In an increasingly interconnected global economy, trade tariffs being imposed on imports to the USA are causing havoc with global markets and economies. They can and are likely to provoke significant legal and diplomatic fallout. For Australian businesses engaged in cross-border trade, understanding the legality of tariffs under international law, and how enforcement plays out, has never been more important.
The Legal Foundation for Tariffs
Trade tariffs, taxes imposed on imported goods, are legal under international law when applied within the framework of rules set by the World Trade Organization (WTO). WTO members, including Australia and the United States, agree to bind their tariffs at specific maximum rates. They also commit to the Most-Favoured Nation (MFN) principle, which mandates equal treatment for all WTO trading partners unless a recognised exception applies.
However, tariffs must comply with additional WTO rules and procedures. Countries may only apply tariffs above bound levels if justified under accepted exceptions, such as national security, safeguards against import surges, or responses to unfair trade practices like dumping or subsidisation.
Dispute Resolution and Enforcement
While WTO rules are robust, enforcement can be challenging. The WTO’s Dispute Settlement Body allows member countries to challenge tariffs they believe violate trade rules. If the panel finds a breach and the offending country fails to comply, the WTO may authorise the affected country to retaliate, typically by imposing equivalent tariffs. The WTO does not impose direct sanctions. Instead, it permits “retaliatory measures” as a form of pressure and compensation.
Notable WTO Disputes Involving the United States
1. U.S. Foreign Sales Corporation (FSC) Tax Breaks (1999–2002)
Issue: U.S. tax code gave illegal subsidies to exporters.
Complainant: European Union.
Outcome: WTO authorised $4 billion in EU sanctions—one of the largest ever.
2. 2. U.S. Steel Safeguards (2002)
Issue: U.S. imposed temporary steel tariffs.
Complainants: EU, Japan, China, South Korea, etc.
Outcome: WTO ruled tariffs illegal. EU prepared $2.2 billion in sanctions; U.S. withdrew the tariffs.
3. Cotton Subsidies Case (2004–2009)
Issue: U.S. subsidies to cotton farmers distorted global prices.
Complainant: Brazil.
Outcome: WTO authorised $829 million in sanctions; U.S. settled with Brazil via direct payments.
4. Boeing vs. Airbus (2004–2021)
Issue: Mutual accusations of illegal subsidies.
Outcome: WTO allowed U.S. to impose $7.5 billion and EU $4 billion in tariffs. Tariffs were later suspended.
5. Steel and Aluminium Tariffs (2018–Present)
Issue: U.S. imposed tariffs citing ‘national security’.
Outcome: WTO ruled against the U.S. in 2022, but enforcement is frozen due to an inactive Appellate Body.
How Could U.S. Tariffs Affect Australian Industries?
While Australia has, in some cases, secured exemptions from U.S. tariffs (notably in the 2018 steel and aluminium case), the broader impacts of U.S. protectionist policies pose risks to several Australian sectors:
- Metals and Mining: Global price volatility and redirection of supply can affect Australian iron ore and aluminium producers.
- Agriculture and Agribusiness: Beef, wine, and dairy exports may face increased competition or market disruption due to shifting U.S. trade flows.
- Technology and Digital Services: Tariffs on digital services or disputes over digital taxes could indirectly affect Australian service providers.
- Renewable Energy and Critical Minerals: U.S. domestic sourcing incentives may disadvantage Australian exporters of lithium and rare earths unless trade preferences are negotiated.
Conclusion
Tariffs remain legal under international law, but their use is tightly regulated. WTO mechanisms provide recourse for aggrieved countries, but enforcement, especially against major powers, has become increasingly uncertain. It is highly unlikely that a Trump lead USA would pay any sanctions imposed by the WTO. For Australia, the impacts of U.S. tariffs are not just legal or diplomatic, they are deeply economic. From resource exports to agribusiness and digital services, Australian industries must remain vigilant and agile in the face of shifting U.S. trade policy.
About the Author: This article has been authored by Steven Brown. Steven is a Perth lawyer and director and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.
