaliation?

Four months after the first announcement, on February 14, 2020, the Office of the US Trade Representative (USTR) announced a revised list of retaliatory tariffs in the Airbus case. These would take effect in March.

“The United States is increasing the additional duty rate imposed on aircraft imported from the EU to 15% from 10%, effective March 18, 2020, and making certain other minor modifications,” a USTR press release said.

Apart from an increase in tariffs on aircraft, the changes seemed to be minor. Two others have been spotted: the addition of “Butchers’ or kitchen chopping or mincing knives” from France and Germany, now facing the 25% import duty, and the removal of prune juice from the list.

The new announcement raised speculation that the US might be considering a “carousel” approach to retaliation. This would involve periodic changes to the list of products facing the retaliatory tariffs, rotating like a carousel, while keeping the predicted loss of EU exports within the $7.5 billion authorised by the WTO arbitration.

Presumably the US would also take into consideration the impact on American consumers and producers who use the imports.

Carousel retaliation is controversial because it increases uncertainty for importers inside the retaliating country (here, the US), as well as for the foreign exporters. Future changes can be announced at short notice, has happened with the February 14 announcement, although in this case the changes were few, apart from the increase in tariffs on aircraft.

Peter Ungphakorn is a former WTO official and long-standing trade expert. He runs the Trade β blog, and contributes regularly to the UK Trade Forum.

This article was updated on February 15, 2020 to include the new US tariffs announced the previous day. It’s also published on the author’s blog as “Spot the difference: US tariffs on Scotch are not part of a tariff war”.

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