There are so many tariff threats, tariff announcements, and tariff impositions being tossed around these days that it can be hard to keep them all straight. With that in mind, I thought it was worth explaining the headlines today about some new U.S. tariffs relating to World Trade Organization (WTO) litigation over aircraft subsidies. These tariffs have the same negative economic impact as all the other recent tariffs imposed by the Trump administration, but it is worth noting that they aren't quite as bad as many of those other tariffs because they are -- so far, anyway -- being pursued in accordance with international law. So while they are not good, they are less bad (if that's any consolation).
Before I get to these particular tariffs, let me start off with some general background. Despite centuries of evidence to the contrary, President Trump, the self-declared "tariff man," seems to think the protection tariffs give to domestic producers, combined with the revenue tariffs bring in, makes the economy stronger. He also seems to think tariffs are helpful as a negotiating tool, as we can threaten our trading partners with tariffs in order to extract concessions from them. (So far, there isn't much evidence that this is very effective.) In addition, the Trump administration has been using tariffs as an enforcement tool: Having made the unilateral determination that China is behaving unfairly on trade, the administration is trying to use tariffs to get China to change its behavior. No luck there yet either.
These are all particularly bad uses of tariffs. But there is another use of tariffs that, while it is far from ideal, is at least designed to support the rule of law and reduce trade barriers. At the WTO, if a government believes that another government is violating the rules, the first government can file a complaint and have a neutral adjudicator decide whether there is, in fact, a violation. If that adjudicator finds a violation, and the guilty party does not come into compliance, the complainant can then get authorization to impose tariffs, in order to induce the guilty party to come into compliance. These tariffs certainly aren't great, but their objective is to help us get to a world of lower trade barriers through a neutral arbitration process governed by the rule of law.
It is this rule of law process that has been followed for the tariffs in the news today. As CNBC reports:
The World Trade Organization (WTO) has backed a U.S. request to impose tariffs on $7.5 billion of European goods, potentially sparking a new trade war across the Atlantic.
Arbitrators from the WTO have granted President Donald Trump’s administration the right to levy billions against imports of European goods for what they say are illegal subsidies granted to the planemaker Airbus by European governments.
It may take a week or two to go through one more formal WTO step before the tariffs can be imposed.
The ideal outcome here is that the EU removes those subsidies, with pressure from these tariffs acting as an incentive. In the meantime, though, American consumers and businesses will feel the costs of the tariffs, with a wide range of products, including cheese, wine, and aircraft parts, to be affected.
At the same time, keep in mind that the EU has also challenged U.S. government subsidies to Boeing, and some time in the coming months the EU will get authorization to impose its own retaliatory tariffs. (The EU may also make an argument that it can impose retaliatory tariffs sooner, based on an old U.S. violation of WTO rules).
The ideal outcome would be that both sides will remove, or at least rein in, their aircraft subsidies, and I hope that these tariff authorizations move us in that direction. But it will be a challenge. These cases (and their earlier iterations) have gone on for decades. The WTO has generally been helpful with resolving trade disputes, but some issues are very difficult to resolve. Nevertheless, with the threat of tariffs now becoming real here, it would be great if both sides would start taking seriously the task of working out how to limit subsidies to the aircraft industry.