Trump Tariffs May Create Worldwide Logistics Chaos

Whenever goods are imported by any means — sea, land or air — customs authorities of a country ordinarily apply the same MFN (most-favoured-nation) tariff to all goods imported under a particular tariff code. 

That tariff code indicates a particular commodity. For instance, American customs authorities would normally apply a tariff of 2.4 per cent on motorbikes under tariff code 871150 imported from any country. 

Therefore, the customs officials do not have to consider which country has manufactured the bike. 

But now, under reciprocal tariffs, they will have to apply an additional 54 per cent of value to bikes imported under this code from China, 10 per cent to those imported from Turkey, and 26 per cent to those from India.

Confusion arises if, say, 40 per cent of the value of a bike is Chinese-made, but 60 per cent of its finishing is done in India or Turkey. 

How Much Tariff Should Be Applied Now? 

The standard rules for these are called Rules of Origin (RoO). These are normally required only when two WTO members also have a Free Trade Agreement (FTA). That is the only time importers may demand a different tariff, since their imports come from a FTA partner. 

With Trump imposing different tariffs on every country, every importer will have to provide a Certificate of Origin, clearly declaring where their goods came from and what tariff rate should apply. 

Most goods are now produced in a global value chain across multiple countries. So, provision, examination and application for tariffs based on such certificates will turn into a nightmare for importers, exporters and the US customs authorities.

The US Presidential order and its annexes (particularly Annexe III) do not provide any clarity on the RoO, based on which differential tariffs can be applied. 

It simply uses the term ‘product of’. In the absence of a specific definition of the term ‘product of’, actual implementation becomes vague, unclear and prone to multiple interpretations. 

At the practical operational level, issues which do not find mention in the Presidential order and merit consideration are as follows.

Nightmare Of Determining RoO

Normally, Rules of Origin are well negotiated for preferential treatment, particularly in free trade agreements (FTAs). Only those goods that demand a preferential tariff are scrutinised for origin. The rest simply pass through customs paying MFN tariffs applicable to all WTO members.

With reciprocal tariffs kicking in, each consignment will have to be checked for originating country paperwork. Does US Customs have the operational bandwidth to handle that? If not, then it will create a logjam and huge delays at all US ports. 

RoO are a complex negotiating tool and take up the highest negotiating space in FTAs. That is because if they are not appropriately structured, non-FTA partners can use the loopholes, claim and get away with preferential tariffs. 

In the past, India has been at the receiving end of such indirect use of preferential tariffs, as goods from non-FTA countries were round-tripped through FTA partners of India.  

Additionally, it will be a big ask for the US Customs authorities to verify the origin of each and every product. Normal procedures involve either self-certification by the American importers or certificates issued by the exporting country authorities.

In both cases, there is a possibility of round-tripping via countries, on which the lowest amount of reciprocal tariffs is imposed.

Now, consider a situation where the US Federal Government asks for certification of every good reaching the American shores. That will invariably lead to a drain and stress on the certifying authorities and related agencies in other countries. Most countries do not have such extensive certifying infrastructure.

Global Trade Logistics At Risk?

In any case, trade logistics is fraught with a maze of unnecessary technical processes and regulations. Often, the exporters and importers at the ground level crave simplification of the procedures, which can substantially bring down the costs of exporting and importing.

Unfortunately, the Trump tariffs will significantly add to these existing burdens. 

Varying tariffs on each import-originating destination is unprecedented, and no customs authorities are equipped for this level of adversarial scrutiny. 

This can snowball into something big in the world of trade logistics, and can create substantial blockage in the movement of goods at every US port, once the reciprocal tariffs kick in. 

Structuring viable Rules of Origin, in the context of Trump tariffs, seems impossible. That means perhaps the world is hurtling towards a logistical chaos originating from the US ports. 

(The writer is a former IRS officer. She served as Director-General, SEPC and Principal Income Tax Commissioner. Currently, she teaches and does research at the intersection of environmental and trade governance)