2 December 2024
- The comeback of tariffs and ‘tit-for-tat’? The case for increasing tariffs in a WTO-compliant manner
- A closer look at Indonesia’s new Government under the new President Prabowo Subianto: What impact on trade and investment policies?
- The EU organic label may only be used on products produced according to EU rules says the Court of Justice of the EU
- Recently adopted EU legislation
The comeback of tariffs and ‘tit-for-tat’? The case for increasing tariffs in a WTO-compliant manner
By Alejandro López Bo, Stella Nalwoga, and Paolo R. Vergano
As the world grapples with economic uncertainty and geopolitical tensions, protectionist trade policies have re-emerged as a contentious issue, with ‘tit-for-tat’ trade wars looming on the horizon. Calls for increased tariffs, including on specific products or countries, have intensified, raising questions about the future of global trade and rule of law. This article explores the legal implications of these proposed policies and measures, assessing their compatibility with the rules of the World Trade Organization (hereinafter, WTO), but also examining alternative, WTO-compliant steps that countries could take to increase tariffs, if needed or wished for.
Tariffs as a trade policy tool
Tariffs are financial charges or taxes on exported or imported goods, which are due because of their exportation or importation across borders. Tariffs constitute an important element of the trade policy toolbox, allowing countries to regulate at what price products may be imported or exported and serving a twofold purpose: being a source of revenue for governments and protecting and promoting domestic industries and interests. They are not necessarily a good thing, especially in the medium/long-term, as they insulate markets, stifling competition, limiting innovation, and burdening consumers, but they remain a key tool of industrial policy that allows Governments to provide preferences and support to domestic producers.
In the last few decades, countries have gradually reduced tariffs and liberalised trade, either through multilateral negotiations in the frameworks of the General Agreement on Tariffs and Trade (hereinafter, GATT) and the WTO, or through bilateral or regional negotiations for preferential trade agreements. However, in recent years, tariffs have made their comeback into global trade policy, especially in the US. In March 2018, the US Administration announced that it would impose a 25% and 10% tariff on imported steel and aluminium, respectively. Initially imposed on all countries, the US Administration started gradually granting temporary exceptions to certain trading partners, overtly violating the principle of non-discrimination and its WTO Schedule of Committments. In addition, the US Administration also imposed tariffs on certain goods originating in China at rates between 15 and 25%.
Now again, it appears that the incoming US Administration intends to heavily rely on tariffs as a trade policy tool, in order to pursue a number of trade and non-trade objectives. More specifically, President-elect Donald J. Trump announced that he would seek tariff increases on all imports regardless of the country of origin (“across-the-board”) ranging between 10% to 20% ad valorem, additional tariffs on products originating from China of 60%, and tariffs of 100% on electric vehicles made in Mexico by Chinese-owned companies. While the actual measures will have to be studied in detail in early 2025, if and when adopted, reportedly the US will likely attempt to justify these increased tariffs on the basis of several non-economic reasons. As things stand, their WTO-consistency appears very questionable at best.
The WTO framework
The WTO framework does provide several avenues to implement tariff increases on trade in goods, but these actions must be consistent with a number of key WTO agreements, starting with the GATT. In particular, the WTO system is sustained by a number of key principles, most notably the principle of non-discrimination. This principle consists of two key obligations: 1) The most-favoured-nation (hereinafter, MFN) principle, under Article I:1 of the GATT; and 2) The national treatment principle, under Article III of the GATT. While the MFN obligation requires a WTO Member that grants certain favourable treatment to any given country to grant that same favourable treatment to all other WTO Members, the national treatment obligation requires a WTO Member to treat foreign products no less favourably than ‘like’ similar domestic products. Another central point of the WTO framework concerns the tariff concessions. All WTO Members have established, on the basis of Article II of the GATT, a Schedule of Concessions, which is the result of tariff negotiations with the other WTO Members and reflects the tariff concessions that a WTO Member has committed to apply as a maximum ceiling (i.e., the ‘bound rates’). Section I of each of these Schedules sets out the MFN concessions of the respective WTO Member, referring to the commitment not to raise the ordinary Customs duties above the limits set therein for each tariff line and Customs code.
The Customs duties in these Schedules, once agreed upon, become “bound”, which means that the WTO Member that has conceded them may not apply ordinary Customs duties in excess of the bound rates. For most developed WTO Members, since the Uruguay round of multilateral trade negotiations, Customs duties for most tariff lines are bound, whereas developing country WTO Members have bound less tariff lines, such as around three quarters of tariff lines for India and Thailand and around 50% of tariff lines for China. According to World Bank data, with respect to the US, in 2021, the average bound rate was 3.6%, while the average applied rate was 1.5%. In this sense, tariff increases such as the ones currently contemplated by the incoming US Administration, ranging from 10 to 20% across the board and up to 100% for specific goods, would clearly be inconsistent with the WTO rules, as they would in almost all instances significantly exceed the bound tariff-rates of the US. Additionally, selective tariff increases that were to discriminate between countries would violate the WTO’s MFN principle. Individual products could possibly be targeted by selective tariff increases over the bound tariff rate in very specific cases, such as when safeguard measures or antidumping or countervailing duties are imposed. However, such increases must be duly justified and cannot be used to justify a general and comprehensive increase in tariffs across all products and vis-à-vis all countries or groups thereof.
Rules for renegotiating lower tariff increases: a middle ground to avoid a trade war?
The WTO framework does provide for clear avenues for WTO Members to legally raise tariffs, but in a negotiated and coordinated manner. According to Article XXVIII:1 of the GATT 1994, in order for a WTO Member to modify or withdraw a tariff concession, that WTO Member must negotiate and agree on the new terms with any other WTO Member with which the tariff concession was initially negotiated (i.e., the Party holding so-called Initial Negotiating Rights, or INR status) and any other WTO Members that have a ‘principal supply interest’ (i.e., PSI status) regarding the relevant good. Article XXVIII:1 of the GATT also requires that the WTO Member modifying or withdrawing a concession consult with any WTO Member that may have a ‘substantial interest’ (i.e., SI status) in the concession, modification, or withdrawal. A ‘principal supply interest’ is generally held by the WTO Member with the largest share of imports into the WTO Member that initiated the tariff concession renegotiation, while a ‘substantial interest’ exists when at least 10% of imports of a good originate from the relevant WTO Member (in this context, see Trade Perspectives, Issue No. 7 of 7 April 2017).
Article XXVIII:2 of the GATT 1994 also provides that, during the negotiation and agreement of tariff concessions or withdrawal, WTO Members must observe the principles of reciprocity and mutual advantage. When a tariff concession is modified or withdrawn, compensation in the form of new concessions must be granted to maintain a general level of concessions not less favourable to trade. It follows from the above that the modification or withdrawal of a tariff binding is based on the principle of renegotiation and compensation. However, if the negotiations fail to lead to an agreement, Article XXVIII:3(a) provides that the WTO Member proposing to modify or withdraw the concessions must, “nevertheless, be free to do so”. In that case, any WTO Member having a ‘principal supply interest’ and any WTO Member having a ‘substantial interest’ would be free to withdraw substantially equivalent concessions.
Arguably, the US Administration could pursue tariff increases in a WTO-compliant manner by modifying its Schedule of Concessions and entering into negotiations with the other relevant WTO Members (i.e., those that fall within the above categories, which would change from one product and tariff line to another). The interesting element of such approach is that, depending on the product at stake, in many instances the commercial cost for the US to renegotiate would be minimal vis-à-vis the countries that the incoming US Administration reportedly intends to target the most, for whatever reason or purpose. For instance, there are still minimal importations from China into the US of electrical vehicles (EVs). A renegotiation of the US tariffs would likely not see China having negotiating rights with the US under any of the three mandated categories of Article XXVIII of the GATT (i.e., INR, PSI, or SI status). On the other hand, this approach may not be ideal or feasible with respect to a large number of tariff lines and it would take a considerable amount of time and efforts to implement. For instance, when Ukraine, in 2012 (i.e., four years after its accession to the WTO), attempted a renegotiation of its tariff bindings on 371 tariff lines, it caused turmoil among WTO Members, prompting concerns that this could undermine the credibility of WTO Members’ commitments to their WTO obligations. However, such approach could be surgical, very effective, and, importantly, WTO consistent, which may not necessarily be a ‘perk’ to the incoming US Administration, but is a priceless asset worth respecting and protecting. The multilateral trading system based on the WTO framework, while not perfect and increasingly ‘frustrating’ to many WTO Members, has served well the international community and should be upheld, even (if not especially) at times when the geopolitical and economic stresses on the system are strong and multifaceted.
Way forward
Tariffs are part of the toolbox of trade policy, but the WTO legal framework sets the rules for any changes. There are ways to legally and in WTO-consistent manners increase tariffs, where needed or necessary. Instead of unilateral and likely WTO-inconsistent actions, WTO Members should make use of the options available under the GATT, notably Article XXVIII thereof. Negotiated solutions could avoid the ‘tit-for-tat’ trade wars that will inevitably follow and that have significant economic consequences for all countries and strong implications on global supply chains. Unless the very purpose of recurring to blanket and/or discriminatory tariff increases is to break what is left of the multilateral system and go back to the ‘law of the jungle’. Time will tell, but trade scholars and practitioners, as well as operators, company executives, trade associations, and responsible political leaders should advocate for the use of policy instruments and measures that, while pursuing objectives that may not always be agreeable or advisable, can still be legitimate. Alternative options always exist.
For any additional information or legal advice on this matter, please contact Paolo R. Vergano
A closer look at Indonesia’s new Government under the new President Prabowo Subianto: What impact on trade and investment policies?
By Alya Mahira, Caitlynn Nadya and Paolo R. Vergano
On 20 October 2024, Prabowo Subianto and Gibran Rakabuming Raka were officially inaugurated as the 8th President and Vice-President of Indonesia, respectively. The focus of President Prabowo’s Administration, as outlined in his agenda, will centre around, inter alia, food and energy self-sufficiency, as well as downstreaming, which refers to the processing of raw materials into finished products, thereby adding value to the commodities. President Prabowo also reaffirmed the commitment to achieving net-zero emissions by 2050 and enhancing trade relations by finalising trade agreements currently under negotiation by the first quarter of 2025. This article discusses the agenda of President Prabowo’s Administration, outlines some of the priority policy programmes, and reviews their implications for trade and investment.
Indonesia’s 2024 general elections and the new “Red and White” Cabinet
On 14 February 2024, Indonesia held general elections to elect the President, Vice-President, and members of the People’s Consultative Assembly. President Prabowo and Vice-President Gibran secured 58.6% of the votes, defeating the other two candidate duos led by the former Governor of Jakarta, Anies Basdewan, and the former Governor of Central Java, Ganjar Pranowo, respectively. Key promises made during President Prabowo’s campaign include the provision of free nutritious meals at schools, free health check-ups at hospitals, the development of a national food barn (i.e., a facility to stock agricultural products and food), and achieving an economic growth rate above 8%, compared to the current 5%.
Following the inauguration of 20 October 2024, President Prabowo unveiled the new “Red and White” Cabinet for the 2024-2029 term, consisting of 48 ministers, 5 ministerial-level officials, and 59 vice-ministers, the largest in Indonesia’s history. The Cabinet includes seven coordinating ministers, up from four in the previous Administration. Of the 48 ministers, 17 were re-appointed from former president Joko Widodo’s Administration, including Airlangga Hartanto as Coordinating Minister for Economic Affairs, Zulkifli Hasan as Coordinating Minister for Food, Bahlil Lahadalia as Minister of Energy and Mineral Resources, and Sri Mulyani as Minister of Finance. This appears to align with the expectation that President Prabowo would continue several of the policies launched under the previous Government, including with respect to downstreaming, the development of certain infrastructural projects, and the move of the capital city to Nusantara.
President Prabowo’s vision and mission
The work of the new Cabinet will be guided by President Prabowo’s Vision and Mission, which focusses on eight key objectives, 27 priority programs, and eight rapid outcome initiatives. Two notable missions include: 1) Promoting national independence through self-sufficiency in food, energy, water, creative economy, green economy, and blue economy; and 2) Continuing the downstreaming and industrialisation efforts to increase domestic value-added.
With respect to energy self-sufficiency, President Prabowo aims to make Indonesia the world’s “green energy leader”, notably through its increased reliance on biodiesel and bio-aviation fuel from palm oil, as well as bioethanol from sugarcane and cassava. Key initiatives include reducing dependence on fossil fuels, revising regulations that hinder investments in the new and renewable energy sector, and improving incentive schemes to encourage the exploration of new energy reserves. With respect to downstreaming, President Prabowo announced that he is committed to expanding the policies already implemented for minerals like nickel, to cover 26 of Indonesia’s key commodities, including gold, petroleum, natural gas, rubber, and cocoa. Related policies would include the construction of smelters, revitalising basic and strategic industries capable of producing capital goods to reduce import dependency, and increasing the value of the domestic content level. On 15 November 2024, at the Asia-Pacific Economic Cooperation (APEC) CEO Summit 2024 in Peru, President Prabowo emphasised that Indonesia required around USD 600 billion (i.e., EUR 570 billion) in investments to drive downstreaming.
Indonesia’s trade agenda and approach to foreign policy
The appointment of Budi Santoso as Indonesia’s new Minister of Trade was recommended by Indonesia’s former Minister of Trade, Zulkifli Hasan. Minister Budi previously held positions as Secretary General and as Director General of Foreign Trade within the Ministry of Trade during the previous Administration and had acted in the past as Head of the Indonesian Trade and Economic Office in Taipei and as Trade Attaché in India. On 3 November 2024, Minister Budi outlined a number of targets as part of the Ministry of Trade’s “quick wins programme”, including protecting the domestic market, as well as expanding export markets by finalising trade agreements currently under negotiation.
With respect to finalising the ongoing trade negotiations, Minister Budi mentioned the conclusion of negotiations for the Indonesia-Canada Comprehensive Economic Partnership Agreement (hereinafter, CEPA), the Indonesia-Eurasian Economic Union Free Trade Agreement, the Indonesia-Peru CEPA, and the Indonesia-EU CEPA by the first quarter of 2025. Negotiations of the Indonesia-EU CEPA were launched in 2016 and have faced over the years various obstacles and delays. Despite 19 rounds of negotiations over nine years, various issues remain unresolved. On 21 October 2024, Minister Budi affirmed that Indonesia was “still studying” the Agreement “in the hopes of finding the solution as soon as possible”, noting that it was not easy to reach agreement with the EU. Therefore, meeting the self-imposed deadline to conclude negotiations for these agreements appears challenging at best.
On 19 September 2024, Indonesia also officially submitted a request to accede to the Comprehensive and Progressive Agreement to Trans-Pacific Partnership (CPTPP), a move endorsed by President Prabowo. Overall, President Prabowo is expected to pursue a more proactive approach to foreign policy, while still following Indonesia’s policy of non-alignment and strategic autonomy. On 21 November 2024, Indonesia accepted the invitation to join the group of Brazil, Russia, India, China, and South Africa (i.e., BRICS) as an observer. Indonesia is also preparing its accession to the Organization for Economic Cooperation and Development (OECD).
Implications for trade and investment
The focus of President Prabowo’s Administration, particularly in promoting a green economy and downstreaming, presents a range of opportunities for trade and investment, but may also mean a continuation of the questionable or evidently WTO-inconsistent policies of the previous Administration. With respect to downstreaming, Indonesia’s policies could further strain the country’s relations with several trading partners, including the EU, which had challenged a number of Indonesia’s export prohibitions, such as those for nickel ore, through dispute settlement at the World Trade Organization (hereinafter, WTO).
Additionally, Indonesia’s trading partners repeatedly expressed their concerns about Indonesia’s local content requirements, highlighting their likely inconsistency with WTO rules (see Trade Perspectives, Issue No. 17 of 23 September 2024). Unfortunately, it appears that Indonesia’s choice of WTO-inconsistent measures in these two policy areas are likely to persist and may even proliferate further in intensity and complexity, as the country seeks to protect and support its domestic industries, potentially further restricting trade in certain commodities. Trading partners and relevant stakeholders should closely monitor the trade and investment policies of President Prabowo’s Administration, seize the relevant opportunities, advocate for available alternatives, and flag or pursue questionable policies. The conclusion of bilateral preferential trade agreements that were to genuinely address reciprocal trade irritants could also provide the natural fora where to negotiate such alternatives and find win-win outcomes.
For any additional information or legal advice on this matter, please contact Paolo R. Vergano
The EU organic label may only be used on products produced according to EU rules says the Court of Justice of the EU
By Alejandro López Bo, Ignacio Carreño García and Tobias Dolle
On 4 October 2024, the Court of Justice of the European Union (hereinafter, CJEU) issued a preliminary ruling in Case C-240/23 concerning a case referred to the CJEU by Germany’s Federal Administrative Court (i.e., Bundesverwaltungsgericht) regarding a dispute about the organic labelling of products from third countries. Under EU law, organic products are those resulting from production methods compliant with Regulation (EU) 2018/848 of 30 May 2018 on organic production and labelling of organic products and repealing Council Regulation (EC) No 834/2007 (hereinafter, Organic Products Regulation).
In its ruling, the CJEU clarified that the EU organic logo may only be used for organic products, whether produced in the EU or imported, if they adhere to the EU’s Organic Products Regulation. Additionally, the CJEU clarified that non-EU products may use the organic production logo of the third country in which they originate. This article provides an overview of the rules for the use of the organic logo and the clarifications provided by the CJEU.
The framework for organic production and commercialisation in the EU
A product is typically considered as organic when it has been grown, produced, processed, and/or handled in compliance with the relevant organic standards. Organic labels play a crucial role in consumer protection, communication and product distinction, by conveying the message to consumers that a given product is compliant with the organic standards.
In the EU, a product is considered organic when “resulting from organic production”, as regulated by the Organic Products Regulation. Article 30 of the Organic Products Regulation governs the use of terms related to organic production, such as “bio” or “eco”, as listed in Annex IV to the Regulation, on labels, in advertising, and in commercial documents. Article 30(2) specifically bans the use of such terms for non-compliant products. Terms and practices that may mislead consumers are also prohibited. In order to import organic products into the EU from third countries, and to commercialise them as “organic”, Article 45 of the Organic Products Regulation on ‘Import of organic and in-conversion products’ provides that such products must either comply with organic standards recognised as equivalent by the EU or fully adhere to all EU organic production rules. The former requires compliance with the production and control rules of the third country, as controlled by an EU-recognised entity there, while the latter involves rigorous inspection and certification processes to ensure adherence to EU standards.
EU Organic logo reserved for compliant products, foreign logos tolerated
Herbaria, a German food business operator, produces a beverage called ‘Blutquick’ that contains ingredients of non-organic origin. German authorities ruled that ‘Blutquick’ may not bear the EU organic logo due to the addition of these ingredients. After various judicial actions based on diverse legal grounds, Herbaria ultimately challenged this decision arguing that a comparable product from the US, a country recognised by the EU as having equivalent organic production rules, would be allowed to use the EU organic logo even if the product does not fully comply with EU production rules, thereby creating an unfair advantage for imported products. This argument was not shared by Germany’s authorities and, given the relevance of the interpretation of EU law for the case, Germany’s Federal Administrative Court requested a preliminary ruling from the CJEU regarding three questions, of which the Court only examined the first, notably whether a product, which does not fully comply with EU organic standards, may be imported under the equivalence regime.
The CJEU first analysed whether EU law would allow the use of the EU organic production logo and terms referring to organic production in imported products that do not fully meet EU production standards under the equivalency regime. The Court clarified that, indeed, under the Organic Products Regulation, “products imported from third countries under the equivalence regime […] may be placed on the market in the European Union as organic products even when they do not meet all the requirements”. However, the Court argued that “to allow terms referring to organic production and the organic production logo of the European Union to be used, on the internal market in organic products”, both for products that comply with the EU’s Organic Products Regulation and for products that are considered equivalent, “would harm fair competition” and would “give rise to ambiguity that could mislead consumers”. In this regard, the CJEU concluded that imported products placed on the EU market as “organic” under the equivalency regime “may not use for its labelling either the organic production logo of the European Union or, in principle, terms referring to organic production”.
The CJEU then assessed whether the use of the organic production logo of a third country would be allowed although the product does not meet the EU organic production standards. The CJEU clarified that the Organic Products Regulation aims to regulate international trade in organic products, facilitating their supply in the EU and their export from the EU. Therefore, the Organic Products Regulation grants the Commission “the power to recognise that rules of a third country are equivalent to those” of the EU’s Organic Products Regulation. The Court acknowledged that certain products imported as “organic” under the equivalence regime may carry third-country organic logos, including terms referring to organic production such as “biologique” or “organic”, but concluded that the use of such logos “does not place the products concerned on the same level from the point of view of competition” and that this does not “give the impression that the imported products concerned comply with all the requirements laid down” by the EU’s Organic Products Regulation. Therefore, the Court concluded that products that have access to the EU market as “organic products” under equivalency schemes may “use the organic production logo of the third country from which they come, even where that logo contains terms identical to those referring to organic production”.
A confusing multiplicity of labels and trade in organic products in question?
While the CJEU’s decision aims at protecting consumer interests and at preventing reverse discrimination against organic products produced in the EU, it raises questions about consumer interests and the impact on trade in organic products. Firstly, the argument that consumers may not be misled by the use of third-country organic logos, despite their distinct visual appearance, may not fully reflect the reality of consumer awareness and behaviour. A commercial environment in which different logos claiming the organic nature of the products coexist may, in fact, confound consumers.
Secondly, the ruling could have an impact on the EU’s position as a major importer and exporter of organic products. The Organic Processing and Trade Association (hereinafter, OPTA), which represents the organic processing and trade industry in the EU, noted that this judgement could have ”far-reaching consequences for EU trade in organic products”, noting that the ruling could hinder progress in the ongoing negotiations between the EU and some 13 countries on organic trade, as it could make it more difficult to reach agreements based on mutual recognition of equivalent standards. OPTA emphasised the importance of balanced agreements that would allow EU organic products to compete fairly in international markets, while also facilitating the import of organic products from third countries. In this regard, international cooperation and harmonisation efforts, such as those conducted in the context of the Common Objectives and Requirements of Organic Standards (COROS) and the International Task Force on Harmonization and Equivalence in Organic Agriculture, could play a crucial role.
Final ruling by Germany’s Federal Administrative Court
The case now moves back to Germany’s Federal Administrative Court, where a final ruling will need to be made considering the CJEU’s clarifications. The CJEU’s decision strengthens the EU’s organic standards and rules, and intends to preserve fair competition between organic products in the EU market.
For any additional information or legal advice on this matter, please contact Ignacio Carreño García
Recently adopted EU legislation
Trade Law
Customs Law
Food Law
Ignacio Carreño García, Joanna Christy, Tobias Dolle, Alejandro López Bo, Alya Mahira, Caitlynn Nadya, Stella Nalwoga, and Paolo R. Vergano contributed to this issue.
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