When the Trade Rulebook Becomes Bargaining Leverage

A trade rule is supposed to make breaking the rules more costly than following them. But this only works if the rules can be enforced.

The World Trade Organization (WTO) still exists. Its agreements continue to define what members must do, and countries still use its rules to challenge tariffs. However, powerful countries can also impose restrictions under their own domestic laws, negotiate directly with individual trading partners, and use the threat of further action as leverage while disputes at the multilateral level remain unresolved.

The main question is not whether the WTO has “collapsed.” It is what happens when the rules remain in place but are not enforced equally effectively in every case.

For India, this matters because trade is no longer just about the tariff imposed on an Indian product. It is also about who decides the conditions under which that tariff can be imposed, challenged, negotiated and replaced.

The rulebook was designed to limit bargaining power

The post-war trading system was built on an important principle: countries should not be able to discriminate against others simply because they have greater economic power.

The General Agreement on Tariffs and Trade established the most-favoured-nation principle. Under this principle, a trade advantage given to one WTO member generally had to be extended to other members as well. The WTO was established in 1995, creating a broader system covering goods, services and intellectual property, along with a process for settling disputes.

The aim was not simply to reduce tariffs. Trade commitments were supposed to become rules that countries followed, rather than positions they could bargain over.

This arrangement gave countries such as India some protection. A larger economy could still have greater negotiating power, but it could not impose just any tariff without risking a formal challenge through the WTO.

The system was never perfect. WTO members can use recognised exceptions, and preferential trade agreements are allowed under certain conditions. Many bilateral free-trade agreements also remain linked to the multilateral system through WTO notification and scrutiny.

Even so, the system created a legal framework between economic power and trade outcomes. Its effectiveness has weakened in one important area: ensuring that a legal challenge can lead to an enforceable result.

The problem is not that the WTO disappeared

The bigger change has been in how trade rules are enforced.

The WTO can decide whether a measure violates a member’s commitments. But such a decision has a different impact when the process for resolving an appeal cannot function normally. The WTO records that its Appellate Body cannot review appeals because of continuing vacancies. The term of its last sitting member ended on 30 November 2020.

The rules did not disappear, but the usual process for reaching a final decision in some disputes became weaker.

The U.S. use of Section 301 shows this problem. Section 301 of the U.S. Trade Act allows the United States Trade Representative to investigate foreign trade practices and respond when they are considered unjustifiable, discriminatory or harmful to U.S. commerce. Under this law, the United States can make the initial decision using its own domestic legal process.

In the 1990s, the European Union challenged Section 301 at the WTO. The WTO panel recognised that even the threat of unilateral action could give one country significant leverage over another. However, it did not declare Section 301 itself inconsistent with WTO rules because the United States had assured the panel that it would use the provision in a way that followed those rules.

According to a 2020 Congressional Research Service report, the United States had generally used Section 301 before the first Trump administration to investigate trade disputes and seek settlements through the WTO. Its later use marked a different approach, with tariffs increasingly used as a tool of unilateral pressure.

The Section 301 action against China in 2017 eventually led to unilateral tariffs of up to 25 per cent. A WTO panel later found that these tariffs were inconsistent with U.S. commitments. The United States appealed the decision when the Appellate Body could no longer function.

This dispute revealed the gap between proving that a measure violates trade commitments and securing an effective resolution. The rule remained, but the process for turning a violation into an enforceable consequence became much weaker.

Domestic law can become a second source of trade leverage

When multilateral enforcement is limited, a powerful country can use its own domestic laws to take another route. The recent U.S. tariff sequence shows how this works.

The Trump administration initially relied heavily on the International Emergency Economic Powers Act, or IEEPA, to impose broad “reciprocal” tariffs. The U.S. Supreme Court later ruled that IEEPA did not authorise the tariffs in question. The Court restricted that particular legal route, but it did not remove U.S. authority to impose tariffs under other laws.

The administration then turned to Section 122 of the Trade Act of 1974 to impose a broad tariff for a limited period. Section 122 allows temporary import surcharges and certain restrictions under specific balance-of-payments circumstances. These measures can last for up to 150 days unless Congress extends them. The provision is not an unlimited power to impose tariffs for any purpose.

At the same time, the administration pursued Section 301 investigations covering issues such as alleged excess production capacity and the failure to effectively prohibit imports made using forced labour. India was among the economies included in these investigations.

Together, these laws give the United States several legal tools it can use to apply trade pressure. One route can be challenged, another can be used, and a temporary measure can expire while a different legal authority remains available. Each law has its own conditions and limits. But restricting one route does not necessarily remove the broader ability to apply trade pressure.

When tariffs become bargaining instruments

The importance of this system goes beyond the headline tariff rate.

A country facing a tariff can challenge it, but the economic damage may already be building while the legal process continues. If the tariff is struck down, another law may provide a possible route for further action. Even the possibility of replacing one measure with another can affect negotiations before a replacement is imposed.

A trade measure can therefore serve two purposes. It can make imports more expensive, and it can change the behaviour of the country facing it. The threat of further action may influence what a government is willing to negotiate, even while the legal position remains disputed.

Section 301 is particularly important because its effects can begin before any tariff is imposed. An investigation can influence the negotiating environment. However, starting an investigation establishes the U.S. government’s allegations and defines what it will examine. It does not mean that an international tribunal has finally ruled that the practices being investigated violate trade rules.

India’s experience shows how these different processes can overlap. After the Supreme Court restricted the tariff regime based on IEEPA, the United States temporarily used Section 122 and began further Section 301 proceedings while India and the United States continued negotiating a bilateral trade framework.

India therefore faced a question that went beyond the tariff currently in force:

Which U.S. law might determine India’s tariff tomorrow, and how does that possibility affect negotiations today?

That uncertainty can matter almost as much as the tariff rate being applied at present.

Bilateral negotiation gains importance

A multilateral system aims to apply common rules across countries. Bilateral bargaining works differently: two governments negotiate specific terms, often with very different levels of economic and political power.

Bilateral agreements are not automatically illegitimate or ineffective. WTO rules allow preferential arrangements, including free-trade areas and customs unions, under specified conditions.

The newer U.S. “Agreements on Reciprocal Trade,” or ARTs, differ in institutional character from conventional free-trade agreements. The United States has described these arrangements as ARTs rather than FTAs. Some have faced criticism because they may operate outside the traditional Article XXIV framework associated with WTO-recognised free-trade areas. They can also include provisions that go beyond tariffs.

The name alone does not settle the question. What matters for India is how the negotiations work in practice. When one country has several domestic legal tools that can affect market access, and multilateral enforcement is less effective, the bilateral negotiating table becomes more important.

In this situation, a country may make a concession because access to the other country’s market is economically valuable. It may also make one because it is concerned about what could happen if negotiations fail. Formal trade commitments then exist alongside the practical pressure created by a negotiating partner’s domestic legal powers.

The paradox of the Supreme Court ruling

The Supreme Court’s intervention shows this tension clearly. By limiting the executive’s ability to use IEEPA for the tariffs in question, the Court reinforced a legal limit on presidential power. Yet that limit did not restore a system in which multilateral rules alone determine trade outcomes.

Other laws remained available, and Section 301 investigations continued. U.S. trade policy still had to operate within domestic law, but the government could change the legal tool it used when one route was blocked.

A legal limit can be meaningful without removing the broader ability to apply trade pressure.

This distinction has economic consequences for exporters, investors and governments. A tariff that can be challenged is different from one whose future legal basis and duration are difficult to predict. Even if a country believes its legal argument is strong, it may still face commercial costs and negotiating pressure before the dispute is resolved.

India is negotiating inside two systems

WTO rules remain important to India because they provide the framework for challenging and assessing unilateral trade measures. But India is operating within two systems at the same time.

The first is the multilateral system. Tariff commitments, non-discrimination and dispute settlement establish formal obligations.

The second is the domestic legal system of a powerful trading partner. Laws such as Section 301 and Section 122 can shape the practical conditions under which market access is offered.

These two systems can operate at the same time. A measure can be challenged under international trade rules and still create economic pressure. That pressure can influence bilateral negotiations before the legal dispute is resolved.

This is why legal validity and practical leverage are not the same thing. A country may ultimately have a strong legal argument and still be in a difficult negotiating position while the dispute continues.

The deeper change: rules now coexist with bargaining power

The WTO has not collapsed, and the developments described here do not prove that every U.S. tariff is unlawful. The change is more specific: a rule-based trading system depends not only on having rules, but also on whether those rules can be enforced reliably.

As multilateral enforcement has weakened and powerful countries have increasingly relied on their own domestic laws, the link between legal obligations and actual outcomes has become less reliable. The rules remain, but they no longer determine every outcome on their own.

For India, understanding this difference is essential to managing trade diplomacy. India must consider not only what the international rulebook allows, but also which domestic laws a negotiating partner can use and how those laws may affect market access before a dispute is resolved.

The most important shift may not be from rules to no rules, but from rules that limit bargaining power to rules that operate alongside it.

The old question was largely: What does the agreement permit?

The harder question is: What can each side legally do, what can it actually enforce, and what can it secure at the negotiating table before the legal process catches up?

When these questions matter as much as the tariff schedule itself, the trade rulebook has not disappeared. It has become part of the bargaining leverage.