International Trade Law Prof Blog

Did MLB Clubs Violate RICO?

On September 28, Yahoo! Sports reported that the Department of Justice had empaneled a grand jury to investigate corruption in Major League Baseball. Four days later, Sports Illustrated published redacted documents showing that the Los Angeles Dodgers, in particular, were targets of the investigation in connection with signings of foreign players, especially those from Cuba.

The emails published by Sports Illustrated appeared to show officials of one team helping to usher a player through a visa interview process in Haiti after he failed to secure necessary immigration documents in the Dominican Republic.

Baseball and the Cuba Embargo

As I’ve described here, these allegations are closely related to the Cuba embargo, its impacts on Major League Baseball, and MLB’s rules in response. Because the embargo prohibits U.S. businesses from engaging in most deals with Cuban nationals or entities, MLB clubs salivating over the island’s wealth of baseball talent find themselves in a spot.

Unable to legally hire players in Cuba, they can wait until a player decides to defect to the United States or a third country. If the player defects to the United States, however, he will be subject to the draft – not something the players (nor the agents, trainers, and handlers taking a cut) want. 

If, however, the player becomes a resident of a third country – say, Haiti or the Dominican Republic – he’s fair game to the clubs and can still be signed as a free agent.

This remains true even after the Department of Treasury under Obama issued a regulation permitting U.S. entities to pay salaries to Cuban nationals. The caveat to that regulation is that the payment is only permitted if the “national of Cuba is not subject to any special tax assessments by the Cuban government in connection with the receipt of the salary or other compensation.” This is a problem for Cuban baseball players because MLB clubs would somehow have to compensate the government-controlled Cuban baseball league before they could sign the players. 

So despite the Obama regulations (which remain in force), signing players straight out of Cuba to MLB contracts would seem to violate the embargo – hence the attractiveness of Cuban players who turn up with Haitian or Dominican residencies.

The Big Kahuna of Federal Criminal Liability: RICO

But how, exactly, does a member of the Cuban baseball league suddenly turn up with Haitian residency? Media reports (such as this one about Dodgers star Yasiel Puig) and a federal prosecution of a baseball agent and trainer in 2017 have revealed stories of players obtaining residency papers outside of Cuba under false pretenses. What’s unclear is how much MLB and the clubs know about and usher along the process.

Yahoo! Sports and Sports Illustrated reported that the grand jury investigation is focusing on potential violations of the Foreign Corrupt Practices Act. As noted by Sheryl Ring for FanGraphs, however, the acts described by the SI report suggest violations not only of the FCPA but also of the Racketeer Influenced and Corrupt Organizations Act, or RICO.

Proving a RICO Violation

RICO is serious stuff. The law was enacted in 1970 to give prosecutors and private plaintiffs a tool to tackle organized crime. It allows suits by private plaintiffs as well as federal prosecution. Criminal penalties include twenty years imprisonment (or even life if the underlying offense provides for it) and forfeiture of property. Civil suits can be brought by “[a]ny person injured in his business or property by reason of a violation of section 1962 ….” That would include baseball agents who would love to get a chance at representing Cuban players but don’t have access to them under the current system. Remedies include treble damages and attorneys’ fees – big money for plaintiffs and plaintiffs’ counsel.

A RICO violation is outlined in 18 U.S.C. § 1962. RICO prohibits:

•  investing the proceeds of a pattern of racketeering in an enterprise;
• acquiring or maintaining an interest in an enterprise through a pattern of racketeering;
• participating in an enterprise through a pattern of racketeering; or
• conspiring to do any of the above.

To establish federal jurisdiction, the enterprise must also be engaged in or its activities must affect interstate commerce.

There’s a lot packed into those few lines, and court decisions have elaborated on various elements of a RICO violation. There are questions about what constitutes an “enterprise” and a “pattern” of racketeering activity. For the third type of violation described above (§ 1962(c)), prosecutors or plaintiffs must show that the defendant conducted or participated in the “operation or management” of the enterprise.

These elements can sometimes be difficult to prove, depending on the structure of the organization and its activities. But many of these structural elements should be pretty straightforward in the case of MLB clubs, and possibly MLB itself (legally known as Major League Baseball Enterprises, Inc.).

First, it should be uncontroversial that MLB and the individual clubs could constitute “enterprises” that would be separate from the individuals participating in them for purposes of a § 1962(c) claim.

Second, multiple illegal signings within a ten-year period may show a pattern of acts that are “part of an ongoing entity’s regular way of doing business” (to cite a standard used by one circuit), especially in the context of MLB rules that still make such signings lucrative.

And third, team or MLB employees might be shown to have conducted or participated in activities through the questionable signings, and the Supreme Court has held that the “operation or management” test can go pretty far down the chain of command.

Possible Predicate Offenses Related to Trafficking of Cuban Players

To prove a RICO violation, prosecutors or plaintiffs would have to prove that the defendants committed certain underlying crimes or “predicate offenses.” Media reports on Cuban player signings suggest several possible RICO predicate offenses beyond the garden variety mail and wire fraud, each of which could spell trouble for MLB or team executives if they knowingly participated in such activities.  

Each of the following offenses are specifically enumerated in the definition of “racketeering activity”:

Identity document fraud. Section 1028 of Title 18 of the United States Code outlines criminal penalties not just for people who hold or use fake IDs, but also for anyone who “knowingly transfers an identification document … or a false identification document” if the person knew it was stolen or unlawfully produced.  

Forgery or false use of passports. Section 1543 provides for fines or imprisonment for “whoever willfully and knowingly uses, or attempts to use, or furnishes to another for use any … false, forged, counterfeited, mutilated, or altered passport or instrument purporting to be a passport.”

Misuse of passports. Section 1544 also provides criminal penalties for any person who “willfully and knowingly furnishes, disposes, of, or delivers a passport to any person, for use by another person than the person for whose use it was originally issued and designed.”

Visa fraud. Section 1546 extends to anyone who “knowingly subscribes as true, any false statement with respect to a material fact in any application, affidavit, or other document required by the immigration laws or regulations prescribed thereunder, or knowingly presents any such application, affidavit, or other document which contains any such false statement or which fails to contain any reasonable basis in law or fact.”

“Racketeering activity” is also defined to include offenses more commonly associated with organized crime and rumored to be involved in trafficking Cuban players, such as “any act or threat involving murder, kidnapping, … robbery, bribery, extortion ….” These types of acts or threats have been the subject of court testimony and media reports.

The definition also includes “forced labor” as described in Section 1589 (“whoever knowingly provides or obtains the labor or services of a person … by means of force, threats of force, physical restraint, or threats of physical restraint to that person or another person …”). Related offenses defined as “racketeering activity” include “trafficking with respect to … forced labor” in Section 1590 and “unlawful conduct with respect to documents in furtherance of trafficking” in Section 1592.

But there’s no need for prosecutors or plaintiffs to prove that MLB or team executives fit the public perception of old-time movie gangsters in order to establish RICO liability. Even if it proved difficult to connect executives with violent crimes and trafficking offenses, knowing immigration fraud alone could form the predicate for RICO liability and might give federal prosecutors grounds to indict on RICO charges.

Could MLB Clubs Be Criminally Liable under the Foreign Corrupt Practices Act for Signing of Cuban Players?

Previously on this blog, I’ve written about an unfortunate connection between international trade and baseball: the trafficking of Cuban baseball players as a result of the U.S. embargo on trade with Cuba.

The most recent development in the story is a big one: On October 2, Sports Illustrated reported that the Department of Justice is well underway in investigating potential violations of the Foreign Corrupt Practices Act by MLB clubs, including the Los Angeles Dodgers and the Atlanta Braves.

The Sports Illustrated story included redacted emails obtained from the DOJ dossier that show club executives were involved in obtaining a visa in Haiti for one player after a failure to get one in the Dominican Republic.

In another show of colossally bad judgment, it appears that the Dodgers even graphed the “Level of Egregious Behavior” of their own employees in Latin America on a scale of “minimal” to “criminal.”

The Foreign Corrupt Practices Act

What would DOJ have to prove for the Dodgers, Braves, and other clubs to face criminal liability under the FCPA?

Privately-Held Businesses Are Not Exempt

First, there’s a common misperception that the FCPA only applies to publicly-traded companies. Not so. The anti-bribery provisions of the act extend to any “domestic concern,” which is defined very broadly in the act to include essentially any type of business organized under the laws of any state or having its principal place of business in the United States. This includes any “corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship.” Doubtful that any MLB club is going to wiggle out of that on based on corporate organization.

Worse news for individual MLB club employees, the anti-bribery provisions also extend to any individual who is a citizen, national, or resident of the United States.

The Braves Could Get Caught Up on the Accounting Provisions, Too

It’s true that the FCPA’s accounting provisions, unlike the anti-bribery provisions, only apply to an “issuer” of securities.

But this could still be a problem for the Atlanta Braves, one of the clubs that figures prominently in the DOJ investigation. The Braves are owned by a publicly-traded company, Liberty Media, through its subsidiary holding company, the Braves Group. Under the FCPA, publicly-traded companies must also comply with accounting provisions for their majority-owned subsidiaries and make good faith efforts to influence even their minority-owned subsidiaries to do so.

The accounting provisions require covered entities to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” That means that even if DOJ can’t prove a violation of the anti-bribery provisions, it could still go after a conviction for failure to keep sufficiently detailed books.

The Anti-Bribery Provisions Are Broad

To establish a violation of the anti-bribery provisions by a domestic concern for actions taken abroad, DOJ must prove that:

• the entity knowingly, corruptly, or willfully
• made an offer, payment, promise to pay, or authorization to pay
• anything of value
• to a foreign official, foreign political party or its official, or candidate for political office
• to influence an official act or decision; to induce an action or omission in violation of a lawful duty; to secure improper advantage; or to induce an act or decision that assists the company in obtaining, retaining, or directing business to any person.

Exceptions and Affirmative Defenses Are Narrow

The FCPA expressly permits what are commonly known as “grease payments.” A grease payment is any “facilitating or expediting payment” that is used to “expedite or secure the performance of a routine governmental action.” These include non-discretionary actions performed by the official as a routine part of business, such as processing paperwork or scheduling inspections. These payments are ordinarily of low value and courts and regulators view the exception as very narrow.

The FCPA also recognizes two affirmative defenses:

• The payment was lawful under local law where it was made; or
• the payment was a “reasonable and bona fide expenditure” directly related to promoting products or services or performing a contract with the foreign government.

MLB Clubs Could Face Criminal Liability for Cuban Player Signings

A few redacted club documents and some second-hand reports in the media are not enough to establish FCPA violations. But the early evidence sounds some alarm bells.

If documents were to show that team executives knowingly made or authorized payments or offered other value to Haitian, Dominican, or Mexican officials to obtain approval of visas, residency papers, or false identity documents for Cuban players, the elements of an FCPA violation might be met.

The clubs (or their employees, if indicted separately) would then have to show that the payments were merely grease payments – perhaps to speed along the grant of any non-discretionary papers or permits – or that the payments were legal where made.

Will This Motivate the Owners and the MLB to Change?

Back in the era of the MLB steroid investigation, Congressman Henry Waxman said, “We’re long past the point where we can count on Major League Baseball to fix its own problems.”

It’s not too late for owners and MLB to take affirmative action to fix the system that creates perverse incentives to engage in shady or even criminal behavior in international player signings.

Until now, owners have lacked much incentive to do so because they were angling for an international draft instead. The international draft has been actively opposed by many Latin players in the MLBPA.

Maybe the DOJ’s current investigation – and the possibility of criminal liability – will make the owners more receptive to alternative solutions to nagging problems in international player signings. For Cuban players, a commitment to real solutions (such as the one discussed here) could mean an end to human trafficking and related exploitation.

Withdrawing from NAFTA: Legislative v. Presidential Constitutional Powers

Whether it’s NAFTA or a new United States-Mexico-Canada Agreement, the fast track scheme makes clear what roles the President and Congress play in getting into those congressional-executive trade agreements.

But the statutes that set up the fast track framework don’t say much about the branches’ respective roles in getting out. As I outlined here, the best reading is that the framework doesn’t give unilateral withdrawal authority to the President and instead requires that he act in consultation with Congress.

That conclusion is supported by an understanding of the constitutional allocation of authority over trade between Congress and the President. While both have a role to play, Congress takes the lead. The President’s powers over foreign affairs are limited by express or implied congressional intent.

Circling back to the statutes, congressional intent to retain a consultative role in withdrawal or termination from trade agreements is either express or implied in the fast track scheme, foreclosing unilateral presidential withdrawal.

Foreign Commerce v. Foreign Affairs

The Supreme Court has long recognized that the President is the “voice” of the United States, based on the power to act as commander-in-chief, to appoint ambassadors, and to make treaties. In the landmark case of United States v. Curtiss-Wright Export Corporation, the Court said that, in the arena of foreign affairs, the President alone has the power to speak or listen as a representative of the nation,” and Congress itself is powerless to invade [this realm].”

This “sole organ” or “one voice” doctrine is not unlimited, however. In a more recent case, Zivitofsky ex rel. Zivitofsky v. Kerry, the Court in 2015 emphasized that Congress also had an important role in foreign affairs: “In a world that is ever more compressed and interdependent, it is essential the congressional role in foreign affairs be understood and respected. For it is Congress that makes laws, and in countless ways its laws will and should shape the Nation's course. The Executive is not free from the ordinary controls and checks of Congress merely because foreign affairs are at issue.”

In another case, Medellín v. Texas, the Court in 2008 set aside a presidential memorandum purporting to implement a decision by the International Court of Justice. The ICJ decision was based on a non-self-executing treaty, which means that treaty obligations have to be implemented into U.S. law by Congress. The Supreme Court held that Congress, not the President, had the authority to implement those obligations.

The Commerce Clause of the Constitution, Article 1, Section 8, clause 3, gives Congress the power “to regulate Commerce with foreign Nations.” The Supreme Court has extended the “one voice” doctrine to support broad powers of Congress, not the President, in regulating foreign commerce. In Michelin Tire Corporation v. Wages, the Court reasoned that “[t]he need for federal uniformity is no less paramount in ascertaining the negative implications of Congress’ power to ‘regulate Commerce with foreign Nations’ under the Commerce Clause.”

Overlap in Congressional and Executive Powers: The Youngstown Framework

Of course, there is no bright line indicating where the legislative power to regulate foreign commerce ends and the presidential power over foreign affairs begins. The Supreme Court has recognized a “tie-breaker” test to decide where the President can step in to areas otherwise allocated to congressional lawmaking authority.

In Youngstown Sheet & Tube Co. v. Sawyer, Justice Jackson’s often-cited concurrence recognized three potential areas of Presidential action: (1) where the President acts in accordance with the express or implied will of Congress; (2) where the President acts in an area where Congress has not spoken; and (3) where the President acts incompatibly with the express or implied will of Congres.

Unilateral presidential withdrawal from NAFTA is almost certainly not in category (1). It might be in category (3), based on arguments outlined here.

But if a court doesn’t think the fast track framework implies a specific congressional desire to foreclose unilateral presidential withdrawal, then the matter would fall into category (2), action by the President where Congress has been silent.

But a category (2) analysis doesn’t help the President either. The Supreme Court in Medellín considered and rejected the argument that the President might rely on his independent foreign affairs powers to implement the ICJ decision even where Congress had not executed it. The Court held that such independent presidential action may derive only from “‘a systematic, unbroken, executive practice, long pursued to the knowledge of the Congress and never before questioned.’”  The Court cited by way of example its approval of the practice of executive claims settlement, a 200-year-old practice that had received congressional acceptance throughout its history.

A Brief History of Trade Dealing (and That Awkward Business of Withdrawal)

Far from having a 200-year pedigree, unilateral presidential withdrawal from trade agreements is unprecedented. The following history is adapted from a fuller discussion in Withdrawing from NAFTA, which is forthcoming in Georgetown Law Journal.

Early trade policy was simply tariff policy: Congress passed statutes setting tariffs on key imports. Beginning in 1890, things became more complex, as Congress included provisions in its tariff acts that gave the President authority, either expressly or by operation, to adjust certain tariffs through negotiations with trade partners in order to obtain better treatment of U.S. exports.

Some statutes specifically allowed the President to enter into commercial treaties for tariff breaks. For example, the Dingley Tariff of 1897 authorized the President to make treaties lasting up to five years that would lower duties by up to twenty percent or completely eliminate tariffs on any products that the U.S. did not produce in quantity, such as products of tropical agriculture. The effect of provisions like this one was to induce foreign sovereigns, worried about potential tariff hikes, to negotiate and strike deals with the United States to avoid being punished.

Exiting Trade Deals Under the Old Tariff Laws

Most tariff statutes between 1890 and 1930 possessed some type of reciprocity or flexibility provision. This presented an obvious question when Congress passed the next tariff act and removed the previous Presidential authority: What was to become of the agreements entered into by the Executive pursuant to that old authority?

This question vexed Congress when it passed the Wilson-Gorman Act of 1894, which repealed the reciprocity provisions of the McKinley Act of 1890. Congress attempted to preserve the existing agreements, but the Executive insisted to trade partners that it no longer had the authority to honor them. In an 1894 letter from Secretary of State Walter Q. Gresham to the Brazilian foreign minister, Gresham said, “I think that the reciprocity arrangement between Brazil and the United States was terminated by the going into force of our existing tariff law, and I do not think the executive department can act upon any other theory. That is the view of the Secretary of the Treasury.”

In other tariff acts, Congress clearly expressed the view that it had the competence to terminate the agreements as a function of its tariff-making power. For example, in the Payne-Aldrich Tariff Act of 1909, Congress directed the President to withdraw from trade agreements entered into under the Dingley Tariff. Section 4 of the Payne-Aldrich Act said, “That the President shall have the power and it shall be his duty to give notice … to all foreign countries with which commercial agreements in conformity with the authority granted by … [the Dingley Act] have been or shall have been entered into, of the intention of the United States to terminate such agreement ….”

The New Deal on Trade

More power shifted to the President with the Reciprocal Trade Agreement Act of 1930. Seeking to free himself from the strictures of the most infamous tariff act in U.S. history, the Smoot-Hawley Act of 1930, President Franklin Delano Roosevelt and his Secretary of State, Cordell Hull, sought new reciprocity authority for the President.

There appeared to be no question in Roosevelt’s or Hull’s mind that such authority must come from Congress. The Administration proposed a three-page amendment to the Smoot-Hawley Act, allowing the President to reduce tariffs by up to fifty percent in connection with a reciprocal trade deal from a negotiating partner. These tariffs would not require any form of congressional approval, but negotiating authority was limited to three years. The President could end the agreement through proclamations eliminating any tariff concessions made in the deal.

To be sure, the RTAA was a significant expansion of Presidential authority compared with the old tariff acts. Nevertheless, it was Congress – not the President – that did the expanding.

Delegated Power in the Modern Congressional-Executive Agreement

By 1973, the tariff-making authority bestowed on the President by the RTAA was insufficient to make modern trade agreements. To deal with modern concerns over non-tariff trade barriers, something more than traditional “tariff proclamation” authority was needed.

Congress immediately recognized a constitutional dilemma: how to expand the powers of the President but not to “abrogate Congress’s constitutional powers over international trade or ignore those barriers’ impact on the people of the United States.”

Congress fashioned a solution in the Trade Act of 1974. On the one hand, Congress authorized the President for a specific period of time to negotiate trade agreements extending beyond tariff proclamations to include non-tariff barriers and other issues, such as subsidies.

But Congress emphasized that these powers were an express delegation of authority from Congress to the President, and therefore subject to numerous procedural requirements to ensure legislative oversight and input into the process. As the report of the House Ways and Means Committee stated, “it is important to stress that the achievement of these objectives entails a substantial delegation of congressional authority. Accordingly, the bill makes certain procedural reforms, both in terms of the development of an appropriate oversight role for the Congress and in terms of providing a focal point in the executive branch for carrying out the trade policies jointly agreed upon by the Congress and the President.”

While the Trade Act of 1974 does not detail the respective roles of the political branches in withdrawing from trade agreements (a problem the Congress would do well to address if it implements the new USMCA, as discussed here), the history of that Act clearly indicates that Congress continued to believe that presidential power over trade deals was delegated and conditioned by Congress.

Back to the Future of NAFTA

Based on this historical practice of highly conditioned presidential authority over both entry into and exit from trade deals, it cannot be argued that unilateral presidential withdrawal enjoys “‘a systematic, unbroken, executive practice, long pursued to the knowledge of the Congress and never before questioned.’”

To the contrary, unilateral presidential withdrawal is better understood to be either incompatible with the implied will of Congress or, at best, an exercise of presidential power where Congress has not spoken on the issue. In either case, a Youngstown analysis does not support unilateral presidential withdrawal from congressional-executive agreements like NAFTA.

Withdrawing from NAFTA 2.0

There’s a new NAFTA in town, called the United States-Mexico-Canada Agreement or USMCA. Much like the old NAFTA, the new NAFTA contains a provision allowing parties to withdraw upon six months’ notice.

So what does it take to get out of the new NAFTA? Is it any different from getting out of the old NAFTA?

The new NAFTA provision, Article 34.6 says, “A party may withdraw from this Agreement by providing written notice of withdrawal to the other Parties. A withdrawal shall take effect six months after a Party provides written notice to the other Parties. If a party withdraws, the Agreement shall remain in force for the remaining Parties.”

In comparison, the old Article 2205 said, “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.”

This seems to be a technical clarification, not a substantive one. Article 2205 in the old NAFTA could be read to require two steps: First a party gives written notice of withdrawal to the other parties, and then six month later that party “may withdraw” (how?).

Article 34.6 of the new NAFTA makes clear that this is all one step: A party gives notice of intent to withdraw and six months later it takes effect. That’s probably what the drafters of Article 2205 meant too, but Article 34.6 is more clear.

Who May Withdraw?

But this doesn’t really answer the big question: Who is entitled to effect U.S. withdrawal? In my last post, I highlighted why the fast track statutes that form the basis for congressional-executive trade agreements don’t support the case for unilateral presidential withdrawal: The Trade Act of 1974 gives specific powers to the President in the event of U.S. withdrawal, but not the withdrawal authority itself. That authority exists, but it’s written in passive voice, not as a power of the President. The 2015 fast track statute doesn’t talk about withdrawal at all.

This is consistent with the structure for getting into trade agreements under fast track, which requires a cooperative process by Congress and the President.

The fast track framework that governed the first NAFTA also governs the new one (with updates and extensions). So we're still in the dark about withdrawal and termination procedures. Congress could clarify withdrawal and termination authority if it wanted to in the implementing act for the new NAFTA.

Clues in the Statement of Administrative Action

The implementing act for the old NAFTA did contain one clue about who could effect withdrawal. In Section 101(a)(2) of the NAFTA Implementation Act, Congress approved “the statement of administrative action proposed to implement” NAFTA. Statements of administrative action are required by Section 1103 of the 1988 fast track statute and describe significant administrative actions proposed to implement the agreement.

The Statement of Administrative Action (“SAA”) that was incorporated into the NAFTA Implementation Act discussed the dilemma the U.S. might face if Mexico or Canada were to withdraw from the side agreements on labor and the environment that the U.S. considered essential to the deal.

The Clinton Administration proposed a resolution to this potential dilemma in the SAA: “The 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 the President would deliver notice of withdrawal if Mexico or Canada withdrew from a side agreement, but only “after thorough consultation with the congress.” The SAA doesn’t specify the details of that consultation or whether the Administration could proceed if Congress expressed objection. But it does suggest that the President was not expected to act unilaterally, even in this instance that was anticipated and discussed by both branches before implementing the agreement.

Implementing NAFTA 2.0

If it decides to approve and implement the new NAFTA, Congress could fill the gaps in the fast track scheme and the old NAFTA implementing act by specifying how withdrawal by the United States should be accomplished.

Given the constitutional powers that Congress has always retained over U.S. entry into trade agreements, it would make sense for Congress to spell out a role for itself in withdrawal or termination as well. More about the constitutional interplay between the political branches in a later post.

Reason #1 Why Trump Can’t ‘Terminate’ NAFTA: Getting off the Fast Track

The Canadian negotiating team is in Washington this week trying to strike a new NAFTA deal, and Trump has threatened to “simply terminate NAFTA entirely” if they don’t.

There are three reasons he can’t do that legally.

First, the statutes under which NAFTA was created don’t give him the right to unilaterally terminate the agreement.

Second, the President’s constitutional authority over foreign relations is limited by Congress’s enumerated authority to regulate foreign commerce.

Third, and relatedly, the statute that implemented NAFTA obligations into U.S. law would only terminate if the U.S. effected a lawful withdrawal from the agreement – which, for reasons #1 and #2, is something a unilateral Presidential withdrawal would not be.

In the next few posts I’ll outline the legal authorities behind each of these statements, starting with the first one – the scope of the President’s withdrawal authority under the statutory regime that provides for the creation of congressional-executive trade agreements – the so-called “fast track” framework.

First Things First: It’s Not a Treaty

The first thing to bear in mind is that NAFTA is not a treaty, despite what some news sources say. It’s a congressional-executive agreement, negotiated by the President under consultation with Congress.

Does that matter? For legal purposes, yeah, a lot.

A treaty is governed by Article II, Section 2, clause 2 of the Constitution. That clause, of course, provides that the President can enter into any treaty he wishes, but it has to be ratified by a 2/3 majority of the Senate.

That Senate ratification can be a tough sell and a turn-off to potential negotiating partners, so Congress in the Trade Act of 1974 recognized an alternative: the congressional-executive agreement.

Unlike treaties, congressional-executive agreements must be notified to Congress before the President begins negotiations, and Congress must be consulted in specific ways throughout the negotiation process.

The up-side for the President (and negotiating partners) is that agreements made with this kind of cooperation between the two political branches don’t have to be ratified by the Senate. Instead, they are authorized by a thumbs-up/thumbs-down vote by a simple majority of both houses of Congress after limited debate.

So for a President, congressional-executive agreements are easier to get into, because Congress is part of the process.

But they’re also harder to get out of – because Congress is part of the process.

Termination Authority under Fast Track

The fast track statutory regime began with the Trade Act of 1974 and has been amended and extended several times, most recently by the Bipartisan Congressional Trade Priorities and Accountability Act of 2015. Since the 2015 statute says nothing about termination, the 1974 Act remains the governing standard.

The fast track statutes are very specific about the roles of the President and Congress in entering into trade deals, devoting dozens of pages to describing that process in detail.

They are considerably less clear about the process for termination, but the structure and context do not support a unilateral Presidential right to withdrawal.

Termination, in the Passive Voice

Section 125(a) of the Trade Act of 1974 provides the authority for termination of or withdrawal from congressional-executive agreements. That section, however, is written in the passive voice. Section 125(a) provides:

Every trade agreement entered into under this Act shall be subject to termination, in whole or in part, or withdrawal, upon due notice, at the end of a period specified in the agreement. Such period shall not be more than 3 years from the date on which the agreement becomes effective. If the agreement is not terminated or withdrawn from at the end of the period so specified, it shall be subject to termination or withdrawal thereafter upon not more than 6 months’ notice.

That’s it – “shall be subject” to termination. No subject, no actor.

 Withdrawal By “the United States” and Action by “the President”

So did Congress intend the President to effect withdrawal? While Section 125(a) does not say, Section 125(c) suggests not. Section 125(c), which deals with the impacts of a withdrawal, sets out a distinction between actions of “the United States” and actions of “the President:”

Whenever the United States, acting in pursuance of any of its rights or obligations under any trade agreement … withdraws, suspends, or modifies any obligation with respect to the trade of any foreign country or instrumentality thereof, the President is authorized to proclaim increased duties or other import restrictions, to the extent, at such times, and for such periods as he deems necessary or appropriate, in order to exercise the rights or fulfill the obligations of the United States.

 In “Withdrawing from NAFTA,” an article forthcoming in Georgetown Law Journal, I summarize the fast track termination scheme this way:

[T]he statute is ambiguous as to how “the United States” is expected to exercise its withdrawal authority. The distinction between action by the United States and action by the President, however, suggests that Congress contemplated action of “the United States” to mean something other than unilateral Presidential power. … Indeed, the Trade Act as a whole prescribes numerous express Presidential powers, but never expressly authorizes the President to withdraw from trade agreements. This omission of any such express authority when the Act discusses withdrawal and termination from trade agreements is conspicuous.

 Terminating Agreements v. Terminating Proclamations

There’s another section, Section 125(b) that allows the President to “at any time terminate, in whole or in part, any proclamation made under this Act.” Although this authority is broad, it does not include the power to withdraw from trade agreements as a whole.

Historically, the President’s power to make proclamations under tariff acts referred to his power to raise or lower duties within certain limits and under certain conditions, against the backdrop of a detailed tariff law passed by Congress. In debates on the Trade Act of 1974, members of Congress described Section 125(b) as an uncontroversial continuation of that authority dating back to the 1930s – a time when Congress, not the President, clearly set the limits on trade agreements.

This distinction between “trade agreements” and “proclamations” is reflected in the structure of the Act. Section 101(a), which sets out the basic authority for entering into trade agreements, divides the President’s authority between two tools: (1) entering into trade agreements, and (2) proclaiming tariff modifications. Section 101(a) provides:

Whenever the President determines that any existing duties or other import restrictions of any foreign country or the United States are unduly burdening and restricting the foreign trade of the United States and that the purposes of this Act will be promoted thereby, the President –

(1)  … may enter into trade agreements with foreign countries or instrumentalities thereof; and

(2) may proclaim such modification or continuance of any existing duty … as he determines to be required or appropriate to carry out any such trade agreement.

So terminating a proclamation – as provided in Section 125(b) – is not the same as terminating or withdrawing from a trade agreement. The Trade Act of 1974 gives the President the right to do the former but not the latter.

Getting Off the Fast Track

To summarize: NAFTA was entered into not under the President’s constitutional treaty power, but under the procedures of the Trade Act of 1974 for creating congressional-executive agreements.

When Congress laid out the role of the President in that scheme, it gave him certain specific powers and duties, including the power to notify Congress of the need for a trade agreement; the power to negotiate that agreement while consulting with Congress; the power to conclude a trade agreement; and the power to terminate or modify proclamations of duties.

What Congress did not do is give the President an express power to ‘terminate’ agreements like NAFTA. Under the statute, termination is by “the United States,” not by “the President.”

What About the Constitution?

This begs the second question presented in the introduction to this post: Doesn’t the President have the authority under his foreign affairs power to speak for “the United States” and withdraw from NAFTA? For that matter, couldn’t he rely on this inherent constitutional authority instead of congressional authorization under the fast trade statutes?

In my next post, "Reason #2 Why Trump Can't Terminate NAFTA" (not to be a spoiler), I'll explore this question.

Can Trump Dump Canada from NAFTA?

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.”

The Moral Acceptability of Beanball in Trade Relations

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.

"Pitching Inside" and the Steel and Aluminum Tariffs

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.

 

Trade Retaliation - Beanball Style

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):

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

Korean Conflict

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.

The Hit-Batsman

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.

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.

Rethinking Our Civil War Over Trade

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.

50^th 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 50^th 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.

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.

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.

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.