Global Trade 101: The World Trade Organization’s trade rules and market mechanisms

President-elect Trump has made numerous statements about the imposition of tariffs on some of the U.S.’s major trading partners. These tariffs, if put in place, are likely to have implications for biofuels and related feedstock imports. The objective of this “Trade 101” is to explain how the rules and mechanisms of the World Trade Organization (WTO) function with specific reference to biofuels and related feedstocks. We also explain the various means by which higher tariffs could be applied and their ramifications. This article is neither exhaustive nor provides specific guidance on tariff or customs treatment on specific goods or products. For such guidance it is recommended to consult the relevant customs authority or a customs broker.

WTO overview and key principles

Headquartered in Geneva, the WTO serves as an international body overseeing global trade rules.  It has 166 member states and “governs” 98% of global trade. The WTO’s primary objectives are to promote free and fair trade, to resolve trade disputes, and to foster economic growth by reducing trade barriers and ensuring predictable trading systems.

The global trade rules that the WTO oversees embody a number of key principles:

• Trade without discrimination – under the most-favoured-nation (MFN) principle, countries cannot normally discriminate between their trading partners, nor can they discriminate between domestic and imported goods in terms of market access, regulatory treatment etc. This means in practice that in new agreements members must offer terms as least as good as their existing tariffs and vice versa.  This has the effect of “ratcheting down” tariffs.  There are exceptions to this principle, for example, in free trade blocks (such as USMCA¹ and the EU) or providing developing countries (LDC²) special access.
• Freer trade through negotiation – this covers not only trade tariffs but also seeks to remove or avoid other non-tariff barriers on goods (e.g. quotas, import bans, or registration requirements that only apply to imports). There is a general preference to multilateral trade agreements versus bilaterals as this generally avoids disadvantaging smaller developing countries – however the 9^th round of global trade negotiations, the Doha Round, has effectively been stalled since 2011.
• Predictability and transparency – this principle attempts to make the business environment stable and predictable. By joining the WTO, countries agree to open their markets to goods and services and “bind” their commitments. For goods, these bindings amount to ceilings on tariffs.  A country can subsequently change its bindings but only after negotiating with its trading partners.  This principle also discourages the use of quotas or other measures to set limits on the quantities of imports.  In addition, WTO members are required to publicly disclose their policies.
• Promoting fair competition – the WTO is a system of rules dedicated to open, fair and undistorted competition. So, as well as the rules on non-discrimination (MFN and national treatment) there are also rules that enable countries to protect their markets against unfair competition from imports (e.g., price dumping and subsidies).
• Encouraging development and economic reform – over three quarters of WTO members are developing countries or in transition to market economies. So, the WTO rules and agreements are designed to give them transition periods to adjust to the WTO provisions as well as allowing preferential trade access.

To understand how the WTO works in practice, you need to understand the underpinning structure and regulations around global trade policy.  Below, we provide a brief overview of these underpinnings using biofuel relevant examples where possible.

Tariff structures and frameworks

The Harmonized System (HS) Codes managed by the World Custom Organization sets out an internationally standardized system of names and numbers to classify all traded products. It serves as the foundation for customs tariffs and international trade statistics in over 200 countries and territories.

The HS consists of a 6-digit coding structure that classifies goods in a hierarchical manner starting with 21 sections which are then sub-divided into 99 chapters which are further subdivided into 1,244 headings and 5,224 sub-headings. The intent is to provide a structure that allows for increasing specificity. WTO members then add additional digits to create an extra subheading and statistical suffix for domestic tariff and statistical trade reporting needs. The U.S. Harmonised Tariff Schedule (HTS) and the EU Combined Nomenclature (CN) are examples of these.

The example below of the classification for bioethanol used for blending into gasoline under the U.S. HTS and EU CN systems demonstrates how the hierarchical specification system works.

Figure 1: U.S. and EU HTS and CN coding example
Sources: U.S. International Trade Commission and EU Taxation and Customs Union

Under both systems there are additional codes defined by 7^th and 8^th digits (HTS and CN Subheading) for other uses for ethanol of >80% purity (e.g., beverage) that have different tariffs. Likewise, different four-digit HTS codes classify a set of other uses or forms of ethanol with <80% purity, with which the HTS and CN systems will set other tariffs (e.g., wines or >14% purity).

Key U.S. biofuel and related feedstock HTS codes and tariffs

The table below provides a selection of some of the key biofuel-related U.S. HTS codes and the default or standard tariffs.⁴

Figure 2:  US HTS codes and tariffs for selected biofuels and related feedstocks ^4,5Country groupings and trade arrangements

The WTO defines a number of country groupings and trading arrangements that enable certain countries to obtain preferential tariff treatment versus the standard or default tariffs. The key ones being:

• Least Developed Countries (LDC): a UN defined list of 46 counties (of which 35 are WTO members) which have a combination of low income per person, weak human resources (e.g., high child mortality, and low adult literacy), and high economic vulnerability. Countries are chiefly located in Sub-Saharan Africa and Southeast Asia, and by way of example include Bangladesh, Chad, Nepal.  These countries receive enhanced trade preferences, technical assistance, and exemptions from some WTO rules.
• Generalized System of Preferences (GSP and GSP+): works with the LDC grouping and is a trade policy tool that allows developed countries to grant non-reciprocal tariff reductions to LDCs on a wide range of products.   GSP+ is an enhanced version of GSP which offers additional tariff reductions to certain LDCs that are vulnerable in terms of export diversification and income levels, and meet additional criteria, such as international conventions related to human rights, labor rights, environmental protection, and good governance.
• Everything Except Arms (EBA): is a specific EU initiative under the GSP scheme that provides tariff and quota- free access to the European market for LDCs for all goods except arms and ammunition.

Product entries in the U.S. and EU trade databases will detail the specific tariff treatments for these countries / groupings in addition to the standard tariff rate. The tariff treatment under any pertaining Free Trade Agreements (FTA) will likewise be shown (e.g.,  USMCA,⁹ CAFTA-DR,¹⁰ etc.)

Rules of Origin

WTO Rules of Origin are a set of regulations and criteria used to define a country of origin for goods for a number of purposes, including the correct application of tariffs and quota, eligibility under Free Trade Agreements or preferential trade arrangements, and the correct application of any trade remedy (e.g., anti-dumping tariffs).

The WTO agreement on Rules of Origin attempts to achieve three objectives:

1. Harmonisation – developing a single set of non-preferential rules of origin to ensure consistency across WTO members.
2. Transparency and Predictability- clear rules that are predictable, and not designed to restrict trade.
3. Prohibition on Abuse – ensuring rules are not used as disguised trade restrictions.

Criteria used either on their own or in combination to determine rules of origin are:

• Wholly Obtained Goods: products entirely produced in a single country (e.g., agricultural products).
• Substantial Transformation: goods that undergo significant processing in a country, based on value addition or a change in tariff classification.
  • Value addition is typically defined as the value add exceeding 40% of the product’s total value.
  • Change in tariff classification – a significant transformation is a change at the chapter level (first 2 digits) i.e. a complete transformation. A moderate transformation is a change at the heading level (first 4 digits). Whereas a change at the sub-heading level would be regarded as minor transformation and typically not qualify as substantial transformation.
• Specifically defined processes under an FTA – for example spinning and weaving for textile products.

Trade Remedies

As mentioned already, there are circumstances and procedures where countries can apply higher tariffs than their otherwise WTO-binding tariffs. There are three such procedures available:

• Anti-dumping duties: Dumping refers to the practice when a foreign producer exports goods at a price lower than their normal value, e.g. below the cost of production or market price in the exporter’s domestic market.

Under the WTO Anti-dumping Agreement countries can impose anti-dumping duties if they can prove:

1. Price dumping is occurring.
2. Domestic industries are suffering material injury.
3. A direct causal link exists between the dumped imports and the injury.

The process normally involves an anti-dumping complaint, or allegation being made by domestic player(s) (typically a trade association) to the relevant trade authority, who will launch an investigation if the case is determined to have merit. The authority will typically call for evidence from both domestic producers and importers of the product concerned. Importers have the option of deciding whether to collaborate with the investigation.

If the investigation concludes that dumping is taking place, then the country concerned is allowed to impose anti-dumping duties to counteract the effects of the dumping. The application of the anti-dumping duties is importing company-specific with higher, additional penalty-based duties being applied to importers who have not cooperated with the investigation. Anti-dumping duties are temporary and typically reviewed every five years.

• Countervailing Duties (CVDs): CVDs are designed to offset the effect(s) of subsides provided by a country to its exporters which allow exporters to import goods at artificially low prices into the importing country. Countries can impose CVDs if they can demonstrate that the foreign government provides actionable subsidies and the subsidized imports are causing material injury to the domestic industry. The process followed to impose CVDs is similar to anti-dumping duties.
• Safeguarding Measures: Unlike anti-dumping duties or CVDs, safeguarding measures allow a country to protect its markets against a sudden surge in import volumes even if the imports are traded fairly. Countries seeking to impose safeguarding measures must demonstrate evidence of a sharp and unexpected increase in imports that causes or threatens to cause serious injury to the domestic industry

If proven, the importing country can apply:

• Temporary increases in tariffs,
• Quotas to limit import volumes, or
• Tariff-rate-Quotas (TRQ) – a combination of tariff and quota, where certain quantity is subject to a lower tariff, with higher tariffs applying to additional volumes.

Unlike anti-dumping or CVDs, safeguarding measures must be applied globally and not on imports from specific countries. They are typically applied for a maximum of four years, with a possible extension up to eight years under WTO rules.

Exporting countries (rather than companies themselves) have the option to use the WTO dispute resolution procedures to appeal any trade remedies if they feel they have been unfairly imposed. This a two-stage process involving an initial consultation phase to attempt to resolve the issue amicably, with a second stage WTO panel review if the consultations are unsuccessful. If a violation ruling has been made, there is a potential third stage Appellate Body ruling, but this currently non-functional due to WTO governance challenges.

A ruling against an importing country requires that country to bring its tariffs into compliance. Failure to do so allows the affected countries to seek permission to impose retaliatory measures.

Outside of the above-listed Trade Remedies, if a country imposes higher tariffs than its previously agreed binding tariffs, affected countries can likewise use the WTO dispute resolution mechanism to seek redress. In addition, such action may prompt retaliatory action by affected countries either outside of or preempting the outcome of WTO processes (i.e., a so-called “trade war”).

Some biofuel related anti-dumping and countervailing measures include:

• August 2024 – The EU introduced additional anti-dumping tariffs ranging from 12.8% to 36.4% on major Chinese companies importing biodiesel, renewable diesel, and sustainable aviation fuel into Europe.
• December 2017 – The U.S. imposed countervailing tariffs (up to 72% in some cases) on biodiesel imports from Argentina and Indonesia in response to subsides that allow foreign producers to sell into the U.S. market below market prices. These were renewed following a five-year “sunset” review by the S. International Trade Commission (USITC) in 2023.
• July 2009 – The EU introduced countervailing tariffs on U.S. biodiesel imports (ranging from 211 €/tonne to 237 €/tonne) in response to U.S. imports benefiting from U.S. subsidies, including the biomass-based diesel blender’s tax credit (BTC). After a number of “sunset” reviews, and despite legal challenge, these tariffs are set to remain in place until 2026.

Conclusion

While the WTO is, to a large extent, a rules-based organization, it would be a mistake to believe that countries scrupulously follow those rules. It is also an organization facing its own challenges, including:

• The non-functioning Appellate Body due to the U.S. blocking new members. This has resulted in many disputes being unresolved.
• Stalled progress in negotiations on agriculture and fishing subsidies and digital trade.
• Lack of institutional reform, with calls to reform the WTO to address modern trade realities including e-commerce, climate change, and state subsidies left unaddressed due to a lack of consensus between advanced economies and emerging markets.
• Erosion of trust and relevance, with some countries such as the U.S. expressing their dissatisfaction with the WTO’s effectiveness, particularly in relation to some of China’s practices.

It is, conversely, a mistake to believe that the WTO has no relevance; the trade rules and mechanisms discussed above do provide some “tramlines” to consider as the new U.S. administration implements its trade policy statements.  And while the WTO’s dispute resolution process is stalled, this may well prompt impacted countries to impose their own retaliatory tariffs, which will have economic and political implications in the U.S. Moreover, there is the potential for domestic legal challenge, as evidenced in 2020 with 3,500 companies (including Tesla) suing the U.S. government for failing to follow due process when Trump first imposed tariffs on China.

In a follow-up article we will look more closely at the potential impact to the U.S. biofuel sector of president-elect Trump’s promised tariffs.