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World Tariff Wars

April 09, 2010

President Obama launched his National Export Initiative last month. Objective: Double exports in five years. Sounds good. Too bad some of our trading partners missed the memo.

Brazil, in the same week, announced a plan to impose new tariffs on 102 U.S. products. On some items, the tariffs will go as high as 100%. In all, it will affect about $1 billion a year in U.S. exports. Brazil also announced it’s considering sanctions against U.S. intellectual property, including compulsory licensing in pharmaceuticals, music, chemicals and software.

Before screaming for a first strike on Brazil, bear in mind that what it did is an approved action under World Trade Organization rules. Brazil won the right to retaliate against U.S. exports because U.S. subsidies to cotton growers contravene the rules of the multilateral trading system. Because we are in “non-compliance,” they get to engage in “retaliation.” On Monday Brazil gave the U.S. a reprieve until April 22 on the new tariff implementation in the hopes that a negotiated compromise might be reached. If not, we will have an old fashioned trade war on our hands.

The destructive clash with Brazil is not an isolated case. WTO-approved retaliation to counteract U.S. trade violations is spreading. More than $3.4 billion of U.S. exports now face punishing retaliation tariffs.

The U.S.’s most economically damaging trade war is with Mexico. As part of the North American Free Trade Agreement (Nafta), the U.S. is supposed to give Mexican trucking companies access to the U.S. But 17 years into Nafta, Mexican trucks still don’t cross the border, because the Teamsters union won’t accept the competition.

A Nafta dispute panel authorized Mexico to retaliate. Last year it imposed duties on $2.4 billion of U.S. exports. It’s a heavy hit. According to Mexico’s economy ministry, imports from the U.S. of tableware are off 38%, fresh grapes are down 24% and almond sales 17%. A September 2009 study commissioned by the U.S. Chamber of Commerce said the Mexican trade spat has cost the U.S. 25,600 jobs.

The Europe Union and Japan have also asked the WTO for authorization to retaliate because the U.S. Commerce Department insists on deciding antidumping cases with an arcane calculation that the WTO ruled against in 2007. As a result, according to the trade publication Inside U.S. Trade, both Japan and the European Union are eyeing retaliation. The total value of U.S. exports affected could top $500 million.

The Brazil trade office has said it regrets the new tariffs, but “after almost eight years of litigation and over four years of continuing noncompliance” by the U.S., it decided to “exercise its right, as authorized by the WTO.” It’s worth noting that Brazil’s proposal to use intellectual property rights as a lever against the U.S. is a first in retaliation. If the practice spreads it could have a painful effect on American innovation.

None of this seems to have influenced the Administration’s interest in free trade. To get Brazil to delay the new tariffs this week, the U.S. proposed a $147 million U.S. payment to Brazilian cotton producers. In other words, rather than deprive U.S. cotton producers of subsidies from U.S. taxpayers, Washington will ask Americans to fork over even more money, this time to subsidize Brazilian growers. Oh, and the U.S. also offered to wave a magic wand and pronounce the Brazilian state of Santa Catarina free of a host of cattle diseases so that it could send its beef exports to the U.S. And here we thought that bans on beef actually had to do with sanitary conditions.

It is possible that Brazil will back down, but the damage to U.S. leadership on free trade cannot be underestimated. The common thread linking these threats to U.S. export growth is America’s current antitrade compulsions, typified by Congress’s refusal to ratify free trade agreements with Colombia, Panama and South Korea. If Mr. Obama really wants to open new export markets, he doesn’t need to slap the word “export” on new bureaucracies. He needs to honor U.S. commitments and explain the dangers of a creeping global protectionism.