Wednesday, June 7, 2017

Mexico and Why It Matters

On May 18, Trump informed Congress of his intent to renegotiate NAFTA, triggering a 90-day consultation period with Congress over the negotiations. This formal move is mandated by the trade promotion authority that governs NAFTA. So we’re looking at a new era of U.S.-Mexico trade relations. Should you care?

If you use banks, then yes, you should care a great deal. What happens to Mexico will happen to your money. Here’s why.

In and Out and In Again on NAFTA

Trump has been talking since the campaign trail about making NAFTA more favorable for U.S. workers. He considered withdrawing from NAFTA, said he was “psyched” to do it, even.

Then on April 27, he announced he had decided not to withdraw from the pact “at this time,” although the justification is unclear. Trump said publicly it was out of respect for Canada and Mexico, but other news reports suggest that he may have been more influenced by Secretary of Agriculture Sonny Perdue’s map showing the overlap between agricultural regions and Trump voter regions.

The High Stakes of Mexico Trade on the U.S. Economy

As Trump is no doubt hearing from advisors and legislators, decisions about U.S.-Mexico trade are high stakes. And it will affect you personally, even if you’re not a farmer and don’t live near the border.

We have to backtrack a few steps to see why you and your money should care about this. First, we all know that trade doesn’t flow only one way, and U.S.-Mexico trade is no exception. In the agricultural sector, for example, the Peterson Institute for International Economics reported that U.S. agricultural exports to Mexico increased from $3.6 billion in pre-NAFTA 1993 to $7.9 billion in 2003 (we may get avocados and mangos from them but they get fruit juices, vegetables, and grains and feeds from us). Moreover, U.S. foreign direct investment in the Mexican food industry more than doubled from $2.3 billion in 1993 to $5.7 billion in 2000, mostly in pasta, confectionery, and canned and frozen meats. (Mexican agricultural trade to the U.S. increased by a larger percentage but a smaller total dollar value in roughly the same period, from $2.7 billion in 1993 to $6.3 billion in 2003.) That means there’s a lot of apple juice and feed corn flowing south across the border because of NAFTA.

But it’s not just farmers that Trump has to worry about. Hurting farmers would have ripple effects that Trump cannot afford because of one important fact of political life, and it’s not the farm lobby; it’s farm debt.

Your Money, Working on the Farm

Although agriculture employs only about two percent of the U.S. population, 51 percent of the U.S. land base was used for agricultural purposes as of 2007. And that land is heavily mortgaged: USDA’s Economic Research Service predicted that farm real estate debt will reach a historic high of $240.7 billion in 2017, with a 7.3 percent increase in real estate mortgage loans. ERS says farmland owners are also increasingly using real estate as collateral to secure nonreal estate borrowing. All this means the banks are in deep on the farms.

So if farms struggle, farm mortgage lenders struggle. And when the banking and lending industry gets hit, Congress hears about it in no uncertain terms – either that or our bank accounts do. As one agricultural lobbyist explained to a reporter, “‘We are different from Microsoft or Fannie Mae. … When groups with ag interests come to us we ask, ‘Who are the mortgage bankers in your district?’” If farmers want to get attention on Capitol Hill, they go arm-in-arm with the lenders they are dependent on.

We've seen this at work before; it's one of the main reasons why repeated attempts to phase out farm subsidies have failed. As soon as commodity prices go down, farmers face default and lenders beat down Congressional doors to make sure supports get put back into place. Collin Peterson, former chairman of the House Agriculture Committee, told a reporter, “‘It’s hard to explain to people, but [direct payments to farmers are] built into the whole farming structure now. … It’s the bankers and the landlords and everything else that wants them. You get everybody stirred up if you try to do something. The farm credit people and the local bankers are more vociferous about direct payments than the farmers.”

Factoring in Farm Lending in the NAFTA Negotiations

Mexico’s trade dependence on the U.S. is not one-sided. Without NAFTA, U.S. farmers will lose big, and when they do, many of them will default on mortgages and other debts. Lenders who rely on that income will make sure Congress hears about it. If Senators and Representatives who depend on the support of the banking and lending industry for reelection start hearing drumbeats, Trump’s hard line on NAFTA may have to soften considerably.

June 7, 2017 in Current Affairs | Permalink | Comments (0)

Saturday, May 6, 2017

State of Trade - 100+ Days Later

Perhaps one of the most curious developments of the past 100+ days of the Trump administration has been the lack of progress on the trade front. The only campaign promise that has been delivered on is the withdrawal from the Trans-Pacific Partnership (TPP), which to give President Trump credit, was done the next business day after he was sworn into office, on January 23, 2017

For his hundredth day in office, President Trump was set to announce the US’s withdrawal from NAFTA, a move he soon backtracked from when informed that many of the areas that would be hardest hit were heavily Trump-supporting agricultural areas. It is unclear when and if NAFTA will be renegotiated, although it seems likely that, rather than unilateral withdrawal, the United States will instead attempt to renegotiate the agreement with Canada and Mexico.

The TPP page on the USTR website has finally been updated to reflect the withdrawal (for several months the full text remained, along with praise for the agreement). Despite President Trump’s rhetoric regarding the awfulness of the deal and the need to renegotiate NAFTA, however, the NAFTA page continues to extol the virtues of the current agreement.

That trade has not been a priority is especially clear from the state of the Office of the United States Trade Representative. The USTR Twitter account hasn’t tweeted since October 2016. Robert Lighthizer, Trump’s official nominee, has yet to be confirmed, delayed by the need to obtain a waiver of the rule prohibiting persons who represented a foreign government from serving as US Trade Representative. (Interestingly, a provision in the new budget bill has bypassed the waiver requirement, even though he would not be the first USTR appointee who needed a waiver and it seems clear that his representation of foreign governments in the 1980s and 1990s does not pose any conflict of interest.)

In March 2017, President Trump appointed Stephen Vaughn, a member of his transition team, acting United States Trade Representative. The positions of Deputy Trade Representative and Deputy Trade Representative in Geneva (which deals with the WTO) remain vacant. Given Lighthizer’s bipartisan support, it appears likely that he will be confirmed in the near future, which should pave the way to a more functional USTR.

With trade having been such an important talking point of the election cycle on both sides of the political spectrum, the disregard for trade policy in recent months is indicative of chaos in the administration and the well-documented conflict between Trump’s campaign populism and presidential status-quoism. As my co-blogger, Alison Peck, noted in her post on trade and security in Asia, trade policies are not conducted in a vacuum.

In an interesting twist, with China recently banning the import of North Korea coal and turning back coal shipments in an effort to pressure North Korea into curtailing its nuclear testing, the United States has stepped up as a major coal supplier to China. The United States supplied no coking coal (used for making steel) to China between 2014 and 2016, but supplied 400,000 tons in February 2017. If President Trump is going to make good on his promise to revitalize the American coal industry, this is certainly one way to go about it.  

So where does this leave us?  

NAFTA is likely to be renegotiated at some point. President Trump has also suggested replacing TPP with bilateral agreements. The irony there is that TPP was largely based on recent US FTAs, with entire chapters containing almost identical language to that found in agreements such as the US-Chile FTA and the US-Korea FTA. This was a US-driven text that would have been great for US business interests (there were plenty of other issues with TPP, but those are outside the scope of this post).

Both Lighthizer and Vaughn are trade law experts and understand the realities of international trade policy. It is hard to imagine them straying far from the existing bilateral FTAs. Since the USTR will be led by pragmatists, once it is ultimately fully staffed, it seems likely that any new bilateral agreements and a potentially renegotiated NAFTA will reflect much that is already existing. Of course, this all remains to be seen, and if support for President Trump were to wane in agricultural regions of the country, the possibility of unilateral withdrawal from NAFTA of course remains on the table.

May 6, 2017 in Current Affairs | Permalink | Comments (0)

Thursday, May 4, 2017

Buy American, Blow Off the WTO?

On April 18, President Trump signed an Executive Order setting out his “Buy American, Hire American” policy. A month earlier, the Department of Commerce issued a request for comments on requiring a specified minimum domestic content in pipeline construction.

Both of these moves are consistent with Trump’s campaign promises to promote American industry. But both may violate the WTO Agreements and, if successfully challenged, could give rise to trade retaliation by other countries against U.S. industries.

What’s more, those moves are likely to tick off other countries and lead to the imposition of more domestic content requirements of their own. It’s difficult to see how strict enforcement of Buy American laws would offset the costs to U.S. industry if the world descends into a flurry of protectionist procurement legislation.

The National Treatment Principle under the GATT

The DOC’s potential imposition of domestic content requirements on the pipeline construction industry is the more legally thorny of the two. First of all, it’s also not clear whether the domestic content requirements on private contractors are valid. It’s one thing for a government to set guidelines for purchasing by its own agencies (although there are limits there too), and another thing for a government to tell private industry like pipeline construction contractors who they are allowed to do business with. In its comments on the DOC notice, the European Union noted that imposing domestic content requirements on the purchasing decisions of private companies would be “unprecedented” in the trade sphere and “would have serious consequences also with respect to policies with third countries.”

Moreover, domestic content requirements – or legal requirements that producers include a certain amount of domestically-produced raw materials into a final manufactured product – were among the types of restrictions that nations deliberately limited when they entered into free trade and investment agreements in the first place. Domestic content requirements fly in the face of the “National Treatment principle,” one of the pillars of the General Agreement on Tariffs and Trade (one of the many agreements that makes up the WTO Agreements). “National Treatment” is a somewhat confusing name, sounding at first blush perhaps like an endorsement of nationalism in trade relations. National Treatment actually means that a nation may not treat the products of its trading partners differently than the products of its own nation. (Likewise, National Treatment’s ironic sister principle, Most Favored Nation, prohibits favoritism among different foreign countries’ products. Never a dull moment in trade law.)

The National Treatment principle for the GATT is stated in Article III. Entitled “National Treatment on Internal Taxation and Regulation,” Article III, paragraph 4 says,

The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation distribution or use. …

In other words, all WTO members have a legal obligation not to discriminate against foreign products that are “like products” to those produced in their own country. (Whether two products are “like products” is a fact-based inquiry based on the products’ physical properties, end uses, and consumer tastes and habits as to substitutability.)

The governments of both Canada and the EU made the point in their comments on DOC’s request for information that any minimum domestic content requirements on pipelines would appear to violate the National Treatment principle. Were the U.S. to require that pipeline contractors purchase a minimum amount of domestic steel (or be denied federal permits, presumably), it is almost certain that someone – Canada, the EU, and other countries whose steel industries compete for those contracts – would challenge the regulation before the WTO.

In introducing the President’s trade policy agenda in an annual report by the Office of the United States Trade Representative, USTR suggested that the Trump Administration might not comply with adverse WTO decisions, but that’s questionable and complicated (and a post for another day). Suffice it to say that any persistent failure to respect an unfavorable WTO decision would trigger WTO-sanctioned retaliation against other U.S. products or industries that those industries would surely not take kindly to in the next domestic election cycle. It’s not so easy just to blow off the WTO.

Limiting the "Public Interest" Exemption from Buy American Laws

Does the order change anything? The short answer is maybe. 

In the short term, the Executive Order directs federal agencies to strictly comply with Buy American laws already on the books. One thing that might change immediately is contractors’ ability to obtain waivers from the Buy American laws. Right now, the Federal Acquisition Regulations allow waivers when purchasing from a foreign supplier is in the “public interest” because a trade agreements (like the WTO) allows it; where the material is unavailable domestically; or when the domestic supplier’s price is “unreasaonble” based on a prescribed calculation

The "public interest" exemption is what saves the Buy American statutes from violating National Treatment right now. If agencies are now instructed to apply that exemption strictly, does that mean that they won't grant an exemption even where the Buy American requirement would violate National Treatment? 

Opaquely, the order instructs Commerce and the United States Trade Representative to “assess the impacts of all United States free trade agreements and the World Trade Organization Agreement on Government Procurement on the operation of Buy American laws” with 150 days of the signing of the order. It could be that he plans to use this study to be sure that Buy American laws, and the new Executive Order, comply with the United States’ international obligations.

But it would be more consistent with Trump’s rhetoric to use that assessment to decide whether to renegotiate or terminate U.S. commitments that he believes impair U.S. industry. Although Trump seems to have decided against withdrawing from NAFTA for now, it’s unclear what demands he will make to renegotiate both NAFTA and the WTO Agreements and what might make him change his mind and walk away. “Assessing the impacts” of the country’s free trade agreements on domestic sourcing laws might give him a starting point for crafting his positions in renegotiating.

National Treatment in Government Procurement

The WTO Agreement on Government Procurement also incorporates the National Treatment principle of nondiscrimination, although subject to many exceptions. The interaction between Buy American laws and those articulated exceptions will be studied by DOC and USTR.

Only nineteen WTO members, including the U.S. (and the EU on behalf of all its members), are parties to the Agreement on Government Procurement, a “plurilateral” side agreement to the WTO Agreements. That suggests that renegotiation or withdrawal from that Agreement might be more feasible than tampering with any of the 100-plus member multilateral agreements in the WTO. If Trump is unsatisfied with the results of Commerce and USTR’s study about the impacts of the agreement on Buy American laws and wants to identify the low-hanging fruit of renegotiation in the WTO, this might be a place to start.

Policy Concerns

If Trump decides to go down the road of minimum domestic requirements for construction and tougher Buy American laws in government procurement, hopefully he will consider the potential effects of those policies. First, other countries may follow the lead of the U.S. and implement Buy National policies of their own, cutting off overseas market for U.S. products and services. The European Union emphasized this risk in its comments on the Commerce notice:

Both the US and the EU have in the past been pursuing a clear policy against localization requirements in third countries, including China, India, and Russia. … These potential measures, which would be harmful to US industry, would also make the international fight against third countries’ local content requirements much more difficult.

Second, requiring private industry like the pipeline construction industry to source domestic products even when prices or quality are not competitive could degrade those firms’ competitiveness and potentially lead to the elimination of American jobs. The Associated General Contractors of America made this point in its comments to Commerce. For example, the Executive Order excludes a certain segment of the steel industry from qualifying as “produced in the United States” because the industry’s raw materials (steel slabs) are not commercially available in the U.S. Currently, the industry’s products are still considered to be products of U.S. origin due to waivers of the Buy American laws. The Executive Order, as currently drafted, eliminates that option and makes U.S. slab converters noncompetitive. The AGC said:

If a key aim of the memorandum is to maximize jobs in the U.S. steel industry, we are concerned that it will more likely have the effect of shuttering many U.S. operations spread around the country and replace some of those operations with a consolidated finished steel industry that will be limited both geographically and by ownership.

There’s been recent evidence that Trump can be persuaded to consider the larger impacts that his policies would have on U.S. industry, beyond their stump-speech value. Last week, news reports indicated that Trump was persuaded by some members of his cabinet, especially Secretary of Agriculture Sonny Perdue, not to withdraw from NAFTA. According to the reports, Perdue showed Trump a map of regions that would be hard hit by loss of NAFTA trade, a map that overlapped substantially with one showing strong voter support for Trump. It is likely that a map of the steel industry would as well. The assessments Trump is commissioning may show that this is another case of what he has learned in his first 100 days: things that sound good on the campaign trail don’t always look so good when the legal details are analyzed.

May 4, 2017 in Current Affairs | Permalink | Comments (0)