Saturday, September 22, 2018
Trump is talking about terminating NAFTA again – this time by striking a new deal with Mexico and leaving Canada out if they won’t agree. Can he?
On September 1, Trump tweeted, “There is no political necessity to keep Canada in the new NAFTA deal. If we don’t make a fair deal for the U.S. after decades of abuse, Canada will be out. Congress should not interfere w/ these negotiations or I will simply terminate NAFTA entirely & we will be far better off…”
This presents a couple of legal questions. First, if Trump dumps Canada, is the remaining agreement still NAFTA? If not, does he have the statutory authority to enter into a new agreement with Mexico?
The answer to both questions is that the President could probably have done either – but he can’t do the latter now, and he could never do either alone.
This post draws on research that I advance in greater detail in “Withdrawing from NAFTA,” forthcoming in Georgetown Law Journal.
The North American Free Trade Agreement, Minus One-Third of North America
Members of Congress have been pretty much in unison in saying they expect any new deal to include Canada, as reported by the conservative paper The Weekly Standard.
Far from “interfer[ence]” with the President’s trade negotiations, Congress has primary constitutional authority over trade deals and a statutory right to guide any trade negotiations that the President engages in.
“To Regulate Commerce with foreign Nations …”
Although the President has the power under the Constitution to speak for the United States in foreign relations, in the trade context that “sole organ” doctrine has to be read in conjunction with the Commerce Clause of Article I, Section 8, which says that Congress has the power “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”
Where Congress has an enumerated power such as the power to regulate foreign commerce, the implied powers of the President are limited. As articulated in Justice Jackson’s famous concurrence in Youngstown Sheet & Tube Co. v. Sawyer, the President may not take action “incompatible with the expressed or implied will of Congress.”
That’s a problem for President Trump here, because Congress has expressly created a detailed system of procedures that the President must follow before, during, and after negotiating trade deals in the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (“TPA”). TPA gives the President the authority to negotiate and enter into trade agreements through July 1, 2121.
It’s important to note what’s happening here: The President doesn’t go out and negotiate trade deals under his own constitutional authority. Instead, because Congress has the authority to regulate foreign commerce, Congress delegates to the President the power to speak for the nation on trade.
That authority is heavily conditioned. First, Section 103(a)(2) says, “[t]he President shall notify Congress of the President’s intention to enter into an agreement under this subsection.”
It’s clear that this notification must occur before negotiations, because Section 104, entitled “Congressional Oversight, Consultations, and Access to Information,” requires the United States Trade Representative to consult with specific congressional committees during negotiations.
Section 105(a) is more specific still, requiring the President to “provide, at least 90 calendar days before initiating negotiations with a country, written notice to Congress of the President’s intention to enter into the negotiations with that country and set forth in the notice the date on which the President intends to initiate those negotiations ….”
The Trump Administration didn’t do this. Instead, in a letterto Congress on May 18, 2017, U.S. Trade Representative Robert Lighthizer said, “I am pleased to notify the Congress that the President intends to initiate negotiations with Canada and Mexico regarding modernization of the North American Free Trade Agreement (NAFTA).”
All subsequent oversight, consultations, and exchange of information between the two branches – including the development of specific negotiating objectives – related to renegotiation of NAFTA with both Canada and Mexico, not to the creation of a new agreement with Mexico.
Members of Congress seem reluctant to accept one as tantamount to the other. That is effectively a veto, because without implementing legislation by Congress, no trade deal can go into effect, whether new or renegotiated. Procedures for implementing legislation are streamlined but mandatory, as detailed in Section 151 of the amended Trade Act of 1974.
50 Ways to Leave Your Trade Agreement
Technically, though, there may be a way around this to get to an agreement with Mexico that excludes Canada.
Rather than calling the Mexico deal a new bilateral agreement, the Trump Administration might be able to cease to apply NAFTA to Canada – leaving in place a renegotiated NAFTA with only two parties, Mexico and the U.S.
This approach would probably still require some type of congressional approval, so it’s not a get-out-of-jail-free card. But the type of congressional consultation required is not expressly stated, and it avoids the problem of failure to give notice.
Ceasing to Apply NAFTA to Canada
NAFTA became effective in U.S. law when Congress passed the NAFTA Implementation Act in 1995. Section 109(b) of that Act 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”? Section 2 of the Act defines “NAFTA country” to mean:
- Canada for such time as the Agreement is in force with respect to, and the United States applies the Agreement to, Canada; and
- Mexico for such time as the Agreement is in force with respect to, and the United States applies the Agreement to, Mexico.
So if the United States no longer applies the agreement to Canada, then Canada “ceases to be a NAFTA country.”
How convenient! This begs the question, however, of how“the United States” can cease applying the agreement to Canada. Can the President do it with the stroke of a pen? Or does Congress have some say in the matter?
“[A]fter Thorough Consultation with the Congress ….”
Section 2 and Section 109(b) don’t say. But there’s another provision of the Act, Section 101(a)(2), that sheds some light on the question.
In Section 101(a)(2) of the NAFTA Implementation Act, Congress adopted a Statement of Administrative Action (“SAA”) sent by the President along with the text of NAFTA. Among other things, the SAA discussed what would happen if Mexico or Canada withdrew from the side agreements on labor and environment that had been negotiated to accompany NAFTA.
The SAA said, if that happened, “[t]he Administration, after thorough consultation with the congress, would provide notice of withdrawal under the NAFTA, and cease to apply that Agreement, to Mexico or Canada if either country withdraws from a supplemental agreement.”
So at least in the case of withdrawal from a side agreement, United States withdrawal would be accomplished by the President “after thorough consultation with the congress.” It is possible that the President might similarly be able to provide notice to Canada that the United States no longer intends to apply NAFTA to Canada.
It is unclear whether a “thorough consultation with Congress” includes a congressional power to deny the President’s proposed action. But since the Constitution gives Congress the enumerated power to regulate foreign commerce, it seems that the President would not be constitutionally permitted to cease to apply the agreement to Canada if Congress passed a resolution indicating its disapproval of the action.
In my forthcoming article, I summarize the withdrawal authority of the two branches this way:
It is not clear whether the commitment to a “thorough consultation with the congress” applies in all circumstances of United States withdrawal. The SAA does suggest, however, that withdrawal was not viewed as a unilateral prerogative of the President. At least in those circumstances where withdrawal was specifically contemplated, the President and Congress both believed that Congress was to play a role.
Would Congress consent? Some members might find this two-legged NAFTA approach too cute, too clever an effort to cut Congress out of its constitutional powers and oppose it on those grounds. Others may be satisfied on legal grounds but oppose the move to dump Canada for political or economic reasons.
Far from “interfer[ing],” they would be entirely within their rights in doing so, as the branch with the enumerated constitutional power to “regulate Commerce with foreign Nations.”
Monday, June 25, 2018
As I’ve previously written on this blog, the Trump Administration has been “pitching inside” to China, Mexico, and others it considers culprits in trade dealing. These trade tactics resemble another American tradition, beanball, in which a baseball player or team gets mad at another team or player, hits a member of that team with a fastball, often followed by retaliation by the targeted team.
As the headlines have been screaming for a while now, the Trump Administration’s actions may violate trade obligations of the United States under international agreements like the WTO and possibly also domestic statutes governing trade.
This raises a preliminary question:
Do Americans care?
The Moral Acceptability of Beanball
It’s too soon yet to see studies analyzing the American public’s sense of the moral acceptability of “pitching inside” in trade relations. But thankfully, psychologists have explored the moral acceptability among American baseball fans of actually pitching inside, so we have someplace to start in exploring the moral acceptability of trade-related beanball.
In a 2012 study, a group of psychologists (Fiery Cushman, A.J. Durwin and Chaz Lively) wanted to know if beanball was morally acceptable to Western baseball fans, and if so, why.
The first question the researchers had to answer was whether baseball fans thought retaliation via fastball was ever appropriate. After all, serious consequences – to games, careers, even lives – can result.
The researchers began by surveying 145 people outside Fenway Park in Boston and Yankee Stadium in New York in 2011. Each person read a short passage describing a plunking of (then) Cardinals hitter Albert Pujols by Cubs pitcher Ryan Dempster, followed by a retaliatory plunking of Cubs hitter Carlos Peña by Cardinals pitcher Jaime Garcia.
This was a typical case of beanball: The weapon is the fastball; the pitcher is the assassin; the retaliation is by a pitcher and against a hitter who were not involved in the original altercation.
In the survey, 44 percent of respondents rated Jaime Garcia’s action morally acceptable. A larger number – 51 percent – rated it morally unacceptable. The rest were unsure or ambivalent.
Another Case Against the DH Rule …
So a majority of Boston and New York baseball fans found the retaliation described in the hypothetical to be morally unacceptable. But why? Do they object to throwing at another team’s guy under any circumstances? Or do they only object to throwing at another team’s guy when he had nothing to do with the original infraction, as in the Dempster-Pujols-Garcia-Peña example?
To test this, they conducted another survey. In this version, one group of respondents read a hypothetical that was the same as the one described above, except that it involved an American League game, where the pitcher who threw the original fastball would never come up to bat. A second group of respondents read a hypothetical that involved a National League game, and the pitcher who threw the original ball was himself the target of the retaliation when he came up to bat.
Similar to the first survey, only 39 percent of those who read about the American League game, where the target was uninvolved in the original altercation, rated it morally acceptable. In contrast, 70 percent of respondents who read about the National League game said it was morally acceptable to plunk the pitcher who started the plunking himself.
But What If It’s Your Guy?
It seems that a majority of people don’t countenance true “collective punishment” – visiting consequences on an individual based solely on his group membership, not his responsibility for the original altercation.
In other words, American baseball fans don’t believe in hitting the other team’s star player just because your star player got hit, if their star player had nothing to do with it. But if you’re talking about plunking the pitcher that fired the first missile, most people can get on board with that.
But what if it’s your guy?
Before October, most Red Sox and Yankees fans don’t really care that much about the Cardinals or the Cubs, and vice versa (not very scientific but trust me on this one). So maybe that explains why Yankees and Red Sox fans weren’t all that bent out of shape by the Cubs pitcher hitting Pujols. But would they feel differently if it were their player who was hit?
Apparently, yes. The psychologists set up a third survey: They asked fans outside Fenway Park how they felt about retaliation by the Red Sox if a Red Sox player had been hit. This time, approval shot way up: 67 percent of fans said it was morally acceptable for the Red Sox to retaliate.
Did fans agree with retaliation because they found the player being hit in retaliation (like Peña) to be morally responsible for the infraction? Most baseball fans (78 percent) said that he was not. But the majority approved of hitting him anyway.
The Tail Wagging the Dog in Beanball
Perhaps most interesting in this part of the study is that, fans were more likely to say that the targeted player was morally responsible if they had already endorsed retaliation as a general matter.
This aspect of baseball fans’ attitudes about collective punishment (beanball) struck the study authors as potentially consistent with a larger theory advancedby psychologist Jonathan Haidt and others.
As the authors stated, among fans who first gave their opinion of retaliation and then gave their opinion of moral responsibility, “there was a strong relationship, suggesting that the prior commitment to collective punishment induces a post hoc rationalized attribution of moral responsibility.”
In other words, this is an example of the rational tail wagging the emotional dog, in Haidt’s terminology. Although people are capable of reasoning about morality, most make their moral judgments emotionally, prior to rational thought, and use reasoning after the fact to justify their first instincts.
Making the Connections
Trade isn’t baseball. But this study of American attitudes toward beanball tells us a little bit about Americans’ moral judgments of two things that we find in both baseball and in trade: vigilante justice and collective punishment.
The Codes, Both Written and Unwritten
Like baseball, trade relations are played by a set of written rules, agreed upon in advance. Players (trading entities) play for teams (nations) that agree to abide by those rules.
But in trade as in baseball, the rules are not the end of the story. In addition to the written rules, there is a set of norms – a vague but time-honored notion of “fair trade” – that underlies the modern multilateral trading system.
In trade, this tradition is so well-established that the written rules even acknowledge and tolerate a certain amount of unilateral retaliation for “unfair” trade. To effect this, specific WTO Agreements allow but discipline unilateral remedies like antidumping duties and measures to counter subsidies.
And in trade, as in baseball, transgressions of the unwritten code will often be punished. When and how that punishment may go too far is as difficult to define as the original transgression.
Hitting Where It Hurts
There are also parallels between baseball and trade with regard to collective punishment. Under the WTO rules, retaliatory measures may be authorized against industries of an offending member state that had nothing to do with the original offending measure.
For example, nobody alleges that the American wine industry has anything to do with the fight between the U.S. and China over intellectual property protections, but that industry – popular with Chinese consumers – became one of several pawnsin the recent threats of retaliatory tariffs flying back and forth between China and the U.S.
Indeed, that’s the whole point: When a member state fails to bring a measure into compliance with WTO rules, it may be difficult for another member state to get its attention. But when other members of the Chamber of Commerce suddenly find that their markets have dried up because of a trade war they had nothing to do with, their lobbyists often find ways to pressure their government into reforming the offending measure or offering some kind of compensation.
This is a sanctioned form of collective punishment akin to beanball: Your pitcher hit our star player, but it may not get your attention to retaliate against your journeyman middle reliever. We’re going to make it hurt: hit your star player, where it will really get your attention.
The Tail and the Dog in Trade Relations
But although a certain type of retaliatory collective punishment is actually written into the trade rules, it can still be taken too far. The Trump Administration is pushing those boundaries daily – by imposing steel and aluminum tariffs based on vague “national security” interests; by announcing tariffs for Chinese IP violations before initiating a WTO challenge to those measures; by threatening to withdraw from NAFTA.
Do Americans care?
Maybe … but maybe it depends on what question you ask them first. A March 2018 Harvard CAPS/Harris Pollsuggested somewhat different attitudes about China and trade depending upon the order of questions asked.
When asked a series of questions about trade, a large majority – 67 percent –said they feared that other countries would retaliate against the Trump Administration’s planned tariffs and trigger a trade war. And a slight majority (52 percent) opposed the imposition of steel and aluminum tariffs.
When subsequently asked a series of questions about China, however, the picture seemed to shift. A great majority – 71 percent – said the U.S. should take steps to correct the trade deficit with China; only 29 percent said the risk of trade war wasn’t worth it. And 58 percent said they supported the Trump Administration’s plan to impose $30 billion in tariffs on Chinese goods.
Maybe there’s principle behind these differences – the more targeted nature of the tariffs on China versus the global steel and aluminum tariffs; or perhaps even a greater sympathy for Section 301 remedies than for a vague “national security” exception (because of course the average American is poring over such concepts on this blog and elsewhere).
Or maybe these survey results are hinting that, in trade as in baseball, the tail may wag the dog. Americans may generally believe in complying with trade agreements – but not if firstasked what they think about Chinese IP protection.
And what if only holders of intellectual property rights were surveyed – arguably the “home team” in the trade fight with China? Perhaps we’d find the same homerism in trade relations that we do in baseball: Americans may be in favor of following the law unless it’s theirguy that got hit; then all bets are off.
These are questions worth exploring. The answers may give us some idea about the strength and viability of the multilateral trading system –a contract between member states only as strong as the commitment of citizens to the terms of the deal.
Saturday, April 21, 2018
Last week at Coors Field, Padres pitcher Luis Perdomo landed a fastball on the ribs of Rockies third baseman Nolan Arenado. Arenado charged the mound, Perdomo threw his glove, and the benches cleared.
Perdomo was suspended (along with a teammate and three Rockies) for deliberately throwing at Arenado, according to umpire crew chief Brian Gorman.
Perdomo told reporters he was just pitching inside and lost control. “I’m a sinkerballer, and sometimes you have to be able to throw in to get those ground balls and that’s what I was trying to do.”
Yeah, sure. Look, everyone expected the Padres to throw at Arenado; Rockies pitchers had hit two Padres batters in the previous four innings and another was hit near his head a week earlier. As the brawl erupted, Fox Sports San Diego announcer Don Orsillo said, “You sort of had to figure this may happen – maybe not so much after the Margot last night, but the Renfroe today …” Color commentator Mark Grant chimed in, “You got that right.”
Padres manager Andy Green didn’t exactly deny that the plunking of Arenado was deliberate. Green mentioned the pitches that hit Margot and Renfroe, saying, “… they’re pitching aggressively inside. … Our guys at some point in time are going to take up for each other and we’re going to pitch inside as well.”
Beanball and the Steel and Aluminum Tariffs
The Rockies-Padres feud bears a fair resemblance to what’s going on between the U.S. and China over the recent U.S. tariffs on steel and aluminum.
Throughout March and April, the U.S. launched a series of hardballs, some of which have hit China north of the belt. Here’s the play-by-play:
February 16: Secretary of Commerce Wilbur Ross releases a pair of reports recommending tariffs on steel and aluminum imports under Section 232 of the Trade Expansion Act of 1962.
March 8: President Trump proclaims tariffs of 25 percent on steel and 10 percent on aluminum.
March 22: U.S. Trade Representative Robert Lighthizer releases a report under Section 301 of the Trade Act of 1974 about China’s IP regime, identifying five categories of practices that the report claims harm U.S. industry.
March 23: Steel and aluminum tariffs take effect; United States files a request for consultations challenging China’s IP practices in the WTO.
April 3: President Trump releases a plan to impose a 25 percent tariff on about $50 billion worth of Chinese goods.
“Pitching Aggressively Inside”
Were these actions illegal? In other words, did the U.S. deliberately throw at China?
If the steel and aluminum tariffs are really disguised safeguards or anti-dumping tariffs or some other kind of unilateral trade retaliation, then the answer is yes.
Safeguard measures (one of the most obvious candidates here) are unilateral national remedies permitted, but disciplined, by the WTO Agreements.
GATT Article XIX says that a WTO member may apply special safeguard tariffs in the following circumstances:
If, as a result of unforeseen developments and of the effect of the obligations incurred by a contracting party under this Agreement, including tariff concessions, any product is being imported into the territory of that contracting party in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers in that territory of like or directly competitive products …
But Article XIX and especially the WTO Agreement on Safeguards provide a rulebook about when and how a WTO member may apply those safeguard measures. Among other things, as the passage above states, there have to be “unforeseen developments,” not just business as usual. There also has to be a showing of causal link between the increased imports and some “serious injury” to domestic producers.
And even if these showings are made, there are certain steps a WTO member is supposed to take before imposing safeguard measures to allow affected exporters to balance the trade relationship, such as providing notice of the measure to the WTO Committee on Safeguards and an opportunity for consultation with WTO members who will be affected by the tariffs.
Many people think the Section 232 tariffs look a lot like safeguards, imposed merely to protect the steel and aluminum industry from foreign competition. For example, President Trump tweeted the day they were announced, “We have to protect & build our Steel and Aluminum Industries ….”
But the Trump Administration didn’t call them safeguards. First, they weren’t imposed under the U.S. law for finding and imposing safeguards, Section 201of the Trade Act of 1974. Second, the United States did not notify them to the WTO Committee on Safeguards.
Instead, President Trump said the tariffs were plain old tariff increases. Now, tariff increases against other WTO members beyond the parties’ negotiated schedules would normally be illegal under GATT Article II, but the United States claims they are justified by GATT Article XXI, the national security exception (cue the ominous music).
The security exception of Article XXI states (in relevant part),
Nothing in this Agreement shall be construed
(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
Okay, let’s just say that many people are skeptical that the steel and aluminum tariffs are really “necessary for the protection of … essential security interests” of the United States or that there is any “emergency in international relations” right now.
Awkwardly, one of those people seems to be Secretary of Defense James Mattis. In response to the Section 232 report, Secretary Mattis started with something like the party line: that “imports of foreign steel and aluminum based on unfair trading practices impair the national security.” But in the next sentence, he pointed out that only three percent of domestic steel and aluminum production is used for the defense industry.
Mattis concluded the memo by stating, “[i]t is critical that we reinforce to our key allies that these actions are focused on correcting Chinese overproduction and countering their attempts to circumvent existing antidumping tariffs – not the bilateral U.S. relationship.”
So that’s another possibility – in Mattis’ view, it seems, the steel and aluminum tariffs are neither safeguard measures nor “necessary” or “emergency” security measures, but rather anti-circumvention provisions for existing antidumping duties.
Antidumping duties, like safeguards, are permitted but disciplined under the WTO Agreements. Under GATT Article VI and the WTO Antidumping Agreement, the United States is permitted to impose antidumping duties against foreign products that are being introduced into the United States for less than the “normal value,” or cost of production, if those imports are causing “material injury” to an established industry.
As with safeguards, there are provisions of U.S. law – in Title VII of the Tariff Act of 1930 – that provide for findings of dumping and imposition of antidumping duties. The steel and aluminum tariffs didn’t follow those procedures. And there are requirements that have to be followed under GATT Article VI and the Antidumping Agreement that weren’t followed either.
So a quick recap: The United States says the steel and aluminum measures are WTO-justified national security exceptions to its tariff obligations, but that’s pretty hard to swallow from the look of things. And if the steel and aluminum tariffs are really safeguards or antidumping measures, then the United States isn’t following the rulebook – it’s just hurling fastball after fastball in China’s direction.
China’s Guys Take Up for Each Other
Trade experts were no more surprised than Don Orsillo and Mark Grant when China decided to strike back.
China retaliated against the steel and aluminum tariffs by notifying the WTO Council for Trade in Goods on March 29 that China would impose tariffs in roughly equal value on a variety of U.S. products, including wine, pork products, and aluminum waste.
In its notice, China called the United States out on its supposed “inside” pitches. The notice says,
China takes the view that the above-mentioned measures of the United States are safeguard measures although it's in the name of national security. We believe the measures taken by the United States are not consistent with its obligations under the relevant provisions of the GATT 1994 and Safeguards Agreement.
In other words, the Chinese decided that Trump was deliberately throwing at their heads. And rather than wait for the umpire to call it, they rushed the mound, imposing tariffs of their own.
So maybe the United States’ denial (“sometimes you have to be able to throw in to get those ground balls”) isn’t all that persuasive. Maybe it’s pretty obvious that these are safeguards or antidumping circumvention remedies that should have been imposed under different rules.
But that doesn’t necessarily mean you can charge the pitcher, either. The WTO rules provide procedures for dispute settlement when one member objects to the actions of another. Although China did initiate an action against the United States under those procedures, its notice of retaliatory tariffs suggests that it doesn’t plan to wait around for a decision.
China may have an argument that it was entitled to take matters into its own hands once the United States imposed tariffs that looked suspiciously like improper safeguards or antidumping duties, though that’s unclear (and a subject for another post, though you can find a pretty inside-baseball debate about it here).
What’s clear is that the too many pitches have whizzed by too close to the chin. Now the benches have cleared and the punches are flying.
Thursday, March 29, 2018
It’s MLB Opening Day 2018, and that means it’s time to take stock of America’s favorite pastime: imposing trade sanctions. Between its steel and aluminum tariffs, a WTO complaint and more tariffs against China for IP violations, and the possibility of ending NAFTA, the Trump Administration is playing hardball with longtime trade friends as well as foes. But beanball goes both ways. U.S. trade partners have already begun to retaliate through massive WTO complaints that could hit U.S. industry right in the wallet, while other countries threaten complaints and retaliatory tariffs on U.S. products entering their markets. Here’s an overview of the state of play.
Bob Gibson tops most people’s lists as the most feared pitcher of all time. Gibson was known for never smiling on the mound, and for owning the inside half of the plate. In his autobiography, Gibson said he threw nine pitches: “two different fastballs, two sliders, a curve, a change-up, knockdown, brushback, and hit-batsman.”
During the 2017 season, I predicted here that the Trump Administration’s strong-arm tactics with trade partners might be an invitation to a dangerous game of beanball – the baseball term for the battle that ensues when two team’s pitchers take turns hitting each other’s batters with selectively-placed fastballs.
On December 20, Canada took the bait, answering the United States’ intimidation tactics with a brushback pitch of its own: a lengthy complaint in the WTO challenging six aspects of the United States’ conduct of antidumping and countervailing duty investigations. Canadian Foreign Minister Chrystia Freeland told Reuters that the action was part of Canada’s response to U.S. penalties on Canadian softwood lumber and an attempt to defend Canadian forestry jobs.
South Korea has also joined in the brawl, filing a complaint with the WTO on February 14 that challenged the way the U.S. calculates antidumping duties and countervailing duties.
And now China, in response to Trump’s announcement this week, has threatened $3 billion in retaliatory tariffs as well as a WTO complaint of its own.
What’s making these countries so mad they’re ready to send a warning shot whizzing past the chin of the U.S.? Here’s an overview of the pending legal claims in the Canadian and South Korean WTO complaints.
Canada Gets Mad (No, That’s Not a Joke)
Canada’s request for consultations – the first step in initiating a grievance under WTO procedures – complains that the United States violates various WTO agreements in the way it handles unfair trade remedies.
A little background: The WTO Agreements allow all member states to investigate and penalize practices that were traditionally considered unreasonable manipulations of international trade. But while the WTO Agreements may allow these unilateral sanctions by member states, they also define disciplines on how such investigations will be conducted and sanctions will be administered.
For example, the Antidumping Agreement (“AD Agreement”) allows countries to impose only “definitive” anti-dumping duties, not provisional ones, except in limited circumstances; duties collected must be in the “appropriate amounts”; and duties can remain in effect “only as long as and to the extent necessary” to counteract the injury. The Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) allows countries to impose duties only where there has been a “financial contribution” by a government. Both agreements require that parties be given “ample opportunity” to defend their interests, and a separate agreement, the Understanding on Rules and Procedures Governing the Settlement of Disputes (“DSU”), requires “prompt compliance” with a WTO decision that any provision of the WTO Agreements has been violated.
The Canadian complaint challenges six U.S. practices (and seven individual “measures,” the WTO catch-all term for laws and policies):
- When a U.S. policy for imposing antidumping or countervailing duties is found inconsistent with one of the WTO Agreements, the result may be that the duty collected by U.S. customs authorities exceeded what is legally permitted. Rather than immediately refunding any overage and applying the new, reduced duty to any new product shipments, the U.S. continues to collect and hold duties at the rate originally imposed until any administrative, arbitration, or judicial reviews are completed. Canada claims, among other things, that these policies result in collecting duties that exceed the “appropriate amounts” and do not result in “prompt compliance” with the WTO decision.
- Usually, antidumping and countervailing duties are imposed by the U.S. after the Secretary of Commerce makes a preliminary determination of dumping, but a regulation allows duties to be imposed retroactively up to 90 days earlier where “critical circumstances” exist – sort of a preliminary injunction for antidumping and countervailing duties. Canada claims that this regulation violates restrictions in the AD and SCM Agreements that allow the imposition of preliminary duties only more than sixty days after the initiation of an investigation.
- Countries impose a variety of controls on products being exported from their markets – such as levies, quotas, restraints, and outright bans. Some of these export controls are allowed by the WTO Agreements, some aren’t, but Canada’s complaint is that the United States treats even lawful export controls as “financial contributions” by a government to its domestic industry – an essential element for a finding of a subsidy under Article 1.1 of the SCM Agreement – and relies on them in imposing countervailing duties.
- Canada also challenges the U.S. practice of “zeroing” in finding counteravailable subsidies. According to Canada, the U.S. bases countervailing duty calculations only on instances where the government has provided goods to its industry at less than a set benchmark price and ignores (“zeroes”) instances where the government has provided goods to its industry at prices higher than the benchmark price.
- Another U.S. regulation requires interested parties in an investigation to file certain factual information at least 30 days before Commerce’s preliminary determination of dumping or subsidy. Although the regulations allow the Secretary to accept such information later under “extraordinary circumstances,” Canada alleges that the Secretary never or almost never does so. Canada alleges that these time limits do not allow interested parties the “ample opportunity” to defend themselves that the AD and SCM Agreements require.
- Under the Tariff Act of 1930, the International Trade Commission determines injury from dumped products or products subject to counteravailable subsidies. The Act provides that the ITC will have six Commissioners. The Tariff Act requires that a tie vote on an injury determination be treated as a finding in the affirmative. Canada alleges that this contradicts the obligation of the United States to make an objective determination as to injury from dumping or subsidies.
If these claims sound a little vague – they aren’t. Zeroing has been roundly rejected by the WTO in the antidumping context; although the comparison between antidumping and subsidies is not quite on all fours here, it’s not a flight of fancy either. And the Appellate Body frequently decides cases by giving content to obligations in the agreements that sound vague or even hortatory, such as “appropriate amounts” or “ample opportunity.” The outcome may turn on the panel’s or Appellate Body’s opinion of the commercial reasonableness of the United States measures in context.
The complaint filed by South Korea also alleges that the United States violates WTO disciplines on how antidumping and countervailing duties may be calculated. Specifically, the complaint centers upon the United States’ use of adverse factual inferences when calculating an antidumping duty or countervailing duty.
According to the AD and SCM Agreements, when a party being investigated does not cooperate, “preliminary or final determinations, affirmative or negative, may be made on the basis of the facts available.” (It’s the same language in both agreements, Articles 6.8 and 12.7, respectively.)
Korea challenges Commerce’s use of adverse facts available in several ways. First, Korea alleges that the United States unfairly invoked Articles 6.8 and 12.7 against Korean producers and exporters in six listed investigations, although the complaint alleges no facts to support that claim.
The complaint also claims that the Department of Commerce uses this provision improperly when it invokes it: by failing to give notice of the information it requires; by failing to verify that the information supplied by other parties is accurate; by failing to inform the parties of the essential facts it is considering; by failing to determine individual dumping margins for each producer and export; and by requesting information that’s not in the original application being investigated.
The most sweeping complaint is that Section 502 of the Trade Preferences Extension Act of 2015 allows Commerce to use adverse facts available that are not commercially reasonable because it doesn’t require that those inferences be consistent with any verifiable information that was supplied or by other available and relevant commercial information.
Like the Canadian complaint, the claims in the Korean complaint are not outlandish. The AD and SCM Agreements allow determinations based on “facts available” to give interested parties some incentive to cooperate with the investigation. But the agreements also require that the interested parties have “ample opportunity” to defend themselves, a term that the Appellate Body may flesh out further.
So it looks like Beanball 2018 is definitely on in the trade realm. Stay tuned for the bottom half the inning (i.e., the next post), in which we’ll review the United States’ complaint against China. And remember, as Bob Gibson said, the brushback is just the first pitch thrown to get a hitter’s attention. After that comes the knockdown, “a brushback pitch with an attitude.” If even that fails to gain respect – look out. We could be in for a bench-clearing brawl.
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.