US tariffs: where Trump rushes in, others may fear to tread

It was reported on 23 January 2018 that the US is to impose tariffs on imported solar panels and washing machines. China, South Korea and India, among others, were quick to express outrage at these steps. But are investors, exporters and the companies reliant on these imports impotent in such circumstances? And will it lead to a global wave of protectionism, especially in the booming renewables sector?
The new US measures will impose a 20% tariff on the first 1.2 million imported large residential washing machines in the first year, and a 50% tariff on imports above that number. By the third year, these will drop to 16% and 40% respectively. For imported solar cells and modules, the tariff in the first year will be 30%, falling to 15% by the fourth year, although 2.5 gigawatts of imported cells will be allowed in tariff-free annually.

The tariffs follow a report by the US International Trade Commission (ITC) which found that large numbers of imported washing machines – mostly from China and South Korea – were damaging domestic manufacturers; and that China in particular had been selling ‘artificially low-priced’ solar components in the US, assisted by state subsidies.

The move is unashamedly protectionist and, by its nature, discriminatory to non-US companies. However, the latter – investors, exporters and in some cases foreign-controlled importers – might benefit from protections offered by bilateral and multilateral trade agreements. Similarly, the countries in which such companies are based also have rights under the World Trade Organization (WTO) rules.

Taking the latter first, the countries whose companies will be most affected by the increased tariffs have already indicated that they will take the issue up with the WTO, the intergovernmental organisation that regulates international trade. Among the WTO’s key principles are the reduction and eradication of tariffs, as well as the ‘national treatment policy’ ie that imported goods should be treated no less favourably than domestically produced goods. Where a dispute is referred to the WTO and a negotiated solution is not possible, a dispute panel can be appointed to adjudicate between the states involved.

Such a dispute resolution mechanism can take time, and also depends on the complainant state having the political will and international standing to challenge the state imposing the barriers to trade. However, investors who are affected by the measures of a host state might be able to bring arbitral claims against the state directly. Those rights might arise out of bilateral investment treaties (BITs), or multilateral agreements such as the Energy Charter Treaty (ECT), which protects investments in a signatory state’s energy sector.

Protections differ from treaty to treaty, but generally speaking there will be an obligation on the host state to treat foreign investors fairly and equitably, and specifically to accord them treatment which is no less favourable than it accords domestic investors or other foreign investors. BITs often also incorporate specific provisions requiring the signatory states to refrain from imposing discriminatory taxes and tariffs on companies from the other state.

For example, the US-South Korea trade agreement provides that neither state may increase any existing customs duty, or adopt any new customs duty, on goods originating in the other state; and that each state shall progressively eliminate its customs duties on goods from the other state. On the face of it, that might prohibit the new tariffs announced in January 2018. However, the treaty also provides that if, as a result of the reduction/elimination of duties certain goods are being imported in such increased quantities that it causes serious injury to a domestic industry, the state may increase the tariff on those goods. The ITC has determined that that is exactly what has happened with solar components and washing machines.

It remains to be seen whether these new tariffs will result in a WTO-administered dispute resolution procedure, or will trigger a raft of BIT arbitrations – much will depend on how the tariffs work, which companies are affected and what the terms of the applicable BITs are (the US is not a signatory to the ECT). However, what is certain is that in this world of global trade, countries cannot impose protectionist tariffs and other measures designed to discriminate against foreign companies without risking claims from states and investors alike.