US tariffs gross violation of WTO rules

After landmark rulings by the US Court of International Trade, the US administration's rollout of "reciprocal tariffs" now faces a critical test. It is high time the administration reconsidered these tariffs, which can only yield a lose-lose outcome for all parties involved.

"Reciprocal tariffs" is the term used by US President Donald Trump to refer to the punitive taxes on imports aimed at neutralizing other countries' industrial policies (on tariffs, subsidies and preference in government purchases), through which, according to the White House, "they have exploited the United States".

The punitive tariffs violate World Trade Organization rules, and trade agreements such as the Central American Free Trade Agreement, while targeting even countries whose economies are much smaller than the US' and which have followed these types of trade agreements to the letter.

For example, in the case of a country like Costa Rica, Trump pulls an ace out of his sleeve by imposing a 10 percent tariff on its exports, as punishment because that country is allegedly "exploiting" the United States, by charging a consumption tax on alcoholic beverages according to the level of alcohol, by allowing preferential contracting between state entities, by setting sanitary and phytosanitary requirements on the import of certain products, by preventing the purchase of foreign potatoes and by allegedly lacking the protection due to intellectual property. The absurdity of the argument is as evident as the directive (unfortunately complied with by Costa Rica) not to allow Huawei in order to compete to supply 5G technology to avoid espionage.

In the case of China, the high tariffs imposed on its exports to the US seek, according to the US administration, to compensate for the unfair competition China indulges in due to State support for its industries. Supposedly, the "visible hand of the State" allows China to "exploit" the US.

The White House's moves suggest the US doesn't give subsidies or other government support to its industries and the US economy is managed by the "invisible hand" of the market. Nothing could be further from the truth. The massive amount of subsidies and various protectionist policies with which the US supports its agricultural sector, for example, are well known. Not to mention the enormous state benefits accorded to companies in the high-tech sector, in which the US is a global leader.

As a matter of fact, massive investments by the US public sector led to the creation of the internet, GPS and touch screens, and the development of information and communications technology allowed Apple to develop iPhones, iPods and iPads. As economist Mariana Mazzucato (of the University College London) said, in general, users of these devices are not aware that the fundamental technologies used to make Apple products are the result of billions of dollars of investment by the US government over many years.

Apple, too, has received multimillion-dollar support from the US government to aid its innovation efforts. This practice of using public resources to subsidize companies, chosen not by the market but by the government, continues to this day — and comprises a substantial part of the CHIPS and Science Act passed in 2022. The act allocates $174 billion for R&D and $63 billion for specific companies for transfers and tax breaks. Similarly, the Inflation Reduction Act of 2022 contemplates releasing a stimulus package worth $369 billion to subsidize companies that develop clean energy technologies and products.

Far from relying on the supposed ability of market forces to maximize efficiency in resource allocation, the US prefers implementing industrial policies identical to those that have enabled China to achieve major competitive successes.

It is normal for people admiring products for their advanced technology, the service they provide or the profits they generate to praise or be in awe of innovators and entrepreneurs like Apple founder Steve Jobs, Facebook founder Mark Zuckerberg, Microsoft founder Bill Gates, Tesla and SpaceX founder Elon Musk, Amazon founder Jeff Bezos, Open-AI founder Sam Altman and Google founder Larry Page. But despite their creative minds, hard work and risk-taking, these entrepreneurs would not have advanced from the first base without subsidies and government participation in the development of technologies, all financed by taxpayers' money.

Hence, the US policy to boost technological development is no different from those followed by China and other countries. And yet Trump accuses them of "exploiting" the US.

Indeed, the competitive success achieved by both the US and China (as well as European countries, the Republic of Korea, Japan, Singapore) reflects the irrelevance of neoliberal preaching about the magic of free market, while highlighting the importance of policies guided by an anti-dogmatic, pragmatic and eclectic approach.

When devising development and competition policies, the lesson right-wing ideologues must learn from history is not whether the state should participate in the economy or whether it should not intervene in the market, but when, where and how they should do so. Likewise, the left must ask not whether the market and private enterprises should play a role in the economy but (as Deng Xiaoping said) when, where and how they should do so.

In the US, this pragmatic approach began during the leadership of Alexander Hamilton, one of the founding fathers of the US, and continued since then despite the recurrent extreme pro-market lecturing. Not even Reagan eliminated the strong role of the state. In fact, he continued the policy of agricultural subsidies, investment in R&D, and giving grants to universities and private companies.

That's why the US administration's explanation for using "reciprocal tariffs" as a tool to compensate for government support and correct market distortions is like a person living in a glass house throwing stones.

The author is a professor at the Instituto Empresarial University in Spain, a senior fellow at the Beijing Club for International Dialogue, and was special adviser to the president of Costa Rica from 2018 to 2022.

The views don't necessarily reflect those of China Daily.

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