International Trade Law Prof Blog

Agriculture v. Trump, Round 2: Steel Tariffs

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.

The EU-Brazil Food Security Proposal – Pragmatism or Idealism?

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.

Playing Beanball at the WTO

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.