Canada
Yesterday I shared with you the Bloomberg Businessweek article “Buy American and Fairer Trade Can Solve Job Woes: Alan Tonelson“. In this article, Alan Tonelson suggests that the United States should impose additional duties at the border on goods coming from a country with a value-added tax. Canadians should be concerned because under the goods and services tax (“GST”) and harmonized sales tax (“HST”) regime, most exported goods are zero-rated.
If the United States Administration followed Mr. Tonelson’s advice, they would arguably be in breach of their most-favoured-nation (MFN) obligations at the World Trade Organization (“WTO”) and in the North American Free Trade Agreement (NAFTA). Simply put, the MFN concept focuses on non-discrimination. In particular, goods at the border must be treated the same. As a result, the United States cannot impose higher tariffs on some goods at the border and lower tariffs on other goods (except there may be lower duties if there is a free trade agreement that satisfied the requirements of GATT Article XXIV).
The U.S. is not allowed to charge a 13% tariff on all goods from Ontario, a 12% tariff on goods from B.C., a 5% tariff on goods from Alberta, a different tariff on goods from the EU, a different tariff on goods from Australia, etc. in retaliation of zero-rating. The U.S. is not allowed to increase its tariff rates on goods from some countries (VAT countries) and not raise tariffs on goods from other countries (non-VAT countries). To be clear, under the GATT, 1947, the United States cannot increase tariffs from their current MFN bound levels against any WTO country. Under the NAFTA, the United States cannot raise tariffs against Canadian goods above the levels agreed in the NAFTA (most NAFTA tariff rates for Canadian goods are now duty-free or 0%).
There are rules in the WTO Subsidies and Countervailing Measures Agreement (“SCM Agreement”) that would allow the United States to impose countervailing duties, but only after a trade remedy process. However, any attempt to impose countervailing duties against Canadian good as a result of zero-rating would undoubtedly lead to a challenge at the WTO under the Dispute Settlement Understanding.
The United States should be mindful of its international obligations while dealing with its domestic financial issues. Options that breach international obligations must be taken off the table as trade wars with each and every country that imposes a VAT will not be helpful to global recovery efforts.