Tariffs, Trade Wars, and Talks: Shift from Multilateralism to Bilateralism

The Trump 2.0 administration’s ‘reciprocal’ tariffs wreaked havoc on the global economy. The move not only challenged the already fragile rules-based multilateral trading system but also caused market fluctuations and fear of supply chain disruptions, triggering uncertainty across businesses. While much has been written about these tariffs, this piece focuses on the bigger problem caused by such unilateral governmental actions, which represent a shift from multilateralism to bilateralism in international trade.

This piece first discusses the international trade law implications of such tariff increases and the responses to them from other countries, while capturing the latest developments. It then examines how similar tariff increases by the Trump 1.0 administration played out in the past and highlights how the US uses tariffs to bring countries to the negotiating table, further eroding the relevance of the World Trade Organization (WTO).

‘Reciprocal’ Tariffs and Responses

The announcement on 2 April 2025, dubbed ‘Liberation Day’ by President Donald Trump, was not the first time tariffs the US government increased tariffs citing ‘national security’.  This time, however, they were supposed to be ‘reciprocal’. But the tariffs allotted to the countries had nothing to do with the rates applied by them on the US and were instead calculated on the basis of the goods trade deficit the countries had with it. Economists questioned the methodology adopted for the tariffs and found flaws in the calculation. In addition to the ‘reciprocal’ tariffs, a base-level tariff of 10% was also applicable on all countries.

Under WTO law, the maximum level of tariff that a country may apply on a good is referred to as the ‘bound rate’. Countries agree on these bound rates after years of negotiations, and this is reflected in their Schedule of Concessions. Specifically, Article II of the General Agreement on Tariffs and Trade (GATT) 1994 mandates that a WTO member cannot raise its tariffs for a product beyond the bound rate. A country may modify it but only through a process of renegotiation under GATT Article XXVIII, which requires a notification to the WTO and compensation to the countries most affected by alternate tariffs or other mutually agreed upon concessions.  Additionally, Article I of the GATT mandates that the tariff rate applied for a product be the same across all countries, known as the most favoured nation (MFN) principle. WTO members usually apply tariffs below their bound rates.

Undoubtedly, Trump’s reciprocal tariffs—which envisage their unilateral increase beyond the bound rates and differential application of tariffs on the same product originating from different countries—is inconsistent with WTO rules.

However, a week after the announcement, the US temporarily suspended these tariffs for all countries except China. In response, China also increased its tariffs on the US, leading to a ‘Trade War’.

Even if a country would like to retaliate against another’s WTO-inconsistent action, like China in this case, Article 23 of the Dispute Settlement Understanding—the WTO’s rulebook on disputes between its members—specifies that recourse must be taken through the WTO, prohibiting any unilateral action. In other words, a country may apply retaliatory tariffs only after a dispute is filed at the WTO and the body authorises it, including the extent of the retaliation. While retaliatory actions may be justified as counter-measures under general international law, provided they comply with the necessity and proportionality requirements, they are still considered inconsistent with WTO law.

Past Developments

During Trump 1.0 (2017–2021), the US increased tariffs on steel and aluminium products that led to several countries like China, India, and the EU filing disputes with the WTO. The US, in turn, filed counter-disputes against the retaliatory tariffs of these countries.

Similar to its response on the recent ‘reciprocal’ tariffs, the US had argued then too that these measures were applied for national security reasons and so were justified under GATT Article XXI (Security Exception). The US maintained that Article XXI was a self-judging provision, but previous WTO cases had already found that the article was justiciable, requiring a panel to do an objective assessment of facts. Thus, the US could not successfully invoke the security exception in these cases as there was no situation of ‘war or other emergency in international relations’.

In their counter-disputes, the countries involved argued that the US steel and aluminium tariffs were ‘safeguard measures’ against which an affected country may retaliate under Article 8 of the Safeguards Agreement. Safeguard measures are temporary trade restrictions to protect a domestic industry from an unexpected increase in imports. The panels disagreed with characterising the US steel and aluminium tariffs as safeguards, noting that the design and application of the measure did not indicate that. Thus, both the tariffs applied by the US and the retaliation by other countries were WTO-inconsistent.

Unfortunately, none of these disputes led to any effective solutions because the US, under the Obama administration, had long paralysed the WTO dispute settlement mechanism by blocking appointments of judges to the Appellate Body. Effectively, countries do not have to comply with an adverse ruling of a WTO panel as they can appeal it ‘into the void’. While a few countries have created a temporary solution—the Multiparty Interim Arbitration (MPIA)—to address the ineffective dispute settlement system, the US has not joined these efforts. It has also paused its contributions to the WTO budget, further weakening the system.

Shift to Bilateralism

With an ineffective multilateral trading system, countries are increasingly relying on bilateral arrangements and negotiations to resolve trade matters. For instance, countries like Canada and Mexico entered into a mutually agreed upon solution to settle the 2018 steel and aluminium disputes.

The US and China also sought to resolve their previous trade war by signing a trade agreement, known as the Phase One Agreement, in February 2020. A key exception to the MFN principle is free trade agreements (FTAs), which enable preferential treatment for FTA partners, provided they comply with the requirements prescribed in Article XXIV of the GATT. Unlike traditional FTAs focused on trade liberalisation, the US-China Phase One Agreement required China to expand purchases of certain US goods and services by $200 billion for a two-year period, further disregarding the principles of WTO law. Although reports indicate that China did not actually buy the additional $200 billion of US exports it had committed to, the US did not raise any concerns in order to perhaps indicate a political win in the trade war.

This trend of raising tariffs to enable bilateral negotiations continues in Trump 2.0 as evidenced by the announcement of the ‘reciprocal’ tariffs.

While these tariffs have been temporarily paused until 9 July 2025, many countries rushed to negotiate with the US to escape their eventual application. For instance, the US-UK Economic Prosperity Deal was announced on 8 May 2025. In fact, the US and China have also agreed to de-escalate their trade war by suspending their post-‘Liberation Day’ tariff escalation for an initial period of 90 days. Currently, both countries seem to consider this a win, but it is not an end to the trade war until a deal is negotiated.

To address the US’s WTO-inconsistent actions, countries appear to be shifting towards bilateralism as multilateralism has increasingly been abandoned by the US. But this is not exclusive to the US; India, for instance, has also joined this bilateral bandwagon by recently concluding its FTA with the UK and negotiating numerous others, including with the US and the EU. Irrespective of the success of these FTAs, such bilateralism will only further fragment international trade law.

About the Author

Ronjini Ray is an assistant professor of law at NLSIU. In addition to teaching, she also has experience in practising international economic law.