Monday, February 26, 2018
Guest blogger Katie A. Hutchison is a member of the WVU Law Class of 2018. She specializes in international law and immigration law and has worked as an immigration intern at the International Rescue Committee and as a Civil Division intern at the US Attorneys Office for the Northern District of West Virginia. She is fluent in German and Russian and conversant in Spanish.
Recently, some Congressional Democrats criticized the Trump Administration for failing to impose sanctions against Russia under the the Countering America’s Adversaries through Sanctions Act when the Treasury Department published a list of Russian official and oligarchs.
The underlying legal question to this controversy is whether U.S. sanctions against Russia are permissible. This post compares the recent U.S. sanctions against Russia with the much-maligned Helms-Burton Act of 1996 to determine whether a potential EU complaint at the WTO over the Russian Sanctions would be successful. As the EC did in the Helms-Burton complaint, the EU can potentially claim that the cybersecurity Russian Sanctions nullify or impair Article I MFN and Article III National Treatment, trade benefits the EU can reasonably expect under the GATT.
Presumably, the United States would defend a claim on the grounds of national security. Several WTO Agreements include a national security exception which operates as a defense to a claim: GATT Article XXI, TRIPS Article 72, and GATS Article XIV.
Most controversial of these is GATT Article XXI(b) which states that the rest of the GATT is not intended “to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests . . . (iii) taken in time of war or other emergency in international relations.”
Since the founding of the GATT in 1947, Article XXI has only been proposed as a defense once, in response to the European Communities (EC) complaint United States — The Cuban Liberty and Democratic Solidarity Act. Ultimately, the WTO panel’s authority lapsed without decision, but the Helms-Burton Act represents the only challenge under the WTO national security exception and, therefore, the only point of comparison in determining whether an EU complaint over the Russian Sanctions would succeed at the WTO or whether Article XXI would be a viable defense for the US.
Background on the August 2017 Codification of the Russian Sanctions
The recent August 2017 sanctions are significant as they codified existing executive orders on Russia in a throwback to the Cold War and created new cybersecurity sanctions in an attempt to prevent meddling in democratic elections.
President Trump reluctantly signed the Countering America’s Adversaries through Sanctions Act into law on August 2, 2017, creating new sanctions on North Korea, Iran, and Russia and codifying existing measures created under executive order into law.
The stated purposes of the newly-added sanctions in Title II, Countering Russian Influence in Europe and Eurasia (“Russian Sanctions”), is preventing the Russian government from meddling in western democratic elections. As quoted in the statute, in a January 2017 report, the US Intelligence Community found 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 their election processes.”
Currently, the US Treasury, Department of National Intelligence, and the State Department reviewed whether investments in Russian state-owned companies, like Rosneft and Gazprom, fall under Sec. 224 of the Russian Sanctions. The Treasury Department published a report listing individuals associated with the Russian government on January 30, 2018. This report, however, does not impose sanctions on these individuals as Congress delegated that responsibility to President Trump, which he expressly refused to impose on January 29, 2018. However, Treasury Secretary Steven Mnuchin stated that although the Treasury Report did not impose sanctions, "[t]here will be sanctions that come out of this report."
The new cybersecurity sanctions included in the Russian Sanctions allow the US to block assets, prohibit all transactions in all property and interests in property, revoke visas, and exclude from US borders:
(1) 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);
(2) impose five or more of the sanctions described in section 235 with respect to any person that the President determines knowingly materially assists, sponsors, or provides, material, or technological support for, or goods or services (except financial services) in support of, an activity described in paragraph (1)(A)
The cyber security sanctions also include a third option for persons that knowingly provide financial services to any person described in paragraph 1(A). None of these options for the cybersecurity sanctions is limited to persons of US citizenship or specifically targets persons of Russian citizenship.
Background on the Helms-Burton Codification of Cuban Sanctions
The Helms-Burton Act codified sanctions against Cuba in 1996 and was the target of a European Communities complaint at the WTO.
The European, Canadian, and Mexican officials, and even President Clinton himself publicly condemned the Helms-Burton Act before it passed. In March 1996, however, Clinton reluctantly signed the bill into law after the Cuban Air Force shot down two private US planes flown by an anti-Castro organization, Brothers to the Rescue, which helped Cuban refugees flee the regime.
Helms-Burton had three parts: (1) freezing the US embargo on trade with Cuba applicable to US firms and firms owned by “US persons”; (2) creating a cause of action in the US for Americans who formerly owned Cuban property “that could result in damages equal not to the value of trade being conducted by the defendants, but to the value of the property once owned by the American plaintiffs, and possibly even to three times that value”; and (3) barring from admission to the US controlling businessmen—shareholders, officers, and their families—of companies “trafficking” in property formerly owned or claimed by American nationals.
The international community found the creation of an extraterritorial cause of action most troubling because the US failed to cite existing treaty law or customary international law allowing it to do so. Under The Lotus Case (France v. Turkey), the Permanent Court of International Justice found that jurisdiction exercised by States must be territorial, unless there is an international custom or controlling convention to the contrary.
On May 3, 1996, the European Communities (EC) (today the European Union (EU)) complained to the WTO about the US Helms-Burton Act and its effect on EC citizens. While the complaint was pending, the EC and the US negotiated a deal obviating the need for the Panel to decide on the EC complaint, and the Panel’s authority lapsed on April 22, 1998, under Article 12.12 of the DSU. Under the deal, the US agreed not to prosecute any European companies under Helms-Burton, and every six months since 1996, Presidents Clinton, Bush, and Obama have waived the Helms-Burton Act’s authorization to file suit.
Comparing Helms-Burton and Countering Russian Influence in Europe and Eurasia to Understand the Possible Trajectory of the Russian Sanctions in International Trade
The EU can likely claim that the new cybersecurity sanctions of the Russian Sanctions nullify or impair GATT Article I Most Favored Nation (MFN) and Article III National Treatment due to the strong influence of Russian energy companies, like Gazprom and Rosneft, in the European market and the broad language of Russian Sanctions Sec. 224 “any person.”
Nullification or Impairment of Trade with the EU
The EC’s Helms-Burton complaint included six grounds for complaint, but most applicable here are the complaint about its extraterritorial application, which in turn would have affected “trade between the EC and Cuba or trade between the EC and the US” and potentially resulted in denial of visas to foreign business executives found in violation.
Similarly, if the EU complains to the WTO about the Russian Sanctions, the EU must show that the Russian Sanctions impair benefits reasonably expected to accrue to the EU under the WTO, in particular GATT Article I Most Favored Nation (MFN) and Article III National Treatment.
MFN generally requires that benefits given to one nation must be immediately and unconditionally applied to all other WTO Member States. National Treatment prevents Member States from using national measures to discriminate between domestic and imported goods.
Section 224 of the Russian Sanctions broadly includes any person, not just of Russian nationality, who by the President’s determination “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 is directly or indirectly owned, controlled by, acts on behalf of, or purports to act on behalf of any of those persons.
The alleged impairment here would stem from the close economic ties between the EU and Russia. One dramatic example is the EU’s relationship with the Russian state-owned natural gas company, Gazprom. Gazprom and Rosneft were notably absent from the Treasury Department’s list of entities from January 30, 2018, although they might be included in a separate classified annex.
In 2016 Gazprom sold 228.3 billion cubic meters of natural gas amounting to $36 million to 25 European countries. EU citizens doing business with Gazprom would likely fall under Section 224 because Gazprom is owned and controlled by the Russian government, the intended target of the language in subparagraph (1)(A).
Congress’s stated policy for Section 224 of the Russian Sanctions is to prevent the Russian Government from undermining democratic elections. Therefore, under Section 224(2), an EU citizen who engages in conduct that violates the Russian Sanctions can be subject to the denial or revocation of his visa or blocking of his assets.
In the real world, the Russian Sanctions could sweep broadly, capturing very common conduct by EU citizens.
For example, if an EU citizen sells goods, like Ethernet cables, to Gazprom he may be “knowingly selling goods in support of significant activities undermining cybersecurity.”
Gazprom is owned by the Russian government, the primary target of the sanctions. The Russian government may be found to be per se participating in significant activities undermining cybersecurity, since Congress found in the Russian Sanctions that “the Russian Federation has made significant efforts to reduce the number and intensity of cyber intrusions conducted by that Government.”
Reading this broadly, the Russian Sanctions might apply to any person who “knowingly” sells Ethernet cables to Gazprom, since that person could be said to be “knowingly” helping to undermine cybersecurity. The same analysis may apply with respect to EU citizens doing common business with the Russian state-owned oil company, Rosneft.
Some EU members have been advocating since 2016 to end the EU’s more-limited sanctions on Russia. These sanctions have caused major contracting delays: in Italy, for example, $32 billion in signed contracts have been on hold for three years as a result of the sanctions.
The statute does contain potential safeguards, parallel to those in the Helms-Burton Act, that the U.S. might rely on to defend a claim under the GATT. The sanctions are subject to the President’s discretion and the President may, under limited circumstances, waive the application of the sanctions. The US might agree to a non-enforcement waiver of the Russian Sanctions similar to the deal it struck with the EC not to enforce the Helms-Burton Act against EC citizens.
Relying on Presidential discretion and repeated waivers may have assuaged the EC in 1997, but in 2017, EU leaders are less likely to find comfort in relying on Trump’s discretion. Germany and EU leadership have already expressed concerns that US sanctions on Russian energy companies will harm EU trade interests and that “if diplomacy fails, the EU will consider complaining at the WTO” but that requires all EU Member States to support the complaint.
Unlike in Helms-Burton, where the EC presented a united pro-Cuban trade front, the EU is split internally on the topic of its own Russian sanctions. As support for the EU’s Russian Sanctions wanes, will the EU accept the extraterritorial application of the US Russian Sanctions? If not, affected EU Member States could complain in their own right.
Does the Article XXI National Security Exception provide a Real Defense?
If the EU or EU Member States complain to the WTO, the US could raise the GATT Article XXI national security exception in defense of the Russian Sanctions, but it is an open question of how the WTO will interpret the exception. Article XXI reads, in part, that agreement shall not be read:
(b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests . . . (iii) taken in time of war or other emergency in international relations; or
(c) to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.
With Helms-Burton, the US had a stronger case for the National Security Exception than in the Russian Sanctions because Clinton signed the Helms-Burton Act immediately after Cuba attacked private US planes (although there was speculation as to whether the planes were over international waters or Cuban territory at the time).
To defend the Russian Sanctions, the US would need to argue that (1) the Russian Sanctions were a direct result of Russian tampering in the 2016 US elections and that tampering in that election threatens US essential security interests, or (2) that Russian tampering threatens the maintenance of international peace and security as construed in the UN Charter.
Neither option is sound as a matter of US foreign policy or the comity of nations that the UN Charter is intended to promote.
If the US raises the election tampering as the main purpose of the Russian Sanctions, the US could argue that attacking US democracy in cyberspace is akin to an emergency in international relations and that the sanctions were “necessary for the protection of its essential security interests” under GATT Article XXI(b)(iii).
The WTO Panel will need to be careful to show respect for US interests in interpreting Article XXI(b)(iii) because the structure of the WTO and the GATT, like all international legal institutions, continues to function due to the respect for the sovereign equality of nations.
However, respecting sovereignty to too high a degree could easily lead to the degrading of the international trade structure, since allowing each country to protect all of its own idiosyncratic interests would create barriers to free trade. Although the WTO Panel could construe Article XXI to allow for broad interpretation of what is necessary for the protection of essential security interests, it is unlikely to do so because this construction is contrary to the goal of free trade and, in this case, violates international law’s prohibition on the extraterritorial application of laws declared in The Lotus Case.
As to the second option, under GATT Article XXI(c), the UN Security Council decides when there is a threat to international peace and security. Because both the US and Russia are permanent UN Security Council Members, it is unlikely that the US would ever succeed in passing some version of the Russian Sanctions as a resolution of the Security Council, as demonstrated by the Security Council’s forty-year gridlock of the Cold War era.
In comparing the EC Helms-Burton complaint of 1996 to the possible EU Russian Sanctions complaint, it becomes apparent that it is in the US’s best interests to find a way to waive the application of the Russian Sanctions as to EU citizens as it continues to do with respect to the Helms-Burton Ac. A WTO Panel would be unlikely to construe the GATT Article XXI National Security exception in the US’s favor and the US would then be faced with a choice between either conforming its measure to the GATT or facing economic retaliation countermeasures from the EU or other affected trade partners.
Monday, January 8, 2018
The following is from guest blogger Matthew Stiles. Stiles was born and raised in Ottawa, Ontario, Canada, and has earned degrees in engineering and economics from Concordia University in Montreal, Quebec, and a J.D. from West Virginia University College of Law. He has extensive experience working on international construction mega-projects in various capacities across North America and currently focuses on international construction and engineering law.
On August 15, 2017, the White House issued a press release highlighting President Trump’s plan that “[c]rumbling infrastructure will be replaced with new roads, bridges, tunnels, airports, and railways gleaming across our very, very beautiful land.” After successfully overhauling the United States tax system, in early 2018, the Trump Administration will turn its attention to President Trump’s “Rebuilding America’s Infrastructure” policy.
The President, however, is fast approaching a paradox at the crossroads of America’s failing infrastructure and the global resurgence of political realism, a philosophy that considers nation states to be the principal actors in the international arena, each primarily concerned with their own security, the struggle for power, and which act first and foremost in pursuit of their own national interests.
As the President continues to focus on protecting American interests and creating opportunities for U.S. businesses, American contractors face record-setting backlogs. All of a sudden, a roadblock emerges: Who in fact will build this infrastructure work?
A Closer Look at the Trade-Infrastructure Paradox
President Trump has painted a bleak picture of America’s infrastructure—and the American Society of Civil Engineers (“ASCE”) agrees. The fact is, it is crumbling. In ASCE’s 2017 Infrastructure Report Card, America received a disconcerting D+ grade, which ASCE estimates will require a multi-trillion dollar investment to rehabilitate.
At the same time, the Trump Administration has signaled its intent to steer the world’s nations towards a more nation-centric worldview. In his remarks at the 72nd Session of the United Nations General Assembly, President Trump stated:
To overcome the perils of the present and to achieve the promise of the future, we must begin with the wisdom of the past. Our success depends on a coalition of strong and independent nations that embrace their sovereignty to promote security, prosperity, and peace for themselves and for the world.
But the application of political realism has historically resulted in nations restricting access to domestic markets, under the guise of sovereignty. International contractors, in response to growing political uncertainty, have retreated to the safe harbors of their domestic markets.
If the Trump Administration acts on its stated beliefs, then the issue is how the international contracting industry will respond. And if international contractors assess the Trump Administration’s advancement of political realism as increasing political and legal risk in American markets, then governments should expect either higher project costs, or longer project time horizons. The negative impact of either effect could cascade throughout the economy.
A nation’s infrastructure acts as its economic nervous system, in which serious problems can be life threatening. For nations competing in an increasingly globalized marketplace, sound infrastructure is essential to future prosperity. Policy makers, and the international law community—especially lawyers acting in the trade dimension—should pay close attention to how the Trump Administration manages to reassert American sovereignty, as America’s failing infrastructure lurks around the bend.
Without knowledgeable policy makers who can anticipate and head off a collision between these two potentially competing issues, the Trump Administration could be doomed to fail in its pledge to Make America Great Again.
Only One Fifth of American Infrastructure is Under Federal Jurisdiction
The Trump Administration has pledged significant federal support, through its “Rebuilding America’s Infrastructure” policy, to help states rebuild critical infrastructure. But only one fifth of America’s infrastructure is under the jurisdiction of the Federal Government—the vast majority of America’s failing infrastructure is a problem under the jurisdiction of the states, localities, and the private sector.
On December 18, 2017, following an Amtrak derailment in Washington state that resulted in multiple deaths, President Trump tweeted: “The train accident that just occurred in DuPont, WA shows more than ever why our soon to be submitted infrastructure plan must be approved quickly.” A few days later, on December 22, 2017, President Trump tweeted, “At some point, and for the good of the country, I predict we will start working with Democrats in a bipartisan fashion. Infrastructure would be a perfect place to start.” There is widespread bipartisan agreement on the fact that America needs a plan to address its infrastructure.
The Trump Administration has vowed to “get out of the way” and allow state and local governments to find solutions to meet their unique infrastructure challenges. But will President Trump’s “America First” policies act as roadblocks?
West Virginia, under Governor Justice’s aggressive road building plan could be the first state in the union to find out.
Governor Justice’s Roads Building Plan Would Remediate West Virginia’s Infrastructure
Governor Justice has colored his roads building plan as vital to West Virginia’s future prosperity. It addresses two important policy issues, which are systemic across the United States: (1) the critical condition of existing infrastructure; and, (2) the critical condition of governmental budgets.
While the nation’s infrastructure scored a dismal D+ grade by ASCE, many states, including West Virginia, fared even worse. In West Virginia, ASCE asserts that driving on poor roads costs each West Virginian an extra $515 per year.
Unfortunately, the only thing more broke than state infrastructure is state budgets. The National Association of State Budget Officers anticipates that 31 states will “bust their budgets” in the 2018 legislative session. A 2017 study from George Mason University showed that most states are under fiscal stress, with each state carrying massive debt obligations.
West Virginia was ranked 42nd in fiscal strength in the George Mason study, with long-term liabilities at $4,223 per capita and unfunded liabilities at 33 percent of state personal income. West Virginia Cabinet Secretary of Revenue Robert Kiss stated that West Virginia faces a budget deficit of over $400 million for fiscal year 2018.
Governor Justice found a way to address the state’s empty treasury. On October 7, 2017, West Virginia held a special election to authorize the state to issue bonds over a four-year period, a step that would qualify the state for matching funds from the Federal Government.
Governor Justice was staggered by the overwhelming support for the “Bonds for Roads and Bridges Measure,” which was fundamental to executing his roads building plan. Of the state's over 120,000 voters, nearly 73 percent supported the measure. Governor Justice spent months promoting the roads building plan as a way to boost the state's crumbling economy, consistently arguing:
This is a not a Democrat, Republican or Independent issue. It’s about jobs, safety, your roads and bridges, and hope for our state. The overwhelming majority of our elected leaders, along with myself, are in favor of the Road Bond Referendum . . .
Governor Justice’s rhetoric echoes President Trump’s. Governor Justice’s bond measure will raise the capital necessary to begin important infrastructure repair in West Virginia. Unfortunately, no such option is politically viable for the Federal Government. But the like-minded Trump Administration is also thinking outside the box, signaling that it plans to turn to the private sector for support.
Private Equity Can Help to Rehabilitate America’s Roads and Highways
ASCE has estimated that governments across the nation need to invest $4.5 trillion by 2025 to remedy America’s infrastructure problem. On December 5, 2016, former Speaker of the House Newt Gingrich, “Chief Planner” during President-elect Trump’s transition into the White House, stated that the Federal Government plans to turn to the private sector for innovative infrastructure solutions.
Similarly, United States Transportation Secretary Elaine Chao said that the United States needs a new approach to remediate “aging, congested and technologically lagging” infrastructure. “Previous attempts to address this problem relied upon massive borrowing and top-down federal control,” Chao said. “This administration takes a different approach. To avoid saddling future taxpayers with unsustainable debt, the plan seeks to unleash billions of dollars in private capital for infrastructure investment.”
With all levels of government pledging to begin major infrastructure work, the issue is whether American contractors have the capacity to build it.
American Contractors Face Record-Setting Backlogs
According to an article published by Princeton University on international competition in engineering and construction, American contractors previously faced little international competition for large, high-margin domestic government contracts because domestic firms had the capacity to build it all.
Today, however, domestic contractors face a record-setting backlog. The Washington, D.C.-based Associated Builders and Contractors’ Construction Backlog Indicator, which measures the average length of backlogs among all its contractor members, rose to nine months during the first quarter of 2017, up 8.1% from the fourth quarter of 2016, says Chuck Goodrich, president of Gaylor Electric Inc. and 2017 ABC chairman.
“For the first time in the series’ history, every category—firm size, industry and region—registered quarterly growth in the Construction Backlog Indicator,” Goodrich said. “The Construction Backlog Indicator is up by 0.4 months, or 4%, on a year-over-year basis.”
With backlogs approaching 12 months for work exceeding $100 million, governments must turn to international contractors to keep costs down, and to expedite project delivery. This is an increasing practice worldwide, as well as among American states.
Figure 1 - Construction Spending Projection (Source: FMI 2016 Quarterly)
On June 29, 2006, the Indiana Toll Road Concession Company, a joint venture between Cintra Infraestructuras S.A, a separate Spanish construction firm, and Macquarie Atlas Roads, an Australian toll road company, was awarded the contract to construct and operate the Indiana Turnpike.
In Florida, over five years beginning in 2009, a Spanish multinational contractor, Actividades de Construcción y Servicios S.A. (ACS) Infrastructure Development of Madrid, constructed the $1.8 billion I-595 Expressway.
In 2017, in North Carolina, I-77 Mobility Partners LLC, another joint venture led by Cintra, began to construct the 26-mile I-77 Express Lanes Project, as part of a public-private partnership with the North Carolina Department of Transportation.
Construction spending is set to rise to an all-time high in 2018 (Figure 1). Consequently, governments will soon compete for a narrowing market of domestic contractors. This fact could slow down, or even worse crash, the Trump Administration’s policy proposal and state infrastructure initiatives, like Governor Justice’s roads building plan.
While perhaps American governments can accommodate extended time horizons, failing infrastructure cannot.
International Builders Hesitate to Depart from Safe Harbors
In response to increasing global political uncertainty, foreign contractors with the capacity to help reconstruct America’s infrastructure in America are reticent to leave the safe harbors of their domestic markets.
President Trump’s America First policies threaten to deepen already growing uncertainty in the international contracting market, as shown by the results of the Engineering News-Recording (“ENR”) Top 250 International Contractors list.
In 2016, the Top 250 International Contractors reported $468.12 billion in contracting revenue from projects built in foreign markets, which represents a 6.4% retreat from 2015. ENR reports that 2016 is the third straight year showing a decline in Top 250 revenue earned in foreign markets. Moreover, according to ENR, in 2016, the Top 250 reported $927.94 billion in revenue earned in domestic markets, a 3.4% increase.
Before President Trump’s election, international contractors had to assess the impact of Britain’s exit from the European Union as well as growing political turmoil in the Middle East and elsewhere. Now, international contractors must assess what effect the Trump Administration’s hostility towards international law will have on project risk profiles.
The Trump Administration has Expressed Hostility Towards International Law
According to the Financial Times, the United States has lost about 5.6 million manufacturing jobs between 2000 and 2010, while arguably complying (generally at least) with the rules of international trade law.
On the campaign trail in 2016, President Trump stated that international trade has had a negative impact on American prosperity, and promised to place tariffs on the “unfair” trade of international goods and services. In its international trade policy, “Trade Deals That Work For All Americans,” the Trump Administration isolated international trade law, and allegedly nefarious actors operating in its realm, as a primary causal factor in growing political unrest:
For too long, Americans have been forced to accept trade deals that put the interests of insiders and the Washington elite over the hard-working men and women of this country . . . the President understands how critical it is to put American workers and businesses first when it comes to trade. With tough and fair agreements, international trade can be used to grow our economy, return millions of jobs to America’s shores, and revitalize our nation’s suffering communities.
With his bold, repeated, and consistent commitment to reestablish American sovereignty and promote American interests, President Trump has raised policy concerns within the international trade law community, and within the international political class. European Union Trade Commissioner Cecilia Malmström and the minister of economy of Mexico Ildefonso Guajardo said in a joint statement that President Trump’s actions have triggered a “worrying rise of protectionism around the world.”
Is President Trump’s philosophy consistent with American international law obligations established by the General Agreement on Tariffs and Trade (the "GATT"), one of the World Trade Organization (“WTO”) agreements?
Can The Trump Administration Legally Implement Its America First Policies?
The issue is whether the Trump Administration can legally implement its America First policies under the existing international legal framework.
Following World War II, 23 countries, including the United States and major European powers, ratified the GATT, which became law on January 1, 1948. Under the GATT, Member States committed to eliminating or reducing tariffs, quotas, and subsidies, while maintaining meaningful economic regulations. The original purpose of the GATT was to boost economic recovery through trade liberalization and consequently mitigate the risk of international conflict.
Since 1948, the GATT has been revised numerous times, which, on January 1, 1995, ultimately led 123 nations to create the WTO. Thus, what began as an international treaty designed to mitigate the risk of international war by boosting national economies has evolved into a major supranational structure of self-regulation by Members States.
Although the WTO is not a sovereign body or a world court, as it has no sovereign enforcement power, from a legal realist perspective, WTO rules in fact compromise Member State sovereignty. From this perspective, the WTO operates as a de facto regulatory body, wielding some of the powers that come with acting as a sovereign body. For example, the WTO decides to apply provisions of WTO agreements to economic interactions between nations, and exerts very real pressure on Member States to conform to those interpretations through the threat of retaliatory suspensions of concessions by other Member States. In any case, it cannot be disputed that the WTO represents a strong force in international relations that, the Trump Administration has argued, is increasingly out of sync with American interests.
Notwithstanding this fact, international trade agreements, which are fundamentally based upon anti-discriminatory protections for international corporations, mitigate risk for international contractors. With President Trump reasserting American sovereignty, prudent international contractors must understand whether international trade agreements will continue to provide protection in America.
Rehabilitating America’s Failing Infrastructure Demands Foreign Contractors
International trade law scholars may disagree that the blame for America’s current economic issues belongs at the feet of the WTO and the actions of nation states in international trade. But most would likely agree that the existing international trade law framework has created a global marketplace in which nation states compete, often fiercely, based upon the principle of comparative advantage and generally “free market” economics. Ultimately, this framework results in winners and losers.
President Trump is correct to point out that, from a legal realist perspective, America compromises its sovereignty upon the altar of international law. A large American constituency, primarily responsible for President Trump’s election, rejects submitting to what it views as supranational governance in the form of multilateral trade agreements and their application by international organizations.
Ironically, however, the Trump Administration can look to existing international trade agreements to resolve the apparent paradox between its goals to rebuild American infrastructure and to protect, secure, and promote American interests.
On March 30, 2012, the United States adopted the WTO’s revised Agreement on Government Procurement (the “GPA”), which provides foreign contractors with certain protections when executing work for the Federal Government. The GPA, which is a plurilateral international trade agreement that the Federal Government and 47 Member States currently apply, has been an instrument in globalizing the construction market, by harmonizing construction law norms and protecting international contractors operating on the world’s stage.
Discriminatory regulations and prohibitions on the free flow of capital act as barriers to trade in international goods and services. The GPA aims to tear down these barriers and establish protections, in part, for the trade in construction services, by requiring open, fair, and transparent conditions in competition for government procurement. Results suggest that GPA membership has had a positive impact on the trade in construction services.
GPA Members promise to provide “national treatment” (i.e. non-discrimination) to services provided by firms head-quartered in other Member States. The GPA guarantees fair and non-discriminatory conditions for international competitive tendering, for example by requiring that Member States put in place domestic procedures by which aggrieved private bidders can challenge procurement decisions and obtain redress in the event that such decisions are found to be inconsistent with the rules of the GPA.
The revised GPA, which entered into force on April 6, 2014, extends the GPA’s provisions to sub-central government procurement, where adopted. Although international trade agreements normally only apply to national governments, most GPA Members, including Japan, Korea, Israel, and Canada, have added sub-central entities. For example, Canada provides access to its provinces under the revised GPA. In the United States, 37 states have voluntarily adopted the GPA, including major construction markets like California, Florida, Texas, and New York.
International Law Mitigates Political and Legal Risk for Foreign Contractors
States like West Virginia, where major infrastructure spending is imminent, and which have not yet adopted the GPA, should consider doing so, to reassure foreign international competitors that its market offers fair treatment. Alternatively, West Virginia should consider adopting the anti-discriminatory measures into its state law—likely a more politically salient option.
Such provisions could make the difference between, for instance, an Australian international contractor pursuing work in Germany, which has completely adopted the GPA, and pursuing work in West Virginia. Provisions such as the following would match the spirit of the GPA’s purpose:
(a) Construction Services. “Construction services” means services that have as their objective, by whatever means of civil or building works necessary, the realization of major infrastructure projects.
(b) Scope of Protection. This law applies to government procurement, by any procuring entity, by any contractual means, including public-private partnership contractual frameworks, for which the value of the construction services equals or exceeds $10,000,000 USD.
(c) Unconditional Non-Discrimination. Any procuring entity shall accord immediately and unconditionally to any qualified contractor, whether American or foreign, treatment no less favorable than the treatment the procuring entity accords to firms domiciled in West Virginia.
(d) Domestic Protections. This law shall not exclude successful contractors, whether American or foreign, from their obligations to meet minimum lower-tier or disadvantaged business enterprise procurement requirements.
These anti-discriminatory provisions are based upon the fundamental economic principle that resource development is maximized by increased competition in a free market, unfettered by arbitrary discrimination.
States that are philosophically aligned with the Trump Administration, such as West Virginia, should understand that under the revised GPA, the United States maintains all of its current exclusions and exceptions, including set-asides for small and minority firms. Additionally, consistent with GPA general rules, commitments for construction services are only triggered if a project exceeds $7,358,000 USD.
The Crossroads Between Failing Infrastructure and American Sovereignty
America’s winding road to crumbling infrastructure was likely paved with good intentions—but the unintended consequences have led to infrastructure in a desperate state of disrepair. On this fact there is widespread bipartisan agreement, at all levels of government.
The Trump Administration has pledged to help rebuild America’s infrastructure, and to “get out of the way” of states that face unique infrastructure challenges. But the Trump Administration’s strong assertion of American sovereignty and its skepticism towards international law may act as a roadblock, deterring necessary support from the international contracting industry.
The Trump Administration should closely monitor the countervailing effects of its policies and rhetoric on state infrastructure initiatives. States like West Virginia could mitigate these potential effects by either adopting the GPA, or by directly enacting nondiscrimination procurement standards for foreign contractors into state law.
These technical modifications to America First policies may be necessary to achieving President Trump and Governor Justice’s goal of putting America and its workers back on a stable road to prosperity. By understanding the potential conflict between American sovereignty and failing infrastructure, policy makers can help to keep the Trump Administration on track in its effort to Make America Great Again.
Wednesday, November 8, 2017
For those who are or can be in the Chicago area next week, John Marshall Law School is hosting the Hon. Gary Katzmann of the U.S. Court of International Trade on November 14 at 2 p.m. for their annual DiCarlo Lecture, a lecture series dedicated to international trade law.
A CLE session on international trade and ethics will follow.
The lecture is free, and readers of this blog can attend the CLE at no charge by entering the promo code JMLSFriend on the EventBrite link: https://cil11142017.eventbrite.com.
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.