Wednesday, October 4, 2017
On the warm Monday morning of June 11, 1787, the delegates to the Constitutional Convention met in Philadelphia and resumed their discussion of how the states should be represented in the legislature of the new government. Roger Sherman of Connecticut proposed that representation be according to "respective numbers of free inhabitants" in one house and one vote per state in the other. Other delegates, such as John Rutledge of South Carolina and John Dickinson of Delaware, suggested that states be represented according to how much income they contributed.
Rufus King of Massachusetts pointed out that the latter rule was ultimately about trade power, since income would no doubt be drawn largely from import duties. "If actual contributions were to be the rule," said King, according to James Madison's notes, "the non-importing States, as Cont. and N. Jersey, wd. be in a bad situation indeed."
This was not the first day that the delegates had broached the subject of state representation. Apparently their discussion the previous Saturday was not as stately as the records suggest, because Benjamin Franklin had taken the time on Sunday to put his thoughts on the matter in writing. His remarks, read to the Committee on the Whole by James Wilson, began this way:
"It has given me a great pleasure to observe that till this point, the proportion of representation, came before us, our debates were carried on with great coolness & temper. If any thing of a contrary kind, has on this occasion appeared. I hope it will not be repeated; for we are sent here to consult not to contend with each other; and declarations of a fixed opinion, and of determined resolution, never to change it, neither enlighten nor convince us. Positiveness and warmth on one side, naturally beget their like on the other; and tend to create and augment discord & division in a great concern, wherein harmony & Union are extremely necessary to give weight to our Councils, and render them effectual in promoting & securing the common good."
We may not be writing a Constitution in 2017, but we are testing the meaning of the one those delegates wrote that summer in Philadelphia. Is it too late for us to stop contending and begin consulting? I'll be thinking of Franklin's words as I continue my work today.
Thursday, September 21, 2017
On Tuesday, President Donald Trump told the United Nations, “I will always put America first.” Trump’s speech evoked sovereignty, but mostly celebrated nationalism and implied protectionism.
Is Trump showing the world America? Or is he holding up a mirror showing the world itself?
Protectionism from 10,000 Feet
Three decades ago, political scientist David A. Lake argued against the popular idea that United States policy on international trade could be understood, as conventionally suggested, by focusing on domestic interest group behavior or party politics.
It’s the Republicans. It’s the Democrats. No, it’s the farmers, the unions. No wait, it’s …
In his book Power, Protection and Free Trade, Lake suggested that trade policy can only be understood in the context of what he called “the international economic structure.” Basically, that means the United States trade strategy is highly dependent on what other nations are doing – which ones have global economic power, which ones are important export markets, and how each acts or reacts in its own trade policy.
According to Lake, domestic interest groups and political parties either don’t vary as much as we think, or their preferences don’t carry much weight until they happen to become consistent with the strategy dictated by the international economic structure. But too often, we miss the international context and devote all our attention to the domestic tug-of-war.
Lake’s book was published in 1988 and he was trying to explain the establishment, and decline, and resurgence of protectionism in U.S. trade policy from 1887-1939.
He wasn’t talking about Donald Trump or United Steelworkers or NAFTA or Brexit or Marine Le Pen or Andrés Manuel López Obrador.
But maybe we should.
Trump As Effect – and Cause – and Effect – of Global Instability
Trump’s rhetoric since the campaign trail has been to “Make America Great Again,” in large part by making America protectionist again.
The media, which didn’t expect Trump to win, seems to offer explanations based mostly on domestic interest group issues (like the stagnation in real wages since 1979) or the platforms of political parties (like the failure of Hillary Clinton and the Democrats to grasp the importance of wage stagnation).
But these explanations don’t quite add up.
First, if real wages have been stagnant since 1979, why did it take 37 years for this to show up in the voting booth? And why in 2016 and not 2012 or 2020?
Second, if the Democrats are to blame, then what about the fact that Republicans in the White house and in Congress have mostly been as strong or stronger supporters of liberal trade policy than Democrats (and reportedly still don’t know quite what to do about this President)?
If the international economic structure is mentioned at all in this discussion, it’s mostly about (1) how the election of Trump is representative of a broadly illiberal movement springing up around the world, or (2) how Trump’s policies may affect the reputation of America abroad.
While these observations hint at the perspective Lake raised, they generally fail to note the causal links in the international economic chain – links that may have led to Trump’s election and may determine the fate of his policies.
Only rarely do pundits consider whether the election of a protectionist like Trump in 2016 – not sooner, not later – could be the likely and predictable outcome of global economic instability, increasing isolationism, and the decline of American hegemony in the international economic order.
What Happened When America Stopped Being “Great”?
Perhaps Trump’s cry to “Make America Great Again” is more useful as diagnosis than prescription.
As long as the United States was the market every other country needed to gain access to, U.S. trade policy could afford to be liberal. Any country that tried to protect its own industries from our exports could be swiftly and effectively punished with trade sanctions that kept their products out of our markets.
But if the U.S. market sags or teeters – as it did in 2008 – and emerging markets like China and India can pick up the slack for any country that shuts out the U.S. and pays a price in access, the effects may start to compound.
In this context, protectionism against U.S. exports might be expected to rise, and U.S. industries might begin to feel a hit that conventional trade sanctions can’t remedy. The hardest-hit industries might begin to demand exceptional sanctions like Section 232 steel tariffs based on national security, or strong-armed renegotiation of NAFTA.
Aftershocks of 2008
These kinds of burn-the-bridges trade policies might become much more attractive under conditions of international economic instability like those that surfaced to widespread public awareness in 2008.
As Lake wrote thirty years ago, most countries – even those that usually seek to deal – will try to insulate themselves from international economic instability through protection. This has ripple effects: “By making future interactions between opportunists less likely or predictable, instability increases the value of present returns relative to future returns, also increasing the attractiveness of protection.”
In other words, why not elect a Donald Trump in 2016 if Britain has already taken its ball and gone home (and China arguably never played by the rules anyway)?
If other important trade partners defect from the game, Trump’s tough trade rhetoric might start to be translated into policy. Also in Lake’s words: “A threat that becomes a certainty stops being a threat.”
Under this view, if Donald Trump hadn’t existed in 2016, perhaps the international economic structure would have created him.
Saturday, September 16, 2017
This week, the Chicago Cubs’ Venezuelan catcher Willson Contreras came off the disabled list after suffering a hamstring pull on August 9. While Contreras was rehabbing, the Trump Administration placed additional sanctions on Venezuela as the government of President Nicolás Maduro screeched toward dictatorship.
What do these sanctions mean for MLB – and for MLB hopefuls in Venezuela?
At the beginning of 2017, MLB rosters included a record 77 players of Venezuelan origin, including stars like Miguel Cabrera and Jose Altuve. But most of those players entered professional baseball before conditions in Venezuela significantly deteriorated in the past few years. Now, MLB clubs are pulling out of the Venezuelan scouting market.
While the new sanctions don’t prohibit clubs from continuing to scout and sign Venezuelan players, the deteriorating conditions and escalating political tensions spell dark days for Venezuelan baseball hopefuls. Here’s a look at the evolving sanctions program against the country and what it might mean for baseball prospects in the near term.
Trump’s August 24 Sanctions Order
On August 24, President Trump issued an executive order that prohibits U.S. persons from financing most Venezuelan government debt, transacting in Venezuelan bonds or securities, or distributing profits to the government of Venezuela by any Venezuelan-owned entity. Excepted is the issuance of debt with a maturity of less than 90 days to the state-controlled oil company, Petróleos de Venezuela SA, and debt with a maturity of less than 30 days to any other Venezuelan government entity.
What’s the upshot of this? Economically speaking, not much. Venezuela is already way too big a risk for the private markets. As one Latin America finance expert told The Washington Post, “It won’t have any important impact in terms of financial flows to Venezuela, because there aren’t any to speak of right now.” The only thing it might meaningfully prevent is a refinancing by Venezuela of its debt in a way that buys the Maduro government a little more time.
The executive order still allows for imports and exports, including trade in Venezuelan crude oil – a trade that is important for Gulf Coast oil refineries and crucial to the Venezuelan economy. The White House press secretary has stated that Treasury will issue licenses for financing of imports and exports and certain other types of transactions, calculated to “mitigate harm to the American and Venezuelan people.”
Treasury’s Venezuela-Related Sanctions Program
These (mostly political) sanctions have some history – this isn’t a wholly Trump-created program. The U.S. began to step up sanctions against the Maduro government in late 2014 when Congress passed and President Obama signed the Venezuela Defense of Human Rights and Civil Society Act.
The Act takes notice of the rising human rights abuses, government-sponsored violence and repression, and economic crisis in Venezuela, and authorizes the President to freeze assets, block transactions, and deny visas for anyone responsible.
The presidential power to freeze and block assets under the act is based on the International Emergency Economic Powers Act. This law, passed in 1977, was first used by President Jimmy Carter in 1979 to freeze Iranian assets during the hostage crisis at the U.S. Embassy in Teheran and is currently the basis for sanctions against numerous countries and organized criminal enterprises. The scope of the President’s powers under the IEEPA (broad) was considered by the Supreme Court in the 1981 case Dames & Moore v. Regan.
The Act (maybe) avoids infringing on GATT protections by including an “Exception relating to importation of goods,” which states that “the requirement to block and prohibit all transactions in all property and interests in property … shall not include the authority to impose sanctions on the importation of goods.” Hence, the President doesn’t have the authority (at least not under IEEPA) to block Venezuelan crude oil imports.
Up to last month, the Venezuela sanctions program had mostly been used to block assets of or transactions with individuals in the Venezuelan government. By executive order in 2015, Obama recognized an emergency in Venezuela and invoked IEEPA to block assets of a list of Venezuelan nations. The Specially Designated Nationals list, monitored by Treasury’s Office of Foreign Assets Control, includes 38 Venezuelans since Trump added Maduro and other officials of Maduro’s government to the list in late July.
Law and Baseball in Venezuela
So the new Venezuelan sanctions order protects goods coming into the U.S. It doesn’t explicitly protect foreign direct investment in Venezuela like MLB player development academies, but it doesn’t prohibit those transactions either.
Where MLB clubs could run into trouble is if signing a Venezuelan player requires transacting with someone on the sanctions list, which might happen if, say, top players are represented by agents who have close business ties with sanctioned government officials. But unless OFAC or another federal law enforcement agency gets heavily involved in investigating those ties, MLB clubs can probably continue to sign young Venezuelan talent.
The possibility of further sanctions and even military intervention, however, is not off the table if the Maduro regime continues to ignore international demands such as respecting democratic elections.
In a press briefing about the latest sanctions, National Security Advisor General H.R. McMaster said that the President had asked his cabinet to analyze how the situation might deteriorate and what the range of U.S. and international response to such scenarios might be. General McMaster emphasized that any response would be multi-faceted:
“In terms of military options or others options, there’s no such thing really anymore as only a military option, or a diplomatic option, or an economic option. We try to integrate all elements together.”
Could the U.S. go so far as to prohibit all transactions with Venezuelan entities, as it does in Cuba? The realist answer is that it’s unlikely: the U.S. imports 6 to 9 percent of its crude oil from Venezuela.
The Bottom Line for Venezuelan Baseball
As of now, there’s no real legal impediment to MLB clubs continuing to scout and develop and sign Venezuelan players. The obstacles are mostly related to safety and efficacy, not legality. But those obstacles are enormous. In addition to concerns about the personal safety of scouting personnel, teams are reluctant to spend money on development programs and travel if street violence may prevent scouts from ever making it to the ball field. At some point the risks outweigh the potential competitive edge of finding the next big star.
The growing reluctance of MLB clubs to devote resources to Venezuela has already caused the collapse of most of the infrastructure for developing pro ballplayers in the country. In 2000, 22 MLB clubs had academies for young players in Venezuela. As of this year, only four remain (Tigers, Rays, Cubs, and Phillies). As the teams pulled out, down went the Venezuelan Summer League, which operated from 1997 to 2016.
A few Venezuelan players will still be signed – those who look, from a young age, like star prospects worth moving to the Dominican Republic for development. But players like Contreras, today a rising star in the Cubs lineup who no one considered a top prospect early on, are unlikely to get a shot.
Tuesday, September 5, 2017
Can Trump withdraw from NAFTA? At a rally in Phoenix on August 22, President Trump said, “[w]e’ll probably end up terminating NAFTA at some point.” Can he? More specifically, can Trump dump U.S. trade obligations with a stroke of the pen, or would it require cooperation from Congress?
If Trump’s threat to withdraw from the trade deal is more of a bargaining chip in the NAFTA renegotiations, as his comments last week suggested, questions about the legality of that action are even more immediately relevant. How much should Mexico and Canada worry that Trump will unilaterally exit the talks and the deal?
NAFTA as a Problem in Constitutional Law
Under the agreement, it’s clear that the United States could withdraw from NAFTA just by giving six months’ notice. Article 2205 of NAFTA says, “A Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.”
For purposes of international law, that should do it. President Trump sends a letter to the Mexican president and Canadian prime minister and as far as they’re concerned, we’re out.
But as a matter of domestic law, it’s not quite that simple. This is where international trade law morphs into a constitutional law problem, or actually two of them.
First, it’s unclear whether the Constitution allows the President to withdraw from congressional-executive agreements like NAFTA without consulting Congress and, perhaps, receiving their approval.
Second, even if he can, it’s not clear whether withdrawal from the agreement would automatically terminate the underlying U.S. trade obligations toward Canada and Mexico. Because trade agreements are generally not self-executing, trade deals have to be implemented into U.S. law by Congress. Congress did that for NAFTA obligations in 1995 when it passed the NAFTA Implementation Act. Even if Trump withdraws from NAFTA, the NAFTA Implementation Act continues in force – unless it expires by its terms or Congress repeals it.
A lot of research will be needed to answer both of these questions. Below are some preliminary observations and relevant legal authorities.
Getting Out of NAFTA Free: Section 109(b)
Let’s take the second question first because it may be the easier (though not easy) one. There’s a good argument that Trump wins here.
The NAFTA Implementation Act has a provision, Section 109(b), that provides for situations in which the Act will cease to have effect. Basically, it’s a Terminator provision inserted by Congress under which the Act self-destructs if certain conditions occur.
The trouble is, the provision is hardly a model of clarity, so both false detonations and dead wires are possible. Section 109(b) says:
(b) Termination of NAFTA Status. – During any period in which a country ceases to be a NAFTA country, [the implementing provisions of the Act] shall cease to have effect with respect to such country.
Okay, but when does a country “cease to be a NAFTA country”? Does that only refer to withdrawal by Mexico or Canada, or could it include a case where the United States withdraws? “NAFTA country” is defined as
(A) Canada for such time as the Agreement is in force with respect to, and the United States applies the Agreement to, Canada; and
(B) Mexico for such time as the Agreement is in force with respect to, and the United States applies the Agreement to, Mexico.
Comparing Termination Provisions of Other Implementation Acts
Now, this is not nearly as clear as the termination provisions in a number of U.S. bilateral trade agreements. For example, Section 107 of the United States-Colombia Trade Promotion Agreement Implementation Act says,
(c) Termination of the Agreement. – On the date on which the Agreement terminates, this Act … and the amendments made by this Act … shall cease to have effect.
That one’s pretty clear, but that one’s also easy – as a bilateral agreement, the underlying agreement between the U.S. and Colombia would terminate if either party withdrew. Drafting is understandably more complicated where there are multiple parties to the agreement.
Termination of a Multilateral Trade Agreement: CAFTA-DR
So let’s consider the Dominican Republic-Central America-United States Free Trade Agreement Implementation Act (yes, that’s really its name). The underlying agreement, better known as CAFTA or CAFTA-DR, is a trade deal between the U.S., Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. As with NAFTA, one of the parties could withdraw and the agreement could remain in force.
The CAFTA-DR Implementation Act is more clear about the effects of termination than the NAFTA Implementation Act is. Section 107 of the CAFTA-DR Implementation Act says,
(c) Termination of CAFTA-DR Status. – During any period in which a country ceases to be a CAFTA-DR country, the provisions of this Act (other than this subsection) and the amendments made by this Act shall cease to have effect with respect to that country.
(d) Termination of the Agreement. – On the date on which the Agreement ceases to be in force with respect to the United States, the provisions of this Act (other than this subsection) and the amendments made by this Act shall cease to have effect.
A “CAFTA-DR country” is defined for each country in the following manner:
[T]he term ‘CAFTA-DR country’ means –
(A) Costa Rica, for such time as the Agreement is in force between the United States and Costa Rica; ….”
Well, that makes a lot more sense. Nothing here about the United States “apply[ing] the agreement to” anybody. As long as the agreement is in force between the U.S. and a particular country, they’re a CAFTA-DR country. If the agreement ceases to be in force between the U.S. and that country, the Implementation Act terminates with respect to that country (and that country only). But if the agreement “ceases to be in force with respect to the United States,” then the Implementation Act terminates completely.
What should we make of the difference between the termination provisions in the NAFTA and CAFTA-DR Implementation Acts?
Making Sense of the NAFTA Termination Provision
Maybe nothing. The CAFTA-DR Implementation Act was passed ten years after the NAFTA Implementation Act. Perhaps Congress had just gotten better at expressing the two conditions in which the Act’s provisions might terminate.
Under the CAFTA-DR Implementation Act, it’s clear that that may occur either where (1) the Agreement ceases to be in force between the U.S. and a particular country; or (2) the Agreement ceases to be in force with respect to the U.S., period.
The first seems to contemplate withdrawal by the particular trade partner (or maybe selective withdrawal by the U.S. as to that partner only, though such a thing isn’t provided for in the Agreement). The second seems to contemplate withdrawal by the U.S. from the Agreement as a whole (or maybe the other parties kicking the U.S. out of the deal, though again, there’s no provision for that).
In contrast, the NAFTA Implementation Act says the act terminates when a country ceases to be a NAFTA country, and it requires that two conditions be met for a country to be considered a “NAFTA country”: both “the Agreement is in force with respect to” that country, and “the United States applies the Agreement to” that country.
Compare that to the CAFTA-DR termination provisions. The first condition, “the Agreement is in force with respect to” Canada or Mexico, seems to contemplate withdrawal by Canada or Mexico. So what could the second condition, “the United States applies the Agreement to” Canada or Mexico, mean?
Scant Clues from Legislative History
The only authoritative sources of legislative history are the House and Senate Reports. Those reports are cursory in their discussion of Section 109(b). The House Report pretty much just repeats the language of the statute: “[The implementing provisions of the act] shall cease to have effect with respect to a country during any period in which that country ceases to be a NAFTA country.”
The Senate Report doesn’t say much more, but it does paraphrase, which might shed a little light on the Senate’s understanding of the provision. The Senate Report says that the implementing provisions of the act “shall cease to have effect with respect to a country during any period in which that country ceases to be a party to the NAFTA.” This seems to contemplate only cases where Canada or Mexico withdrawal, not where the U.S. withdraws.
But in that case, what does the text mean when it says that the act terminates unless the agreement is in force with respect to, and the United States applies the agreement to, Canada or Mexico? According to core principles of statutory interpretation, the second clause must mean something. The Senate Report’s description seems to make it redundant, if the act’s provisions terminates only when the other party pulls out. Isn’t that already covered by the first clause, “for such time as the agreement is in force with respect to” Canada or Mexico?
The debates aren’t authoritative as to statutory interpretation and they’re not that extensive anyway, since NAFTA was passed under the procedures of the Trade Act of 1974, which is designed precisely to curtail congressional debate on our trade agreements. That wouldn’t necessarily have prevented Senators and Representatives from talking about termination, but it doesn’t appear that anyone worried too much about it (though further research will be needed to confirm).
What Could It Mean to Say “the United States Applies the Agreement to” Canada or Mexico?
So how are we to understand this second condition on which the act might terminate? Saying that “the United States applies the Agreement to” Canada or Mexico could mean any of the following:
(1) That Canada or Mexico withdraws from NAFTA (like the Senate Report says);
(2) That the United States refuses to “apply the Agreement” to either Canada or Mexico, but not both; or
(3) That the United States withdraws from NAFTA entirely.
The first case seems to create a redundancy in the statute, which is disfavored in statutory construction. The second case is a plausible reading, but it’s probably still a win for Trump’s stated agenda – it may be a sufficient bargaining chip if he has the power to “rip up” NAFTA and press the Terminator button in the Act only as to Mexico but not as to Canada. The third case allows him to pursue his agenda of tough bargaining backed by the power of complete escape from the U.S. trade obligations set out in NAFTA.
All of this assumes that the Constitution gives the President, acting alone, the power to withdraw from an agreement like NAFTA.
And that’s not a foregone conclusion. Even if Section 109(b) can be read to provide that the implementing law terminates upon U.S. withdrawal from NAFTA, that provision does not specify how that withdrawal may or must be accomplished.
It might seem obvious that the President alone holds that power, since the Supreme Court has long recognized the President as holding the power to act for the country in foreign affairs. If NAFTA were a true treaty, entered into as an express power of the President under Article II, section 2 of the Constitution, that would likely be true (although the process for withdrawal from treaties has never been definitively resolved either).
But NAFTA is not a treaty, at least not under U.S. law. (If you’re a lawyer and you didn’t know that, don’t worry, you’re in a big club.) NAFTA was not entered into pursuant to the Treaty Power of Article II, which would have required submission to the Senate for ratification by a two-thirds majority.
Instead, NAFTA is a strange sort of bird called a congressional-executive agreement. You won’t find it mentioned in the Constitution, and as recently as post-NAFTA passage, litigants were still challenging its constitutional legitimacy. (Speed briefing: the U.S. Court of Appeals for the Eleventh Circuit called the issue a political question and declined to resolve it, and the Supreme Court denied cert.)
Instead, as the name implies, a congressional-executive agreement is an organism arising from a special procedure that devotes some responsibilities to the President and others to Congress (but not a ratification by two-thirds of the Senate).
So we can argue about Section 109(b) of the NAFTA Implementation Act all day and still not address the elephant in the room: If the President doesn’t have the power to get into a congressional-executive agreement by himself, does he have the power to get out by himself? I’ll turn to the elephant in a future post.
But that’s going to be a political question too, you might reasonably object. If a federal court wouldn’t rule on the constitutionality of congressional-executive agreements, how likely are the federal courts to rule on the constitutional procedure for getting out of one? But even if courts won’t hear it (and that’s not a sure thing), a Congress that feels its constitutional powers have been usurped would have other, political remedies available to counter Executive action that oversteps its bounds. A future post will begin to explore the respective powers of the President and Congress in making – and withdrawing from – these Fast Track trade agreements.
Thursday, August 24, 2017
President Trump has continued to use tough rhetoric on trade with Mexico, saying at a rally in Phoenix on Tuesday that he will “probably” terminate NAFTA because he doesn’t think a deal can be made. Whether he really has the legal power to do that is a subject I’ll turn to next week, but for now, it’s important to remember one thing:
If Trump hits Mexico, Mexico will hit back, and it has tools to do so.
Hitting the U.S. in the Corn Belt
For example, Mexican legislators have introduced a measure that would use trade as a weapon against the U.S. The measure would reduce Mexican purchases of U.S. corn by 60 percent in the first year, 80 percent in the second year, and 100 percent in the third year.
In Mexico, corn imports from the U.S. are a hot-button issue. Many Mexicans blame NAFTA for the decline of domestic corn prices and the resulting economically-driven migration to the U.S. in the 1990s and 2000s (although economic analyses like this one and this one suggest that the story is more complex).
But even if shutting out U.S. corn would help the Mexican rural economy, it would devastate the Midwestern United States. Since Mexico is the second-largest market for U.S. corn, accounting for 25 percent of U.S. corn exports, the measure would have a substantial impact on U.S. agricultural imports. That threat would not be lost on Trump voters in the Corn Belt.
The measure may not pass, but its author, Mexican Senator Armando Ríos Piter, has made his point: Mexico is not a passive player in the renegotiation of NAFTA.
Remembering the Alamo, South of the Rio Grande
Ríos Piter, who plans to run for president of Mexico in the next election, has made another aggressive claim: The senator told the host of Boston’s NPR station that Mexico should consider making claims to land that changed hands in the Mexican American War. “What I said is that Mexico should be analyzing every treaty we have with the United States. The thing is: Why should we continue collaborating with the United States, with this administration especially?”
Getting Mexico to swallow a NAFTA deal that shifts the balance toward U.S. interests would not be simple. Mexican Economy Minister, Ildefonso Guajardo Villarreal, told CNN Money that Mexican officials could not accept a new NAFTA that is worse than the current deal because the government’s party does not have a majority of the multi-party Mexican Congress. Mexico’s Congress would have to approve of any changes made in the agreement, which would require a broad coalition among Mexican political interests in support of the new deal.
Mexican Nationalism on the Rise
Perhaps Trump doesn’t care and still hopes to “rip up” NAFTA, despite the pressure from agricultural interests. The current front-runner for in next year’s Mexican presidential election, Andrés Manuel López Obrador, might be just fine with that.
López Obrador, the former mayor of Mexico City, has been an outspoken opponent of NAFTA and all other measures to liberalize the Mexican economy. A chapter from his most recent book is titled, “Privatization, Synonym for Robbery.” That means the Mexican market for U.S. products might go away for a long time.
In another book responding to the election of Donald Trump, López Obrador describes the U.S. government by the Spanish idiom “lamp in the street, darkness in the home,” referring to one who appears good to the outside world but is revealed to be bad by his conduct in his own home or family.
Nationalism breeds nationalism and protectionism breeds protectionism. Despite its weaker economy (or perhaps because of it), Mexican politicians are unlikely to accept one-sided demands from the Trump Administration. The consequences of a trade and culture war with a neighbor with whom we share a 2,000-mile border could be costly to Trump supporters as well as opponents.
Friday, August 18, 2017
Even if we assume that steel imports do threaten national security, do we really need the national security exception to protect the U.S. steel industry?
The national security exception is an extraordinary remedy that has been used only a few times in its history, and never in the WTO era. That’s because it could trigger a worldwide trade war with no established ground rules if countries start throwing up trade barriers on vague and unverifiable grounds of “national security.”
But there are other trade remedies that are commonplace, WTO-approved, and don’t run the same risk of blowing up the consensus underlying the multilateral trading system. Could those conventional trade remedies protect the steel industry without having to open Pandora’s box by invoking the national security exception?
Section 232 as Part of the Trade Remedies Toolkit
Under Section 232 of the Trade Expansion Act of 1962, Secretary of Commerce Wilbur Ross only has to determine whether steel “is being imported to the United States in such quantities or under such circumstances as to threaten to impair the national security.”
If he finds it is and President Trump agrees, the President need only “determine the nature and duration of the action that, in the judgment of the President, must be taken to adjust the imports of the article and its derivatives so that such imports will not threaten to impair the national security.”
Nothing there about invoking the exception only as a last resort when other trade remedies fail, at least not on the surface. Maybe there’s a bit of a limiter in requiring the President to determine the action that “must be taken” to adjust imports. Can it be argued that special Section 232 tariffs must be invoked if antidumping or countervailing duties or changes in Commerce calculations for nonmarket economies would do the trick?
In Commerce’s Section 232 investigation and elsewhere, steel producers have claimed several types of harm to its segment of the steel industry that result from imports. Can those harms be remedied without Section 232?
Harms Alleged and Possible Remedies
Harm: Other countries, especially China, are selling steel products in the U.S. at less than the cost of production or are illegally subsidizing their steel industries.
Remedy: Commerce has already placed anti-dumping tariffs or countervailing duties on specific Chinese steel products where the Department of Commerce has found that those products were sold in the U.S. below the cost of production or were illegally subsidized. According to the Department of Commerce website, there were 152 anti-dumping and countervailing duty orders in place on steel from 32 countries as of April 19, 2017.
Harm: Chinese producers are evading anti-dumping and countervailing duties.
In September, several steel producers filed a petition with Commerce alleging that Chinese hot and cold rolled steel producers have been sending their products through Vietnam to avoid the U.S. tariffs.
Remedy: Commerce opened an investigation of the matter in November. U.S. law allows Commerce to place anti-circumvention duties on products that are passed through a third country to avoid tariffs. Section 781(b) of the Tariff Act of 1930 (as amended in 1988) allows Commerce to extend the tariffs to the passed-through articles if the processing or assembly in the third country is “minor or insignificant” and if the value of the merchandise produced in the original country (in this case, China) is “a significant portion of the total value of the merchandise exported to the United States.”
If Chinese producers subject to anti-dumping and countervailing duties are passing their products through Vietnam with no real value added just to avoid the trade remedies, Commerce has the power to extend the duties to include those products.
Harm: Massive global overcapacity in the steel industry, especially in China, exceeds the scope of harms that can be addressed though specific anti-dumping and countervailing duties, which can only be placed on specific products from specific countries.
Remedy: In 2002, President Bush imposed sweeping safeguards on most types of steel imports, on top of anti-dumping duties, under the authority of Section 201 of the Trade Act of 1974. Under the WTO Agreement on Safeguards and U.S. law, safeguards are exceptions to WTO obligations in cases where a recent flood of imports has threatened the domestic industry.
The 2002 steel safeguards ran into trouble with the WTO because they were imposed even on products where there had been no recent increase in imports, and because a few trading partners (Canada, Mexico, Israel and Jordan) were excepted.
The remedies permitted under Section 232 are not limited by thestatute, and national security measures are excepted from the GATT by Article XXI, although no one knows the scope of that exception.
Escalating the Steel Trade War
Would Section 232 tariffs start a trade war? Commerce Secretary Wilbur Ross told CNBC in March, “We are in a trade war. We have been for decades. The only difference is that our troops are finally coming to the rampart. We didn’t end up with a trade deficit accidentally.”
Well, the existence of 152 anti-dumping and countervailing duty orders on steel alone says the U.S. hasn’t exactly been sleeping on the issue. From a trade law standpoint, using Section 232 is more like an intercontinental ballistic missile launch.
Other countries will see it that way and respond with a firestorm of retaliatory duties, WTO challenges to the remedies or to Section 232 on its face, and measures to protect their own industries from U.S. competition on the basis of their own “national security.”
Although Section 232 does not specify any specific remedy, possibilities include raising tariffs on countries like China but not friendlier trade partners; raising worldwide tariffs above GATT schedule commitment levels; establishing hard import quotas; or pressuring China (using vulnerabilities like China’s tolerance of IP piracy) into signing a voluntary export restraint agreement.
Each of these remedies raises a host of thorny WTO compliance problems and potentially exposes U.S. industries outside of steel or even manufacturing to WTO retaliation sanctions by impacted countries.
Thursday, August 10, 2017
As a constitutional matter, it is ironic that President Trump proposes to use a national security exception to impose tariffs on steel imports, tariffs that would otherwise exceed U.S. trade commitments. It’s ironic because the national security exception was enacted by Congress in order to limit the President’s authority over trade and to preserve some measure of congressional control over “Commerce with foreign Nations.” President Trump’s proposed action would accomplish the opposite.
1954: The National Security Exception Is Born
The national security exception is now in Section 232 of the Trade Expansion Act of 1962, but the exception originally appeared in a 1954 statute that had modest goals amid constitutional rumblings about trade and Executive power.
The Trade Agreements Extension Act of 1954 was intended as a placeholder, a one-year extension of presidential trade authority pending further study of the new constitutional direction that the country had taken on trade since the 1930s.
In the Tariff Act of 1930 and the Trade Agreements Act of 1934, Congress granted the President authority to enter into reciprocal trade agreements, an authority that would have expired without the 1954 Act. Originally one paragraph, the 1954 Act purported only to extend the president’s authority “pending the completion of a thorough study of the overall tariff and international trade situation,” according to the Senate Report.
The first part of that work had been completed with the submission in January of a report by the congressionally-created Commission on Foreign Economic Policy. The House and Senate demurred that the press of other legislative priorities had precluded them from holding hearings on the report and the 1954 Act was intended as a stopgap.
Neither the bill that passed the House nor any of the amendments offered on the House floor mentioned national security. Section 2 of the Act, the precursor to current Section 232, was introduced in the Senate on June 24, 1954, by Senator Stuart Symington, a Democrat from Missouri and previously the first Secretary of the Air Force.
On the floor, Senator Symington emphasized “the harsh realities of the world in which we live – the world in which we trade and do business.” His remarks presented the amendment as a limitation on presidential power to enter into trade agreements: His amendment, he said, “in effect would require testing tariff decreases against defense requirements.” He stated his belief that “it should be mandatory for the administration to make certain that no tariff should be reduced, whenever such reduction would threaten continued domestic production necessary to meet our projected defense requirements.”
An Era of Lingering Doubts About Presidential Trade Powers
Section 232 requires that the President make a study and report to Congress (as the Trump Administration is now doing), but it does not substantively cabin the President’s discretion to invoke the national security exception. As Trump has told the press, Section 232 lets him do pretty much whatever he wants if he finds a national security threat.
This would have troubled Senator George W. Malone of Nevada. During the floor debates, Senator Malone read a lengthy statement opposing the 1954 Act extending the President’s trade authority.
Senator Malone’s opposition was expressly based on separation of powers concerns. Opening his remarks, he said, “I am opposed to the extension of the act because the Constitution of the United States, in article I, section 8, specifically provides that the Congress shall have power to lay and collect duties, imposts, and excises – we call them tariffs – and to regulate the commerce of the United States with foreign nations.”
Senator Malone objected that Congress, in the 1934 Trade Agreements Act, “yielded these responsibilities to the executive branch.” He was troubled that the President had delegated those powers to the State Department (this was prior to the creation of the Office of the United States Trade Representative). The State Department, he said, “scatters and diffuses them among foreign nations” through the GATT, “which has never been approved by Congress, and which considers itself, in fact, a creature of the United Nations.”
Senator Malone’s opposition was not just formal. In substance, his statement objected to a great number of what he viewed as the evils of the new era of trade agreements. His first objection was that, in his view, the Trade Agreements Act “retarded and weakened the nation’s defense potential.” He argued that “favoritism shown foreign producers of critical and strategic materials, minerals, and fuels” had “reduced the productive capacity of vital American defense industries, and … atrophied worker and professional skills in those industries.”
The next day, Senator Symington’s amendment was introduced, addressing at least the first of Senator Malone’s substantive concerns. Senator Malone’s separation-of-powers concerns were essentially ignored by the rest of the body.
Senator Malone lamented in 1954 that no court had ruled on the constitutionality of the new trade agreement process, and that remains true today: Only the Eleventh Circuit has been directly asked to rule on the constitutionality of modern congressional-executive agreements, and that court dismissed the issue as a non-justiciable political question. Rightly or wrongly, over the sixty-three years since Senator Malone voiced his lingering objections to the approach, the congressional-executive agreement has become the standard and accepted means of entering into trade agreements by the U.S.
The Irony of Grown-Up Section 232
So the precursor to Section 232 was enacted in a climate of lingering Senatorial doubt about the constitutionality of trade deals entered into by the President (instead of by Congress under the Commerce power) and approved by a simple act of Congress (instead of by two-thirds vote of the Senate as required of treaties). Section 2 of the 1954 Act was perhaps a last cursory nod in a generation of Senate acquiescence to surrendering both its Commerce Clause and its Treaty Clause powers to the President. In the early days of the Cold War, the one thing the Senate would do was to ensure that the President didn’t bargain away the country’s national security in exchange for a better trade deal. Section 2 (now Section 232) was designed to do that.
The irony of President Trump’s steel imports investigation is that his use of Section 232 would expand rather than constrain Presidential power in the trade realm. Unlike the GATT, which (as Senator Malone pointed out) had not been submitted for congressional approval in 1954, the trade obligations that Trump seeks to deviate from have been implemented into U.S. law by Congress. The Uruguay Round Agreements Act in 1994 approved the WTO Agreements (including the GATT) and made their obligations a part of U.S. domestic law. The NAFTA Implementation Act of 1993 did the same for NAFTA. Those acts were passed by both houses of Congress and were signed into law by the President like ordinary legislation. Now Trump wants to back out of them (or parts of them, at least).
The Way Forward for a Nervous Congress
That’s not to say that President Trump’s proposed use of Section 232 to limit steel imports would be unconstitutional. Congress wrote Section 232 broadly and, aside from procedural requirements, gave the President broad discretion.
Not unconstitutional, but ironic. A statute originally passed to allow Congress to keep a bit of an eye on Presidential trade authority may now be used to derogate from trade obligations that Congress has implemented through legislation.
If the Administration’s trade agenda is making Members of Congress nervous, they should revisit Section 232 and other trade acts that give the President broad authority and consider articulating more intelligible principles for how that discretion may be used.
Wednesday, August 2, 2017
Last week, President Trump told The Wall Street Journal that he would make a decision “fairly soon” about whether to impose tariffs on steel imports based on national security concerns. In an interview, Trump said the decision would take time because “[y]ou can’t just walk in and say I’m going to do this. You have to do statutory studies. … It doesn’t go that quickly.”
By “statutory studies,” Trump presumably meant the investigation required by Section 232 of the Trade Expansion Act of 1962. It’s a very expansive statute, which has trade experts very worried.
Here’s why it matters and how it works.
Why Do Steel Tariffs Matter So Much?
It’s good news that Trump has begun to recognize that the rule of law precludes him from acting as CEO of USA, Inc. In the case of Section 232, however, the steps set out by Congress are largely procedural, not substantive. If Trump decides to play hardball on steel, the statute allows him to do so based merely on findings that steel imports weaken the economy, and that a weak economy threatens national security.
Section 232 also allows Trump to implement any number of trade remedies to inhibit steel imports if the Secretary’s report finds a threat or impairment of national security. Although such trade restrictions by the U.S. could be subject to challenge in the WTO, there is no precedent for interpreting Article XXI of the GATT, which allows countries to implement trade restrictions on national security grounds. WTO members have always just held their breath and hoped that countries won’t start undermining the basic principles of free trade based on some bare recitation of “national security.”
If Trump starts down that road, it’s highly likely that other countries will retaliate. They could restrict imports of U.S. products that compete with their domestic industries, also citing “national security.” If such a trade war starts, who will decide what’s a “legitimate” threat to national security and what’s mere economic protectionism?
The use of laws like Section 232 that appear to equate economic competition with a national security threat could, if taken to extremes, spell the beginning of the end of the multilateral trading system.
What Are the Standards for Determining Effects on National Security under Section 232?
Section 232 (b)(1) provides that the Secretary of Commerce must investigate “to determine the effects on the national security of imports” that are the subject of a motion either by the Secretary, another department or agency head, or an “interested party.”
The statute doesn’t provide any substantive standards as to what constitutes a threat to national security, but the Commerce regulations give some criteria for the Secretary’s evaluation. The regulations direct the Secretary, in his investigation, to consider the quantity of the article imported; the domestic production needed for national defense; domestic production capacity; domestic availability of raw materials and human resources; and growth requirements for domestic industry.
What’s the Relationship Between Economic Competition and National Security under Section 232?
More worrisome for those who fear an opening of Pandora’s Box of trade restrictions justified on “national security” grounds, Section 232(d) requires the President and the Secretary to “recognize the close relation of the economic welfare of the nation to our national security, and … take into consideration the impact of foreign competition on the economic welfare of individual domestic industries ….”
The regulations also require the Secretary to consider the link between national economic strength and national security. This includes weighing the economic impact of foreign competition; the loss of jobs, government revenues, or production capacity due to trade; or “[a]ny other relevant factors that are causing or will cause a weakening of our national economy.”
Neither the statute nor the regulations provide any standard guiding the Secretary’s application of these factors to his analysis of trade impacts and their effects on national security. This leaves the door wide open for justifying trade restrictions on products with localized labor or production impacts of the type that Trump promised on the campaign trail to reverse.
What Are the Steps in the Investigation of Steel Tariffs?
The White House announced the launch of the Secretary’s investigation of steel imports in a Presidential Memorandum dated April 20, 2017. The statute requires the Secretary to consult with the Secretary of Defense and other “appropriate officers of the United States.”
Under the statute, the Secretary is entitled but not required to hold public hearings to solicit additional information and advice. Commerce held a public hearing on this investigation on June 23, 2017, and received public comments through June 26, 2017.
The Secretary must make a report to the President within 270 days of initiating the investigation. The report must advise the President if the Secretary finds that the quantity or circumstances of steel trade “threaten to impair the national security.” All non-classified sections of the report have to be published in the Federal Register.
What Are the President’s Options?
Pretty much anything. The statute allows the President to “determine the nature and duration of the action that, in the judgment of the President, must be taken to adjust the imports of the article and its derivatives so that such imports will not threaten to impair the national security.”
The statute contemplates that the President’s action might include an agreement with trading partners for the U.S. to limit imports (a quota of some kind) or for the trading partner to limit exports (a voluntary restraint agreement). But nothing in the statute limits the President to that remedy, or any other. The barn door is wide open.
How Long Will This Take?
Secretary Ross has nine months (270 days) from April 20 to make his report, which gives him until January 15, 2018. President Trump will have 90 days from the date he receives the report, or no later than April 15, 2018, to determine whether to take action.
If the President concurs with the report and decides to take any action, he must implement that action within 15 days from his determination (no later than April 30, 2018). He must inform Congress of his reasons for taking action (or not taking action, if he so chooses) within 30 days from his determination (no later than May 15, 2018).
Of course, either the Secretary or the President may act more quickly as long as they have followed the procedures set out in the statute. Stay tuned.
Wednesday, July 19, 2017
Can agriculture once again dissuade Trump from dangerous and extreme trade policy? Last time it was withdrawal from NAFTA; this time it’s imposition of steel tariffs on national security grounds.
In a previous post, I discussed how agricultural interests effectively backed President Trump down from his promise to withdraw from NAFTA: The upshot is that half the land in the continental United States is used for agriculture, and most of that land is backed by mortgages and other loans. If agriculture loses, banks lose; if banks lose, Congress gets nailed; and if Congress gets nailed, Trump is on shaky ground. Besides, farm country largely voted for Trump, and Trump responds to that.
The agriculture lobby has once again lined up to urge Trump not to impose sanctions using the national security exception of Section 232 of the Trade Expansion Act of 1962.
What’s the Problem with Section 232?
Under that Act, the President may invoke a variety of trade sanctions for national security reasons if supported by a report (currently in preparation) by the Secretary of State.
But such action would be nearly unprecedented and would open Pandora’s box, inviting other countries to invoke national security exceptions under Article XXI of the GATT.
Since no framework exists in the multilateral trading system for distinguishing between "legitimate" and "illegitimate" threats to national security, the result could be trade bedlam. The entire multilateral trading system could quickly disintegrate as countries justified nearly any measure on grounds that it impaired their national security.
The press has given much attention to a letter to this effect from nearly all of the former chairs of the President’s Council of Economic Advisers, from Republican and Democrat Administrations alike.
The Underestimated Power of Agriculture
Less sensationally but much more importantly, a broad coalition of organizations representing production agriculture also sent a letter to Trump last week, urging him not to impose any sanctions based on the national security exception.
The agricultural groups emphasized that a copycat response by the international community could be devastating to heavily trade-dependent industries, including agriculture.
“U.S. agriculture is highly dependent on exports, which means it is particularly vulnerable to retaliation,” the agriculture groups wrote. “Many countries that export steel to the United States are also large importers of agriculture products. The potential for retaliation from these trading partners is very real.”
So is the potential for this letter to get serious attention from the Trump Administration. Much more so than a letter from a bunch of fancy economists, who are just the type of person Trump promised his voters he would get rid of.
The agriculture letter was signed by a wide cross-section of agriculture industry associations representing farmers of high-volume agricultural products from every major agricultural region, such as the National Corn Growers Association (Midwest), the USA Rice Federation (South), the National Cattlemen’s Beef Association (Midwest and West), and the U.S. Canola Association (Northwest).
Even the U.S. Apple Association, representing farmers of a perishable crop typically subject to different economic considerations than commodity crops such as grains and oilseeds, joined the letter. So did the conservative American Farm Bureau Federation.
Just as the prospect of losing the agricultural lobby seems to have swayed Trump from withdrawing from NAFTA, that prospect might also dissuade him from invoking steel tariffs under Section 232. If the threat of losing votes in his stronghold states isn’t enough, the pressure of the finance lobby breathing down the necks of Congress when faced with widespread debt defaults across farm country could – and should – nudge Trump away from opening Pandora’s box.
Tuesday, July 18, 2017
When it comes to agriculture and trade, few parties have been as intransigent in liberalizing trade in agriculture as the EU and the United States. Both parties, heavily dependent on agricultural subsidies to keep their agricultural sectors afloat, have stymied efforts by developing countries to level the playing field with respect to agricultural exports, an area in which developing countries would have a comparative advantage.
The WTO Agreement on Agriculture, part of the original 1995 WTO framework, was ostensibly a carrot to encourage the Global South countries to sign on to the WTO’s expanded framework, which included sticks such as TRIPs, which particularly impacted developing countries and their intellectual property sectors. In fact, the Agreement on Agriculture was so full of loopholes that it lacked any real teeth. The US and the EU Member States have continued to subsidize domestic agriculture and trade liberalization in that sector has remained elusive.
With the agreement of the Trade Facilitation Agreement in 2013, India used this first multilateral agreement since the establishment of the WTO in 1995 as a bargaining chip by vetoing it in 2014 until India received guarantees that stockholding for food security purposes would be exempted from the Agreement on Agriculture.
Food security is an area of growing concern. With climate change putting additional pressure on already strained agricultural lands, particularly in densely populated areas, many countries are one or two natural disasters away from famine. Stockpiling food allows countries to build a reserve to address such possibilities and to protect their populations from devastating crises.
In light of the Global North-Global South divide on matters of agriculture, it is, therefore, perhaps surprising that the EU and Brazil just announced a joint proposal to address food security by limiting farm subsidies. The proposal addresses the needs of developing countries, exempting least developed countries from any subsidy limits. The proposal is co-sponsored by Colombia, Peru and Uruguay.
Where does this newfound commitment to reducing subsidies on the part of the EU come from? Some of it is no doubt a result of Brexit. The Common Agricultural Policy (CAP), the EU’s agricultural subsidy program, is the costliest EU policy, representing 40% of the EU’s budget. With Brexit to leave a £10 billion shortfall in the budget, the EU may have now reached a point where maintaining CAP at its previous levels is simply untenable.
Some of it may be recognition by the EU that for any further trade liberalization to occur on a multilateral basis, the elephant in the room that is agriculture can no longer be ignored, although pragmatism seems a more likely answer. Whatever the reason, there will be no reductions to agricultural subsidies in the EU without a big fight from Member States.
Wednesday, July 5, 2017
In 2016, Bryce Harper decided he would Make Baseball Fun Again. Donald Trump wants to do the same thing in the WTO.
The results may be more similar than Trump realizes.
Baseball has an unwritten rulebook. You can break those rules, but you may pay for it with a fastball to the rib cage.
The WTO has a written rulebook. You can break the rules, but you may pay for it with a hard hit to domestic industries that never saw it coming.
Either way, better to know what you’re getting into before you decide to pump your fist.
Harper, Shaking Things Up in MLB
Before the beginning of last season, the Washington Nationals’ star outfielder complained to an ESPN reporter that “[b]aseball’s tired.” Harper wants to be able to stand and admire his home runs without anyone throwing a fastball at his backside the next time up, and he doesn’t care if a pitcher who strikes him out pumps his fist and stares him down back to the dugout.
He wants to see a little 24-karat magic in baseball (“[e]ndorsements, fashion – it’s something baseball doesn’t see”) and he’s planning to take you there, one coiffed photo shoot at a time.
The slogan Harper borrowed from Donald Trump was printed on hats and T-shirts. The man was on a mission to make himself the marketing equivalent of “Beckham or Ronaldo … Curry and LeBron.”
Breaking the Baseball Code
Trouble is, other baseball players – including some of Harper’s own teammates – seem to like baseball’s century-old code of etiquette more than they like Bryce Harper. In the last week of the 2015 season, Harper had criticized teammate Jonathan Papelbon to reporters for plunking a grandstanding Manny Machado. A few days later, Harper and Papelbon exchanged heated words over a play that ended up with Papelbon grabbing Harper in the Nationals’ dugout while TV cameras rolled.
Again this year, Harper has been in the middle of a headline-grabbing baseball brawl, this time with Giants pitcher Hunter Strickland. On May 29, Strickland planted a fastball on Harper’s right hip, and Harper reacted by charging the mound and throwing his helmet. Benches cleared. Both players were suspended – Harper for three games, Strickland for six.
Most people think Strickland threw at Harper and most people think Strickland was motivated by an old grudge: In the 2014 National League Division Series, Harper homered off of Strickland twice. In one or both games, Harper stood to admire his shot in a way that Strickland didn’t appreciate. In the second one, Harper pumped his fist and stared down Strickland as he rounded the bases. By some accounts, he had some words for Strickland even from the dugout.
Maybe Harper was within his rights to celebrate a game-tying home run in the postseason, including staring down the opposing pitcher. Maybe he was just waiting to see if the ball, hit down the right field line, was going to be fair. Maybe Strickland should be over it because it was three years ago and the Giants went on to win that series and the whole Series that year anyway.
But the fact is that Harper wants to play the game a new way, and Strickland doesn’t. Harper wields a mighty bat but Strickland wields a hard ball that he throws 96 miles per hour in Harper’s general direction. Strickland may have overreacted, but he was playing by an age old baseball rule: If a player plays the game in a way that other players don’t like, those hard balls tend to find their way into those players’ backsides.
Throwing Taunts: Trump’s First Trade Policy Agenda
Harper and Trump have more than just a slogan in common. Like Harper, Trump has promised a similar type of take-no-prisoners, home-team pride in his early statements about the WTO.
During the campaign, when Chuck Todd on Meet the Press asked Trump whether his proposed taxes on firms doing business in Mexico would violate the WTO Agreements, Trump said, “Doesn’t matter. We’ll renegotiate or pull out. These trade deals are a disaster, Chuck. World Trade Organization is a disaster.”
In his 2017 Trade Policy Agenda, the new Trump Administration said, “even if [the WTO] rules against the United States, such a ruling does not automatically lead to a change in U.S. law or practice. Consistent with these important protections and applicable U.S. law, the Trump Administration will aggressively defend American sovereignty over matters of trade policy.”
Breaking the Trade Code
Legally speaking, the Trump Administration’s statement is strictly correct: there is no global sovereign, and nothing the WTO says can directly alter U.S. law nor force the U.S. to alter its own law.
But if he thinks there would be no consequences to staring down the WTO, he needs to read the rulebook.
The dispute resolution provisions of the WTO use market power, not the police power, to keep WTO member states playing by the rules of the game. And that power can be pretty darn persuasive.
Here’s how it works: Let’s say the U.S. passes a law that another WTO member thinks violates the trade agreement. The aggrieved member can seek review of the U.S. law by the WTO. If the WTO ultimately agrees (after a hearing and potentially an appeal), it will “recommend” that the U.S. change its law. It may “suggest” ways that the U.S. “could implement the recommendations.”
Pretty weak stuff, easy to pump your fist at. But here’s where it gets trickier.
The U.S. would have a reasonable period of time to implement the “recommendation.” If it does so, all is forgiven.
But the U.S. may refuse to change its law. Or it may change its law but not enough to conform to the WTO rules. And it may refuse its last chance to avoid a fight, which is to compensate the aggrieved country for the harm it has suffered.
What happens to a country that stares down the WTO as it rounds the bases and shouts at other WTO members from the dugout?
You guessed it. The WTO rules sanction economic beanball.
Beanball, WTO Style
The WTO rules were written by lawyers so they call it “suspension of concessions.” But it’s the same thing. If the U.S. staunchly refuses to take any of the actions (conforming or compensating) that would avoid a fight, then the aggrieved country is authorized to hit the U.S. where it hurts: the pocketbook.
That means the aggrieved country is authorized to levy a tax on products it imports from the U.S. The overall level of tax should be equivalent to the level of harm the aggrieved country suffered from the non-conforming U.S. law.
In other words, 96 miles per hour planted right in the backside of U.S. industry.
In some cases, the taxes don’t even have to be on goods in the same sector. For example, when the United States refused to repeal its cotton subsidies that harmed the Brazilian cotton industry, Brazil didn’t import enough agricultural products from the U.S. to really make the penalty stick. So instead, the WTO authorized Brazil to tax all sorts of consumer and luxury goods coming into Brazil from the U.S.
When producers of those goods got wind that they were about to get plunked, they beat down the door of the U.S. Trade Representative until the U.S. struck a deal: It couldn’t repeal the subsidy without upsetting domestic cotton markets, but it would compensate Brazilian cotton farmers for their loss. Trade brawl averted.
Breaking It Up: The USTR
Will Trump’s advisers rush from the bench and try to break up the fight?
In June, U.S. Trade Representative Robert Lighthizer stated to a meeting of the OECD that “[t]he United States recognizes the importance of international trade systems, including WTO-consistent trade agreements.” The statement said that the U.S. would work with other members to “improve the functioning of the WTO” and to “ensure full and transparent implementation and effective and timely enforcement of the WTO agreements as negotiated.” Lighthizer’s statement also pledged to work for a successful outcome at the WTO ministerial conference in December.
Sounds like he’s trying to play peacemaker. For the sake of U.S. industry’s backside, let’s hope it works.
Wednesday, June 28, 2017
This is a blog about international trade law written by international trade law professors. So it makes sense that the editors of this blog might assume that international trade is, well, pretty cool.
After all, in an October 2016 survey, 86% of foreign policy scholars thought U.S. involvement in the global economy was a good thing. Only 2% thought it was a bad thing.
But that opinion would put us out of step with many Americans. In an April 2016 survey of the general public, only 44% thought U.S. involvement in the global economy was a good thing, while 49% thought it was bad.
And it’s not just a Republican/Democrat thing. Fewer than half of voters of either party have a positive view of U.S. global economic ties – only 37% of Republicans and 49% of Democrats think trade creates new markets and growth.
Nowhere is this opinion more strongly held than in West Virginia. My fellow West Virginians voted for Trump by the second-highest percentage in the country– 68.7%. Exits polls after the 2016 primaries showed that the economy was the top worry for West Virginia voters of both parties. And West Virginians think trade is a big part of the problem: More than two-thirds of Republican voters and more than half of Democratic voters here said that trade was mostly taking jobs away from Americans.
Republicans were somewhat more likely to have an outright negative view, but many Democrats weren’t enthused either: 55% of Republicans and 44% of Democrats thought U.S. involvement in the global economy leads to lower wages and lost jobs.
The Art of Persuasion, Trade Style
So if foreign policy scholars have a different opinion than the majority of Americans, we have two options:
We could keep pounding on our data and hope for a different electoral outcome in 2018 or 2020.
Or we could dig deeper and see whether we might not be missing something important.
I don’t mean to suggest that trade scholars suddenly start arguing that David Ricardo has no clothes. There are strong arguments in favor of free trade that don’t need to be rehearsed here (but if you want, go ahead here or here or even here).
And Trump’s campaign rhetoric and early actions on trade suggest a protectionist policy that many experts may wish to oppose with vigor. Such opposition is not only principled but critical as the Trump Administration continues to suggest a casual attitude toward rule of law, including respect for U.S. trade commitments.
Still, you can take one page from the playbook of Donald Trump: One of the most important principles of the art of persuasion is that people don’t listen to you when you start by telling them why you’re right.
They are more likely to listen when you start by telling them why they’re right.
And West Virginia voters are right about some things that matter in the trade policy debate.
The Un-Kept Promise of Trade Adjustment Assistance
One of the things West Virginia voters are right about is that trade adjustment assistance is a good idea that mostly hasn’t worked.
In a recent study of the effects of China trade shocks, economists David Autor, David Dorn and Gordon H. Hanson concluded that “adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences.”
In light of these decade-long shocks, federal benefits for those who have lost jobs due to trade is inadequate: Displaced workers are eligible only for 18 months while in a job re-training program.
Other federal benefits like disability take up some of the slack, but not nearly enough: Autor and colleagues found that workers in the most vulnerable regions lost $549 in annual pay, while total federal benefits for displaced workers increased by only $58.
50th Out of 50 (Again)
Another thing West Virginia voters are right about is that life in West Virginia has got to get a whole lot better if we are going to talk about a just transition to a global economy.
In a 2017 poll by Gallup and Healthways, West Virginians ranked their own well-being 50th out of 50 states.
This was not the usual health survey that West Virginians are familiar with (and tired of) ranking near the bottom of: obesity, diabetes, smoking, high blood pressure, etc., etc. Instead, the Gallup/Healthways survey asked residents of each state to rate their own well-being across five elements:
- Purpose – Do you like what you do each day and feel motivated to achieve your goals?
- Social – Do you have supportive relationships and love in your life?
- Financial – Do you manage your economic life to reduce stress and increase security?
- Community – Do you like where you live, feel safe and have pride in your community?
- Physical – Do you have good health and enough energy to get things done daily?
West Virginians had scores in the lowest quintile in all five categories, and the lowest scores of any state on the purpose, financial, and physical categories.
Certainly, not all of this unhappiness is due to loss of manufacturing jobs, and not all loss of manufacturing jobs is due to trade. But the losses are real, and as Autor and his colleagues showed, trade is sometimes a contributing factor.
Calling a Truce and Finding a Way
Refusal by international relations experts to take these concerns about trade seriously is likely to lead only to further protectionism, with consequences for the national economy that are all too foreseeable to international relations experts.
A wiser approach might be meaningful engagement with Trump voters who are searching for remedies to the loss of their jobs, communities, and well-being. If international relations and trade experts began listening more carefully to those voters, perhaps those voters might also be willing to listen more carefully to us about the economic and political effects of protectionism.
And maybe, by talking to each other instead of at each other, we might come up with some new and better ways to enhance social justice in a globalizing economy.
Wednesday, June 21, 2017
On Friday, Donald Trump issued a presidential memorandum announcing tighter controls on U.S. economic relations with Cuba. What does this mean for Major League Baseball and the recruiting of Cuban ballplayers, a dicey subject I’ve written about previously on this blog?
Before seeing the regulations that will be forthcoming from Commerce and Treasury, it’s too soon to say. But a couple of aspects of the Trump memorandum suggest that MLB is unlikely to find Treasury a willing partner in its proposal to ease restrictions on doing business with Cuban ballplayers and their teams or agents. Most likely, if MLB wants to reduce the human rights abuses against its star Cuban prospects, it will need to amend its own rules.
GAESA and the “Russian Doll” Problem
One of the primary changes signaled by the presidential memorandum is its prohibition on any transactions with the Grupo de Administración Empresarial SA, or GAESA. Through this company, the military regime under Castro built an investment network that controls major aspects of the Cuban tourism industry, particularly hotels.
This clearly restricts Cuba tourism and may also complicate the proposal made by MLB to the Office of Foreign Assets Control in the spring of 2016. MLB proposed lifting the ban on signing of Cuban players and paying compensation to a newly-created organization devoted to Cuban youth baseball development instead of to the government-owned Cuban teams themselves.
The trouble is that GAESA has been described as “una especie de muñeca rusa” – a sort of Russian doll, each thing hiding something else inside that no one knows about. According to the Miami Herald, GAESA controls about 60 percent of the Cuban economy. With such an extended web of ownership involving GAESA in Cuba, it may be difficult to verify that GAESA holds no ownership interest in whatever entity MLB proposes to pay in exchange for Cuban ballplayers. Without such assurances, OFAC is highly unlikely to entertain MLB’s proposal.
MLB Doesn’t Have to Wait for Trump
The new policy means Trump is not letting MLB off the hook. But MLB can still protect young Cuban baseball players from the greatest dangers of human trafficking and extortion by changing their own regulations.
MLB should change its draft and international free agent rules to allow Cuban ballplayers to sign as international free agents even after defecting directly to the United States.
Under current rules, Cuban players who defect to Mexico or Haiti or the Dominican Republic can sign as international free agents, but if they enter the United States they are subject to the Rule 4 draft. The testimony in the recent federal conviction of a baseball agent and trainer in U.S. v. Hernandez shed light on the coercive and extortionate conditions to which Cuban ballplayers are subject in these third-country defections.
MLB should not wait for Trump. It should make this issue a point of central importance in bargaining its new rules with the MLB Players’ Association next winter.
You can read the earlier post on MLB’s policy toward Cuban players here.
Friday, June 16, 2017
On Thursday, the Senate voted 98-2 in favor of a bill that legislatively formalizes sanctions against Russia and prevents the President from lifting those sanctions without congressional approval.
The bill was introduced as an amendment to a pending bill about sanctions against Iran. You can read the whole amendment here if you’re into that, or just a few highlights below.
Still just a bill, but this is the strongest action by either House of Congress so far against Russian interference in U.S. elections. It guards against the possibility that Trump has somehow been co-opted by Putin in exchange for easing U.S. sanctions, without openly finding such a relationship. Predictions vary as to whether the House will take it up.
Title II – SANCTIONS WITH RESPECT TO THE RUSSIAN FEDERATION AND COMBATING TERRORISM AND ILLICIT FINANCING
Sec. 211. Findings.
(6) On January 6, 2017, an assessment of the United States intelligence community entitled, “Assessing Russian Activities and Intentions in Recent U.S. Elections” stated, “Russian President Vladimir Putin ordered an influence campaign in 2016 aimed at the United States presidential election.” The assessment warns that “Moscow will apply lessons learned from its Putin-ordered campaign aimed at the U.S. Presidential election to future influence efforts worldwide, including against U.S. allies and the election processes”.
Sec. 212. Sense of Congress.
It is the sense of Congress that the President -
(1) should engage to the fullest extent possible with partner governments with regard to closing loopholes, including the allowances of extended prepayment for the delivery of goods and commodities and other loopholes, in multilateral and unilateral restrictive measures against the Russian Federation, with the aim of maximizing alignment of those measures; and
(2) should increase efforts to vigorously enforce compliance with sanctions in place as of the date of the enactment of this Act with respect to the Russian Federation in response to the crisis in eastern Ukraine, cyber intrusions and attacks, and human rights violators in the Russian Federation.
Sec. 215. Short Title.
Th[is] part may be cited as the “Russia Sanctions Review Act of 2017”.
Sec. 216. Congressional Review of Certain Actions Relating to Sanctions Imposed with Respect to the Russian Federation.
(a) Submission to Congress of Proposed Action. –
(1) In General. Notwithstanding any other provision of law, before taking any action described in paragraph (2) the President shall submit to the appropriate congressional committees and leadership a report that describes the proposed action and the reasons for that action.
(2) Actions Described. –
(A) In General. – An Action described in this paragraph is –
(i) an action to terminate the application of any sanctions described in subparagraph (B); …
(B) Sanctions Described. – The sanctions described in this subparagraph are –
(i) sanctions provided for under –
(I) this title or any provision of law amended by this title …
(II) the Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 …; or
(III) the Ukraine Freedom Support Act of 2014 …; and
(ii) the prohibition on access to the properties of the Government of the Russian Federation located in Maryland and New York that the President ordered vacated on December 29, 2016. …
(b) Period for Review by Congress. –
(3) Limitation on Actions During Initial Congressional Review Period. – Notwithstanding any other provision of law, during the [30-day] period for congressional review provided for under paragraph (1) …, the President may not take that action unless a joint resolution of approval with respect to that action is enacted ...
(4) Limitation on Actions During Presidential Consideration of a Joint Resolution of Disapproval. – Notwithstanding any other provision of law, if a joint resolution of disapproval relating to a report … passes both Houses of Congress … the President may not take that action for a period of 12 calendar days after the date of passage of the joint resolution of disapproval.
(5) Limitation on Actions During Congressional Reconsideration of a Joint Resolution of Disapproval. – Notwithstanding any other provision of law, if a joint resolution of disapproval relating to a report … passes both Houses of Congress … and the President vetoes the joint resolution, the President may not take that action for a period of 10 calendar days after the date of the President’s veto.
(6) Effect of Enactment of a Joint Resolution of Disapproval. – Notwithstanding any other provision of law, if a joint resolution of disapproval relating to a report … is enacted … the President may not take that action.
Sec. 224. Imposition of Sanctions with Respect to Activities of the Russian Federation Undermining Cybersecurity.
(a) In General. – On and after the date that is 60 days after the date of the enactment of this Act, the President shall –
(1) impose the sanctions described in subsection (b) with respect to any person that the President determines –
(A) knowingly engages in significant activities undermining cybersecurity against any person, including a democratic institution, or government on behalf of the Government of the Russian Federation; or
(B) is owned or controlled by, or acts or purports to act for or on behalf of, directly or indirectly, a person described in subparagraph (A) …
Sec. 231. Imposition of Sanctions with Respect to Persons Engaging in Transactions with the Intelligence or Defense Sectors of the Government of the Russian Federation.
(a) In General. – On and after the date that is 180 days after the date of the enactment of this Act, the President shall impose … sanctions … with respect to a person the President determines knowingly, on or after such date of enactment, engages in a significant transaction with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation ….
Other activities that would trigger sanctions include transacting with Russia for the development of pipelines or providing support to Syria to develop weapons capabilities. The sanctions are described in Section 235 and include refusing Export-Import Bank assistance for exports or denying licenses to export goods or technology to the sanctioned person; blocking bank loans; prohibiting government procurement, foreign exchange transactions, and other financial transactions to the sanctioned person; and prohibiting property transactions in which the sanctioned person has an interest.
Sunday, June 11, 2017
Please excuse today’s only peripherally trade-related post, but the recent UK election has been on my mind, not least because I’m currently visiting my in-laws here.
In particular, I want to put forward a theory relating to the swing of nearly a fifth (18%) of UKIP voters away from UKIP and towards Labour (57% of of 2015 UKIP voters voted Conservative in the 2017 election, unsurprisingly).
The 2015 UKIP gains and the subsequent Brexit vote can be viewed as a similar manifestation of populist discontent with globalization, writ large, and concern with the growing wealth inequality between the very rich and the rest of the population that was mirrored in Bernie Sanders’ and Donald Trump’s popularity in the 2016 US elections.
If Brexit represents a version of Make Britain Great Again that hearkens back to the pre-1970s Britain, before engagement with the European experiment, then it makes sense that with Farage gone and UKIP in tatters, many UKIP voters would support the Conservative agenda to go through with Brexit. But what about the 18% who went Labour instead?
I would posit that arguably, for some, Jeremy Corbyn represents a return to a properly left-wing Labour, not seen since before Thatcher’s Tory government privatized the UK’s economy. If we view the goal of these UKIP voters as Making Britain Great Again, then some of these voters, who may have come to realize that Brexit is not the answer to their problems, but rather a start of a whole host of other problems, may have decided that the Britain they yearn for, that pre-1970 Britain, can also be recreated by a return to left-wing policies and re-nationalization of the public sector.
Obviously, this is pure speculation. But all things considered, an 18% shift to Labour from supporters of a xenophobic, anti-immigrant party is a positive change, and one that hopefully Labour can capitalize on. Not all those who are frightened by the toll (whether real or perceived) of globalization on national economies are racist or close-minded. Some may be ready to rally behind truly progressive causes.
Wednesday, June 7, 2017
On May 18, Trump informed Congress of his intent to renegotiate NAFTA, triggering a 90-day consultation period with Congress over the negotiations. This formal move is mandated by the trade promotion authority that governs NAFTA. So we’re looking at a new era of U.S.-Mexico trade relations. Should you care?
If you use banks, then yes, you should care a great deal. What happens to Mexico will happen to your money. Here’s why.
In and Out and In Again on NAFTA
Then on April 27, he announced he had decided not to withdraw from the pact “at this time,” although the justification is unclear. Trump said publicly it was out of respect for Canada and Mexico, but other news reports suggest that he may have been more influenced by Secretary of Agriculture Sonny Perdue’s map showing the overlap between agricultural regions and Trump voter regions.
The High Stakes of Mexico Trade on the U.S. Economy
As Trump is no doubt hearing from advisors and legislators, decisions about U.S.-Mexico trade are high stakes. And it will affect you personally, even if you’re not a farmer and don’t live near the border.
We have to backtrack a few steps to see why you and your money should care about this. First, we all know that trade doesn’t flow only one way, and U.S.-Mexico trade is no exception. In the agricultural sector, for example, the Peterson Institute for International Economics reported that U.S. agricultural exports to Mexico increased from $3.6 billion in pre-NAFTA 1993 to $7.9 billion in 2003 (we may get avocados and mangos from them but they get fruit juices, vegetables, and grains and feeds from us). Moreover, U.S. foreign direct investment in the Mexican food industry more than doubled from $2.3 billion in 1993 to $5.7 billion in 2000, mostly in pasta, confectionery, and canned and frozen meats. (Mexican agricultural trade to the U.S. increased by a larger percentage but a smaller total dollar value in roughly the same period, from $2.7 billion in 1993 to $6.3 billion in 2003.) That means there’s a lot of apple juice and feed corn flowing south across the border because of NAFTA.
But it’s not just farmers that Trump has to worry about. Hurting farmers would have ripple effects that Trump cannot afford because of one important fact of political life, and it’s not the farm lobby; it’s farm debt.
Your Money, Working on the Farm
Although agriculture employs only about two percent of the U.S. population, 51 percent of the U.S. land base was used for agricultural purposes as of 2007. And that land is heavily mortgaged: USDA’s Economic Research Service predicted that farm real estate debt will reach a historic high of $240.7 billion in 2017, with a 7.3 percent increase in real estate mortgage loans. ERS says farmland owners are also increasingly using real estate as collateral to secure nonreal estate borrowing. All this means the banks are in deep on the farms.
So if farms struggle, farm mortgage lenders struggle. And when the banking and lending industry gets hit, Congress hears about it in no uncertain terms – either that or our bank accounts do. As one agricultural lobbyist explained to a reporter, “‘We are different from Microsoft or Fannie Mae. … When groups with ag interests come to us we ask, ‘Who are the mortgage bankers in your district?’” If farmers want to get attention on Capitol Hill, they go arm-in-arm with the lenders they are dependent on.
We've seen this at work before; it's one of the main reasons why repeated attempts to phase out farm subsidies have failed. As soon as commodity prices go down, farmers face default and lenders beat down Congressional doors to make sure supports get put back into place. Collin Peterson, former chairman of the House Agriculture Committee, told a reporter, “‘It’s hard to explain to people, but [direct payments to farmers are] built into the whole farming structure now. … It’s the bankers and the landlords and everything else that wants them. You get everybody stirred up if you try to do something. The farm credit people and the local bankers are more vociferous about direct payments than the farmers.”
Factoring in Farm Lending in the NAFTA Negotiations
Mexico’s trade dependence on the U.S. is not one-sided. Without NAFTA, U.S. farmers will lose big, and when they do, many of them will default on mortgages and other debts. Lenders who rely on that income will make sure Congress hears about it. If Senators and Representatives who depend on the support of the banking and lending industry for reelection start hearing drumbeats, Trump’s hard line on NAFTA may have to soften considerably.
Friday, May 26, 2017
On May 18, 2017, Robert Lighthizer, the US Trade Representative, officially notified Congress concerning plans to renegotiate NAFTA. Congress has 90 days of domestic consultation before negotiations between the US, Canada and Mexico can begin.
Rather than focusing broadly on the potential areas for renegotiation, however, I wanted to introduce some of the interesting developments in investment treaties, which are at least peripherally relevant to NAFTA’s (in)famous Chapter 11 on investment. Since the negotiation of Chapter 11 in 1993, international investment law has evolved considerably while growing in importance, with the pro-investor enthusiasm of the 1990s giving way to a degree of sovereign concern over the investor-state dispute settlement mechanism (ISDS).
Today, the future of the traditional bilateral investment treaty (BIT) is uncertain, as countries terminate and renegotiate their agreements with other states. Notably, in early May, Ecuador’s legislature voted to terminate Ecuador’s remaining BITs, on the basis that Ecuador had not benefitted from foreign direct investment due to the BITs, instead experience disproportionally high costs as a result of ISDS.
Ecuador is far from alone, with other countries, including South Africa, Indonesia and India looking to exit or renegotiate investment agreements on favorable terms. So what comes next? What can we expect future investment treaties to look like?
Perhaps most instructive in evaluating the future of investment treaties for developing countries that are looking for a more equitable bargain between themselves and the states that provide most of the private foreign direct investment is the model India BIT, which was released in January 2016.
India’s model BIT departs from a number of standard provisions in significant ways. In particular, it requires exhaustion of domestic remedies for five years before investor state arbitration may be pursued (Article 15.2). Additionally, there is no umbrella clause (which has been controversial in some formulations in extending the scope of the BIT to contractual relationships between states and private investors), nor is there an MFN clause. What there is that has not previously appeared in BITs (and for those of us who are trade law geeks this is particularly exciting) is a general exception clause (Article 32), not dissimilar to Article XX of the GATT. Exceptions include protecting public morals, protecting human, animal or plant life or health, and protecting the environment.
The model BIT also includes a corporate social responsibility provision (Article 12), which states that investors and their enterprises “shall endeavor to voluntarily incorporate” corporate social responsibility standards. While this is a soft law provision, it is a step in the direction of requiring investors to hold up their end of the bargain in providing benefits to the host country. This shift in the power dynamic, with previous BITs heavily favoring investors, is also reflected in the definition of investment in the model BIT. Under the model BIT definition of investment, the enterprise is required to have characteristics of an investment, including “a significance for the development of the Party in whose territory the investment is made”. Economic development is one of the elements in the Salini test, and one that has given rise to the most divergence of opinion by subsequent arbitral tribunals. For a very thorough and insightful analysis of the model BIT, see Grant Hanessian and Kabir Duggal’s recent article in ICSID Review.
Going back to the US, from a US perspective, how NAFTA will be renegotiated is likely to depend in part on the Canadian government’s position with respect to Canada’s recently agreed free trade agreement with the EU, the Comprehensive Economic and Trade Agreement (CETA). In CETA, the EU and Canada agreed to replace traditional ISDS with a permanent investment court system, the first step in an ambitious plan by the EU to replace ISDS in all of its investment agreements with a more transparent, multilateral judicial system that would include an appellate level of review.
If Canada were to choose to push for adherence to a multilateral investment court system in the renegotiation of NAFTA, it seems unlikely that the parties would reach agreement, given the distrust of the current administration, and Lighthizer in particular, of multilateral dispute settlement systems that would impinge on national sovereignty.
In the midst of all of this discussion of renegotiation, we shouldn’t forget that the negotiations of the Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU have not been called off, although they are on hold. As with CETA, the EU has moved away from ISDS and towards the multilateral investment court model in TTIP, in part a result of increasing Member State concerns regarding ISDS.
As for the EU push towards a multilateral permanent investment court, it appears that any such mechanism will now require the buy-in of all of the Member States. A recent European Court of Justice ruling in relation to the EU-Singapore free trade agreement found that the EU lacks exclusive competence to conclude deals that involve dispute settlement between investors and states, while having exclusive competence with respect to most other areas. This means that before CETA can come into force, the EU Member States will have to unanimously agree to the new dispute settlement mechanism. The same goes for TTIP, if it is ever finalized and if such a dispute settlement system is included in the agreement.
As with so many other areas of law and politics, the international investment regime is today in a state of flux, just as some sense of the state of investment law was emerging from the jurisprudence of the ad hoc arbitral tribunals after several decades of arbitration awards. A recurring theme has been the lack of consistency in these arbitral awards and allegations of unfair biases towards developing countries who have borne the brunt of the financial costs in these awards. (See Rob Howse’s fantastic paper providing a conceptual framework for international investment law and arbitration.) These factors are driving the international investment regime to seek out new treaty language and alternative models for resolving disputes between states and investors.
The renegotiation of NAFTA is unlikely to do much to move the world of international investment law forward. The most likely outcome is something not too dissimilar to the text of TPP. Where we are likely to see significant developments is in renegotiated BITs between developing countries and other states (and amongst themselves) and in the EU push for a multilateral investment court. India's model BIT may be the beginning of a trend that profoundly changes the substance of these agreements and the face of investment law itself. In parallel, the EU is reenvisioning how dispute settlement should operate in relation to investment disputes. Both of these efforts would bring greater balance to a system that has historically favored investors over states, even to the detriment of legitimate domestic regulatory policy.
Saturday, May 6, 2017
Perhaps one of the most curious developments of the past 100+ days of the Trump administration has been the lack of progress on the trade front. The only campaign promise that has been delivered on is the withdrawal from the Trans-Pacific Partnership (TPP), which to give President Trump credit, was done the next business day after he was sworn into office, on January 23, 2017.
For his hundredth day in office, President Trump was set to announce the US’s withdrawal from NAFTA, a move he soon backtracked from when informed that many of the areas that would be hardest hit were heavily Trump-supporting agricultural areas. It is unclear when and if NAFTA will be renegotiated, although it seems likely that, rather than unilateral withdrawal, the United States will instead attempt to renegotiate the agreement with Canada and Mexico.
The TPP page on the USTR website has finally been updated to reflect the withdrawal (for several months the full text remained, along with praise for the agreement). Despite President Trump’s rhetoric regarding the awfulness of the deal and the need to renegotiate NAFTA, however, the NAFTA page continues to extol the virtues of the current agreement.
That trade has not been a priority is especially clear from the state of the Office of the United States Trade Representative. The USTR Twitter account hasn’t tweeted since October 2016. Robert Lighthizer, Trump’s official nominee, has yet to be confirmed, delayed by the need to obtain a waiver of the rule prohibiting persons who represented a foreign government from serving as US Trade Representative. (Interestingly, a provision in the new budget bill has bypassed the waiver requirement, even though he would not be the first USTR appointee who needed a waiver and it seems clear that his representation of foreign governments in the 1980s and 1990s does not pose any conflict of interest.)
In March 2017, President Trump appointed Stephen Vaughn, a member of his transition team, acting United States Trade Representative. The positions of Deputy Trade Representative and Deputy Trade Representative in Geneva (which deals with the WTO) remain vacant. Given Lighthizer’s bipartisan support, it appears likely that he will be confirmed in the near future, which should pave the way to a more functional USTR.
With trade having been such an important talking point of the election cycle on both sides of the political spectrum, the disregard for trade policy in recent months is indicative of chaos in the administration and the well-documented conflict between Trump’s campaign populism and presidential status-quoism. As my co-blogger, Alison Peck, noted in her post on trade and security in Asia, trade policies are not conducted in a vacuum.
In an interesting twist, with China recently banning the import of North Korea coal and turning back coal shipments in an effort to pressure North Korea into curtailing its nuclear testing, the United States has stepped up as a major coal supplier to China. The United States supplied no coking coal (used for making steel) to China between 2014 and 2016, but supplied 400,000 tons in February 2017. If President Trump is going to make good on his promise to revitalize the American coal industry, this is certainly one way to go about it.
So where does this leave us?
NAFTA is likely to be renegotiated at some point. President Trump has also suggested replacing TPP with bilateral agreements. The irony there is that TPP was largely based on recent US FTAs, with entire chapters containing almost identical language to that found in agreements such as the US-Chile FTA and the US-Korea FTA. This was a US-driven text that would have been great for US business interests (there were plenty of other issues with TPP, but those are outside the scope of this post).
Both Lighthizer and Vaughn are trade law experts and understand the realities of international trade policy. It is hard to imagine them straying far from the existing bilateral FTAs. Since the USTR will be led by pragmatists, once it is ultimately fully staffed, it seems likely that any new bilateral agreements and a potentially renegotiated NAFTA will reflect much that is already existing. Of course, this all remains to be seen, and if support for President Trump were to wane in agricultural regions of the country, the possibility of unilateral withdrawal from NAFTA of course remains on the table.
Thursday, May 4, 2017
On April 18, President Trump signed an Executive Order setting out his “Buy American, Hire American” policy. A month earlier, the Department of Commerce issued a request for comments on requiring a specified minimum domestic content in pipeline construction.
Both of these moves are consistent with Trump’s campaign promises to promote American industry. But both may violate the WTO Agreements and, if successfully challenged, could give rise to trade retaliation by other countries against U.S. industries.
What’s more, those moves are likely to tick off other countries and lead to the imposition of more domestic content requirements of their own. It’s difficult to see how strict enforcement of Buy American laws would offset the costs to U.S. industry if the world descends into a flurry of protectionist procurement legislation.
The National Treatment Principle under the GATT
The DOC’s potential imposition of domestic content requirements on the pipeline construction industry is the more legally thorny of the two. First of all, it’s also not clear whether the domestic content requirements on private contractors are valid. It’s one thing for a government to set guidelines for purchasing by its own agencies (although there are limits there too), and another thing for a government to tell private industry like pipeline construction contractors who they are allowed to do business with. In its comments on the DOC notice, the European Union noted that imposing domestic content requirements on the purchasing decisions of private companies would be “unprecedented” in the trade sphere and “would have serious consequences also with respect to policies with third countries.”
Moreover, domestic content requirements – or legal requirements that producers include a certain amount of domestically-produced raw materials into a final manufactured product – were among the types of restrictions that nations deliberately limited when they entered into free trade and investment agreements in the first place. Domestic content requirements fly in the face of the “National Treatment principle,” one of the pillars of the General Agreement on Tariffs and Trade (one of the many agreements that makes up the WTO Agreements). “National Treatment” is a somewhat confusing name, sounding at first blush perhaps like an endorsement of nationalism in trade relations. National Treatment actually means that a nation may not treat the products of its trading partners differently than the products of its own nation. (Likewise, National Treatment’s ironic sister principle, Most Favored Nation, prohibits favoritism among different foreign countries’ products. Never a dull moment in trade law.)
The National Treatment principle for the GATT is stated in Article III. Entitled “National Treatment on Internal Taxation and Regulation,” Article III, paragraph 4 says,
The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation distribution or use. …
In other words, all WTO members have a legal obligation not to discriminate against foreign products that are “like products” to those produced in their own country. (Whether two products are “like products” is a fact-based inquiry based on the products’ physical properties, end uses, and consumer tastes and habits as to substitutability.)
The governments of both Canada and the EU made the point in their comments on DOC’s request for information that any minimum domestic content requirements on pipelines would appear to violate the National Treatment principle. Were the U.S. to require that pipeline contractors purchase a minimum amount of domestic steel (or be denied federal permits, presumably), it is almost certain that someone – Canada, the EU, and other countries whose steel industries compete for those contracts – would challenge the regulation before the WTO.
In introducing the President’s trade policy agenda in an annual report by the Office of the United States Trade Representative, USTR suggested that the Trump Administration might not comply with adverse WTO decisions, but that’s questionable and complicated (and a post for another day). Suffice it to say that any persistent failure to respect an unfavorable WTO decision would trigger WTO-sanctioned retaliation against other U.S. products or industries that those industries would surely not take kindly to in the next domestic election cycle. It’s not so easy just to blow off the WTO.
Limiting the "Public Interest" Exemption from Buy American Laws
Does the order change anything? The short answer is maybe.
In the short term, the Executive Order directs federal agencies to strictly comply with Buy American laws already on the books. One thing that might change immediately is contractors’ ability to obtain waivers from the Buy American laws. Right now, the Federal Acquisition Regulations allow waivers when purchasing from a foreign supplier is in the “public interest” because a trade agreements (like the WTO) allows it; where the material is unavailable domestically; or when the domestic supplier’s price is “unreasaonble” based on a prescribed calculation.
The "public interest" exemption is what saves the Buy American statutes from violating National Treatment right now. If agencies are now instructed to apply that exemption strictly, does that mean that they won't grant an exemption even where the Buy American requirement would violate National Treatment?
Opaquely, the order instructs Commerce and the United States Trade Representative to “assess the impacts of all United States free trade agreements and the World Trade Organization Agreement on Government Procurement on the operation of Buy American laws” with 150 days of the signing of the order. It could be that he plans to use this study to be sure that Buy American laws, and the new Executive Order, comply with the United States’ international obligations.
But it would be more consistent with Trump’s rhetoric to use that assessment to decide whether to renegotiate or terminate U.S. commitments that he believes impair U.S. industry. Although Trump seems to have decided against withdrawing from NAFTA for now, it’s unclear what demands he will make to renegotiate both NAFTA and the WTO Agreements and what might make him change his mind and walk away. “Assessing the impacts” of the country’s free trade agreements on domestic sourcing laws might give him a starting point for crafting his positions in renegotiating.
National Treatment in Government Procurement
The WTO Agreement on Government Procurement also incorporates the National Treatment principle of nondiscrimination, although subject to many exceptions. The interaction between Buy American laws and those articulated exceptions will be studied by DOC and USTR.
Only nineteen WTO members, including the U.S. (and the EU on behalf of all its members), are parties to the Agreement on Government Procurement, a “plurilateral” side agreement to the WTO Agreements. That suggests that renegotiation or withdrawal from that Agreement might be more feasible than tampering with any of the 100-plus member multilateral agreements in the WTO. If Trump is unsatisfied with the results of Commerce and USTR’s study about the impacts of the agreement on Buy American laws and wants to identify the low-hanging fruit of renegotiation in the WTO, this might be a place to start.
If Trump decides to go down the road of minimum domestic requirements for construction and tougher Buy American laws in government procurement, hopefully he will consider the potential effects of those policies. First, other countries may follow the lead of the U.S. and implement Buy National policies of their own, cutting off overseas market for U.S. products and services. The European Union emphasized this risk in its comments on the Commerce notice:
Both the US and the EU have in the past been pursuing a clear policy against localization requirements in third countries, including China, India, and Russia. … These potential measures, which would be harmful to US industry, would also make the international fight against third countries’ local content requirements much more difficult.
Second, requiring private industry like the pipeline construction industry to source domestic products even when prices or quality are not competitive could degrade those firms’ competitiveness and potentially lead to the elimination of American jobs. The Associated General Contractors of America made this point in its comments to Commerce. For example, the Executive Order excludes a certain segment of the steel industry from qualifying as “produced in the United States” because the industry’s raw materials (steel slabs) are not commercially available in the U.S. Currently, the industry’s products are still considered to be products of U.S. origin due to waivers of the Buy American laws. The Executive Order, as currently drafted, eliminates that option and makes U.S. slab converters noncompetitive. The AGC said:
If a key aim of the memorandum is to maximize jobs in the U.S. steel industry, we are concerned that it will more likely have the effect of shuttering many U.S. operations spread around the country and replace some of those operations with a consolidated finished steel industry that will be limited both geographically and by ownership.
There’s been recent evidence that Trump can be persuaded to consider the larger impacts that his policies would have on U.S. industry, beyond their stump-speech value. Last week, news reports indicated that Trump was persuaded by some members of his cabinet, especially Secretary of Agriculture Sonny Perdue, not to withdraw from NAFTA. According to the reports, Perdue showed Trump a map of regions that would be hard hit by loss of NAFTA trade, a map that overlapped substantially with one showing strong voter support for Trump. It is likely that a map of the steel industry would as well. The assessments Trump is commissioning may show that this is another case of what he has learned in his first 100 days: things that sound good on the campaign trail don’t always look so good when the legal details are analyzed.
Thursday, April 27, 2017
Since it’s April, I thought it was worth a time out to look at some major legal developments on an international trade issue that’s probably been on your mind lately, even if you don’t realize it: the rules governing the market for prospective Major League Baseball players from Cuba.
Donald Trump’s statements on Cuba have shifted over the past year. During the Republican primaries, Trump expressed approval of some form of diplomatic relations with Cuba, although he wanted “better deals.” During the campaign, he talked tougher on Cuba, saying he would roll back the Obama Administration’s policies unless the Castro government “meets our demands.” Since taking office, the Trump Administration has only said that the White House is studying the issue, leaving some concerned, and some hopeful, about a possible rollback of the more open policies initiated by Obama.
MLB would probably say that the future of the next generation of Cuban athletes depends on what the White House decides. This is not entirely true. Regardless of U.S. policy on Cuba, MLB could substantially reduce the exploitation of another generation of Cuban ballplayers by changing its rules, which currently have Cuban players caught in the crossfire of U.S.-Cuba relations. Having just renegotiated its collective bargaining agreement without fixing the problem, however, MLB will undoubtedly wait for the Administration’s move.
MLB has hidden its greed behind U.S. policy for years. Although sports journalists have reported suspicious circumstances around the defection and signing of Cuban players since the baseball-related defection from Cuba by Rene Arocha in 1991, those circumstances mostly remained shrouded in mystery. Baseball fans thrilled by the heroics of José Abreu, Yoenis Céspedes, or Aroldis Chapman may have, in the lesser angels of our nature, preferred it that way.
But the truth about Cuban baseball players’ journeys to MLB stardom has come out, as the truth tends to do sooner or later. The recent trial and conviction of a baseball players agent and an athletic trainer for smuggling ballplayers from Cuba has produced testimony sensational for both its glamorous celebrity and its underworld horror. Baseball fans who are paying attention should not be able to watch their Cuban heroes without feeling serious qualms that someone, somewhere, ought to do something. And those who are not paying attention should start.
United States v. Hernandez
On March 15, a federal jury in Miami convicted two baseball professionals, a players’ agent named Bartolo Hernandez and an athletic trainer named Julio Estrada, of conspiring to smuggle Cuban ballplayers illegally into the United States for private financial gain. The government alleged a scheme of coercing players, falsifying documents, and carrying out illegal border crossings in order to collect large percentages of the contracts that Cuban players eventually signed with MLB clubs. Hernandez was also convicted of one count of smuggling in connection with the entry of Seattle Mariners outfielder Leonys Martín. Estrada was convicted of conspiracy and three counts of smuggling in connection with the entry of Chicago White Sox first baseman José Abreu, Philadelphia Phillies pitcher Dalier Hinojosa, and former New York Yankees minor leaguer Omar Luis. Neither any players nor the MLB were charged in the case.
Several MLB players testified at trial, describing a dangerous and expensive path to their baseball careers in the U.S. Leonys Martín testified that he was originally smuggled from Cuba to Cancún by other smugglers connected to the defendants, who then increased their demand for payment from the usual $10,000 to upwards of $2.5 million. He testified that the smugglers later moved him to Monterrey and took his family across the Mexican border to one of the smuggler’s homes in Miami. Martín said he was afraid to flee because his family remained with the smugglers, and because he feared being picked up by the Mexican police and returned to Cuba.
In Monterrey, Martín said, he met Hernandez and agreed to pay him five percent and the Monterrey baseball group thirty-five percent of his first contract. Martín ultimately signed with the Texas Rangers for $15.5 million. Martín testified that after the contract had been negotiated, one of his keepers in Monterrey was kidnapped and Martín decided to enter the U.S. illegally out of fear for his own safety. The Mexican group later sued Martín for breach of contract in Broward Country Circuit Court in Florida, and Martín countersued, claiming the contract was the product of coercion.
In the case against Hernandez and Estrada, the government claimed that the defendants employed agents with a history of violent and coercive human smuggling in order to coerce the ballplayers and ensure that they never met or had the chance to sign with other sports agents. If a defector’s family in Cuba or the U.S. refused to pay the smugglers’ fee, according to the government, smugglers called the family and demanded money as their loved one screamed under torture. Baseball players received special treatment because they were worth more money, the government said, but after one player fled, smugglers called his wife and threatened to kill him if he did not return.
White Sox star José Abreu testified that the defendants helped him enter Haiti and to obtain residency papers within days of his arrival there. He said he signed a contract agreeing to pay five percent of his first contract for representation and negotiations, and twenty percent for training and personal needs. Abreu testified that he didn’t realize at that time the amount of money that the contracts represented. Abreu eventually signed with the White Sox for $68 million. At trial, Abreu described a close relationship with Estrada, who was best man in his wedding. Abreu also said he paid Estrada $25,000 a month under their contract after Estrada’s assets were frozen because of the indictment.
One of the most curious incidents described in the trial was Abreu’s testimony that he entered the U.S. illegally in October 2013. He said he had failed to obtain a copy of his Cuban passport and feared that failure to appear for a physical and contract signing would jeopardize his pending contract with the White Sox. With the help of a Haitian agent who was also named in the indictment, Abreu said, he obtained a Haitian passport with his photo but a false name. He testified that the Haitian smuggler had told him to destroy the passport before arrival in the U.S., so he attempted to tear up the document in the lavatory but was interrupted by a flight attendant’s knock. Abreu testified that he ripped out the identification page, returned with it to his seat, and swallowed the document in pieces, washed down by a Heineken. When asked by an investigator what the passport tasted like, Abreu reportedly answered, “Freedom.”
At trial, lawyers for Hernandez and Estrada attempted to separate their clients from the fraudulent, coercive, or violent actions of other smugglers, describing both defendants as strictly baseball professionals who helped the Cuban ballplayers achieve their dreams of playing professional baseball in the U.S. Both Hernandez and Estrada, through their lawyers, have said they will appeal their convictions.
Law and Baseball
The details of the player-smuggling scheme described at trial make more sense in the context of MLB Official Professional Baseball Rules Book (the business rules, not the baseball rules, which are here and a lot more fun but not really relevant). Rule 3(a)(1) treats signing U.S. and Canadian residents differently from signing residents of other countries. Here’s Rule 3, in relevant part:
3. ELIGIBILITY TO SIGN PROFESSIONAL BASEBALL CONTRACTS.
(a) General Rules. … A Major or Minor League Club may contract with a player under the conditions and restrictions set forth in this Rule 3 …
- A player who has not previously contracted with a Major or Minor League Club, and who is a resident of the United States [defined to include Puerto Rico] or Canada, may be signed to a contract only after having been eligible for selection in the Rule 4 draft. A player shall be considered a “resident of the United States” if the player enrolls in a United States high school or college or establishes a legal residence in the United States on the date of the player’s contract or within one year prior to that date.
- A player who has not previously contracted with a Major or Minor League Club, who is not a resident of the United States or Canada … may be signed to a contract if the player:
A. Is at least 17 years old at the time of signing, or
B. Is 16 at the time of signing, but will attain age 17 prior to the end of the effective season for which the player has signed or September 1 of such effective season, whichever is later.
So U.S. and Canada residents have to go through the Rule 4 draft (better known as “the draft”), but residents of other countries can be signed as free agents. That’s great for Dominicans and Venezuelans and Japanese but not so great for Cubans because of the Cuban Liberty and Solidarity Act (better known as the Helms-Burton Act). The Helms-Burton Act instructed the Secretary of the Treasury and the Attorney General to enforce the Cuban Assets Control Regulations and created a $50,000 civil penalty for violating the regulations. Those Regulations prohibit all transactions with Cuba or Cuban nationals in terms so sweeping as to be almost incomprehensible on first reading. Cuban baseball players would be treated as international free agents under MLB Professional Rule 3(a)(1)(B), except that the Cuban Assets Control Regulations prohibit MLB clubs from transacting with Cuban nationals, let alone paying any fees that the Cuban authorities might demand in order to release them from their contract with Cuban national teams.
So what are the options for an aspiring Cuban player? Option 1: Defect to the United States to avoid the embargo – but then be subject to the draft and sign for pennies on the dollar, in some cases. Or option 2: Take the Joe Cubas loophole. Cubas was a Miami-based sports agent known for helping Cuban ballplayers defect not to Miami but to the Dominican Republic, where they could negotiate as free agents under Rule 3(a)(1)(B) if they could establish residence. Many of Cubas’ clients signed multimillion-dollar deals with MLB clubs, creating in the process a tantalizingly lucrative career for sports agents in human trafficking of Cuban ballplayers.
A History Lesson on Rule 3(a)(1): Viera v. MLB
Rule 3(a)(1) has been subject to legal challenge as national origin discrimination, but the lawsuit was ultimately unsuccessful. In 2001, Rolando Viera, a Cuban pitcher who had defected to the U.S., sued the MLB over the rule in federal court, claiming that it discriminated against Cuban players by placing them in the draft. On June 4 of that year, the district court denied Viera’s request for a preliminary injunction. The same week, Viera was drafted in the seventh round by the Boston Red Sox, at 27 the oldest player taken in the draft that year.
In July 2002, the court denied Viera’s motion for summary judgment on his claims under Title VII and the Florida Civil Rights Act. In its ruling, the court repeatedly emphasized that Cuban players were not subject to discrimination because they could defect to other countries and sign as free agents from there. In its July 19, 2002 Order on Plaintiff’s Motion for Summary Judgment, the court stated:
Defendant [MLB] has submitted evidence demonstrating that Cuban players who relocate from Cuba to countries including the Dominican Republic, Venezuela, Panama and Australia have contracted as free agents with franchises without being required to participate in a Rule 4 draft. … Thus, Cuban players may avoid participating in Defendant’s Rule 4 draft by residing in a location other than the United States or Canada. If they choose to establish residency in the United [S]tates, however, they are required to participate in the Rule 4 amateur draft. This evidence does not support Plaintiff’s contentions that Defendant discriminated against him on the basis of his national origin or that Rules 3 and 4 have the effect of unlawful national origin discrimination.
The court’s order denying relief to Viera, then, turned on the presumption that Cuban ballplayers could simply go to the Dominican Republic or Haiti or Mexico first – a presumption that effectively ushered Cuban baseball players into the smuggling ring detailed at the Hernandez/Estrada trial.
The Future of Cuban Prospects in MLB
Although only open trade with Cuba could entirely end the risk currently run by Cuban ballplayers, MLB could remove much of the pressure on Cuban prospects by changing its professional rules.
The Obama Administration took a step toward putting the human traffickers out of business. On March 15, 2016, Treasury issued regulations that permit businesses in the U.S. to negotiate with and hire Cuban nationals, as long as no funds are paid to the Cuban government in connection with the hire. The new regulations take advantage of a Treasury-controlled ejector button in the Cuban Assets Control Regulations. Those sweeping regulations contain an equally sweeping administrative exception that says the prohibitions of the regulations apply “except as specifically authorized by the Secretary of the Treasury by means of regulations, rulings, instructions, licenses, or otherwise.”
This change cleared the way for two MLB clubs in 2016 to sign the most recent high-profile Cuban baseball defectors, the brothers Yulieski Gourriel and Lourdes Gourriel Jr. Although the Gourriel brothers defected while playing at a tournament in the Dominican Republic, they did not have to establish residency there to be eligible to negotiate contracts with the MLB clubs. The newly-authorized negotiations brought big paydays for the Gourriels: the Houston Astros signed Yulieski to a five-year, $47.5 million deal in July 2016. Lourdes signed a seven-year, $22 million deal with the Toronto Blue Jays, possibly with the right to arbitrate for a higher salary in future years.
For players still in Cuba, however, the future remains uncertain. Even if Trump retains or further loosens the right of U.S. businesses to negotiate with and pay salaries to Cuban nationals, it remains unclear whether the Cuban government would demand a portion of any payments made to the players, a demand that would violate the current regulations. Just before the Treasury regulations were announced last year, MLB submitted a proposal to Treasury that would allow the clubs to negotiate contracts directly with Cuban players and pay into a fund that would be directed toward improvements in baseball programs for Cuban youth. It’s unclear whether either government would accept that arrangement, however. Unless and until both countries agree to a deal, young Cuban ballplayers may remain tempted to try to establish residency in a third country by whatever means necessary.
A Partial Fix: Amend Rule 3
For now, the problem is not pressing for MLB or for a large number of Cuban ballplayers. The Gourriel defections followed about 100 others by Cuban players in the past generation, leaving no top MLB prospects currently in the Cuban league. For vulnerable Cuban ballplayers, however – lesser talents still hoping for a shot, or very young players just now coming up through the Cuban system – the smuggling circuit may still prove attractive in the face of great uncertainty or in the event of chilling in U.S.-Cuba relations.
And MLB cannot simply hide behind claims of tough U.S. policies or unreasonable Cuban demands. The danger to Cuban players could be greatly reduced by amending Rule 3(a)(1) of the professional baseball rules to say that Cuban players who enter the United States can seek asylum or some other lawful grounds for admission and then sign as free agents without going through the draft. While smugglers might still attempt to extort deals from Cuban players that they help to cross the Strait of Florida, the players would be in a far less vulnerable position if they were not being effectively held captive in a foreign country, and if they were not dependent on fixers in those countries to secure their identification and residency documents. Once a top prospect arrived in the U.S., he would be free to meet with the many sports agents who would undoubtedly compete to represent him, without coercion and for more reasonable fees, in negotiations with MLB clubs.
The MLB had an opportunity to change the rule in December, but didn’t. The MLB professional rules state that, where the rules are inconsistent with the collective bargaining agreement between MLB and the MLB Players Association, the agreement will control. But the treatment of Cuban players remains largely unchanged after renegotiation of the agreement during the 2016 Winter Meetings. The owners sought an international draft for all foreign players to cap spending by larger-market teams, but the MLBPA objected. Instead, they agreed on a hard cap for international amateur signings (the old cap could be exceeded, with penalties, and routinely was), and raised the minimum age for a player to be signed as a professional from 23 to 25.
Under these new rules, Cuban ballplayers under 25 will be less lucrative for smugglers – the new hard cap on amateur signings is $4.75 million to $5.75 million per club, depending on market size. But those numbers may still look extremely attractive to young prospects and to smugglers. And any players who don't decide to defect until age 25 will still offer big potential paydays to those who would exploit them.
It’s true that Cuban players can theoretically choose to come directly to the United States instead of to a third country, seek asylum, and submit to the draft. They are going to third countries to make more money. But young Cuban ballplayers, who can’t talk to any U.S. clubs or sports agents directly, have little business sophistication or bargaining power. Under the new collective bargaining agreement, it remains likely that sports agents motivated by large payouts from free agent contracts will coerce Cuban players to travel to third countries under dangerous circumstances. Young ballplayers who look like dollar signs to sports agents and smugglers may have few realistic alternatives.
In the Viera litigation, MLB defended its Rule 3/Rule 4 policy for Cuban defectors on the grounds that MLB clubs were not allowed to do business in Cuba and therefore could not scout Cuban players as they could players from other countries. The court quoted from a letter from the Office of the Commissioner to Viera’s agent, stating that
Our guidelines are informed by our desire to maintain an equitable basis for all Clubs to scout player talent. According to our policy, Clubs may not negotiate with or sign a native player from a country where any Major League Club is prohibited from entry or doing business unless the player’s residence and employment status would permit such signing, all Clubs are notified of the player’s availability and all applicable draft and signing rules are observed. Thus, it would not be permissible for a Cuban defector who becomes a United States resident to ‘quietly’ remain in the United States through the Rule 4 draft and then sign as a passed-over player, as you suggest. All Clubs would need to be notified of the player’s eligibility.
This defense doesn’t hold water in the real world of scouting for Cuban players. MLB clubs routinely send scouts to international tournaments to identify Cuban prospects of interest. One convicted smuggler told reporters that the MLB club representatives will observe players at these tournaments and inquire obliquely when a certain player might be available to sign, setting the gears of smuggling and defection in motion. For MLB to claim that the clubs are unable to scout Cuban players until they take up residence in third countries under dangerous circumstances is disingenuous.
Baseball isn’t the only business waiting to see what Trump will do on Cuba. Airlines and other transportation and tourism businesses with routes to Cuba are also continuing business while poised for changes. But MLB is one business that could solve a significant part of its own problem, and eliminate massive amounts of human suffering by the young men that the clubs seek to hire, by changing its own rules.
Revisiting a Title VII Claim post-Hernandez
It is possible that the Trump Administration will further loosen the embargo, granting MLB clubs the right to contract with Cuban players and pay into a fund in Cuba for baseball development. It is possible that the Castro government will agree to that deal. If not, MLB and the MLBPA should amend Rule 3(a)(1), allowing Cuban ballplayers to defect to the U.S. and sign as free agents, before another generation of Cuban players is exploited and endangered for our entertainment.
If the embargo is tightened and Rule 3 doesn’t change, the Hernandez case might lend support to a new Viera-type lawsuit against MLB for national origin discrimination. Hernandez suggests that the district court’s assumption in the Viera case was false: Cuban ballplayers are not similarly situated to ballplayers from other countries just because they can sign as free agents from third countries. When Cuban players – but players of no other nationality – have to risk their lives to sign as free agents and pay extortionate portions of their contracts to unethical agents and human traffickers, the rule may well violate Title VII.