February, 2017
US Trade Policy Relaunch—Possible Directions
Mark K. Neville, Jr.
At the time of this writing the United States has elected Donald J. Trump to the presidency a scant three weeks ago. This article will not appear until some weeks after his January 20 inauguration, so it is impossible to predict with any exactitude the twists and turns of developments in the interval between this writing and those opening weeks of the Trump Administration. Until then, we are left to predict what new directions may be charted, based upon campaign promises and further commitments made in this time of transition.
We plan to touch only upon probable/possible directions for international trade but we should begin with what we do know as a matter of fact. As a matter of fact, the US electorate has repudiated Obama policies fully as much as they have rejected candidate Hillary Clinton, who had pledged more of what had been served up during the two terms of the Obama presidency.
Trade policy was the one major exception to that continuity, as candidate Clinton sought to distance herself from positions on trade issues she had earlier espoused while serving under President Obama. Candidate Clinton’s trade positions owed much to rival Bernie Sanders and, in fact, they were not markedly different from those of President Trump, at least insofar as there was a move away from the TPP, although they were an anemic version of Mr. Trump’s own bold prescriptions.
In any event, elections have consequences, and it is the policy choices decided by President Trump and no one else that will be pursued for at least the next four years. Here endeth the lesson.
A bit of perspective—the Census Bureau’s Labor Statistics show that manufacturing jobs for October, 2016 were projected to be 12.258 million.2 The last time we saw this level was in July 1941, when the US population was 132 million. We’ll get to many Obama trade policies that are being repudiated, but let’s first focus on the prizes that were pursued so stoutly, the jumbo-sized free trade agreements with our Asian and European partners.
With President Trump in charge and with the Sanders/Warren progressive wing of the Democratic Party in the ascendancy, it is a dead certainty that no new wide-ranging FTAs will be negotiated. But we could see some bilateral FTAs, perhaps starting with the post-Brexit UK and with Japan. As a brief aside, in my experience, Japan’s position is very often aligned with that of the US at the WCO and, in fact, it would be a natural ally of the US. In fact, in the brief two-minute plus webcast of his First 100 Days’ projects, President Trump announced that we would drop out of the TPP discussions and that he would vigorously pursue bilateral FTAs.
Published trade statistics show the trade imbalances being run with many of our various FTA partners. For example, for 2016 (year to date), the following trade deficits apply:
Mexico—$46.8 bio
Canada--$5.8 bio
Colombia--$642 mio
Korea--$22.8 bio4
In consequence, any bilateral FTAs should prove to be markedly different from the model that has been developed, as there should be carve-outs and built-in protections for sectors that would otherwise be sorely impacted. One such device that could be employed could be more restrictive eligibility rules. This would help ensure that exporters in FTA partner countries will not be able to make use of simple “screwdriver factories” to gain duty-free access to the US market because of low threshold eligibility rules. We might see a move to preclude the inclusion of US-origin parts or components in Mexican or Canadian products’ NAFTA-eligibility—that would keep those US parts and components at home for manufacture of the finished goods.
One feature of the FTAs that should not need much revision is the inclusion of labor and environmental protections, which have been baked into the FTA cakes for some time. Still, we would be remiss if we did not acknowledge the part that such “soft” standards can play in either imposing or in removing cost burdens on foreign competitors.
Whenever we consider FTAs it is well for us to focus on their broad nature. They go well beyond free trade in goods and embrace trade in services and establish direct investor protections as well.5 The creation of rights under those latter two areas of FTAs might be subject to closer scrutiny.
In the case of the General Agreement on Trade in Services (GATS), some have argued that there is a spillover impact on US immigration law. With the GATS, at Art. I, para. 2 (d), a service supplier of one Member may supply services through the presence of natural persons in the territory of any other Member. Let us see what that grant of right means.
What if India is a signatory of the GATS (it is), and the US is a signatory to the same agreement (and it is), and an Indian citizen working for a services company in India wants to get speedier access to the US market via a non-immigrant visa, but that visa process is expensive or there are quotas in place? Could India complain and initiate an action before the Dispute Settlement Body of the WTO in Geneva, complaining that its, and by extension its citizens,’GATS rights have been abridged? The argument would be that a trade agreement, the GATS, trumps the US immigration laws. And that is exactly what has happened, with such a case having been filed at the WTO by India in 2016.6 7 Three guesses as to a Trump Administration reaction to and proposed disposition of this case.
Restoring US jobs, and especially manufacturing jobs, is a primary goal of the new Trump Administration, just as it was a top-of-mind campaign issue. A bit of perspective—the Labor Statistics show that manufacturing jobs for October, 2016 were projected to be 12.258 million.8 The last time we saw this level was in July 1941, when the US population was 132 million.
Because the FTA that got the most attention from candidate Trump was NAFTA, which was called a “US job killer,” it makes sense to focus a bit on NAFTA.
While it is certainly true that NAFTA itself creates the right to amend or terminate the agreement, it is also true that neither Canada nor Mexico would remain idle but would instead seek to defend their interests.10 While there are some indications that Mexico is not prepared for discussions about changing NAFTA, Mexico’s first move in its own self-defense might be to sit down with the US. One reason for that meeting is that the details for what changes to the NAFTA the US will press for have been missing.
And this prompts us to pose our second question, “Exactly what NAFTA changes will the US want?”
A closer look at Mr. Trump’s remarks about NAFTA reveals that his concerns are primarily about Mexico. There has been much less said about NAFTA’s impact on the US due to the impact of bilateral trade with Canada. That is ironic, since there have been more complaints brought by US companies under NAFTA against Canada than against Mexico. The overt focus on Mexico may be due to complaints against immigration from Mexico acting as a “thumb on the scale” as well as the post-NAFTA expansion of assembly and light manufacturing operations in Mexico which is the source of the runaway trade deficit with Mexico, which was noted above.
With 75% of Canadian exports going to the US, there are already signals that Canada would be perfectly prepared to sit down and re-negotiate NAFTA or to enter into a successor bilateral FTA with the US to protect itself. This would be a reprise of the Canada-United States Free Trade Agreement which entered into force in 1988 but was effectively superseded by NAFTA in 1994. Canada would then be free to enter into a separate bilateral FTA with Mexico.
For its part, Mexico has signaled its opposition to any amendment of NAFTA. Mexico could refuse to entertain a separate bilateral agreement with the US and thereby lose duty-free access to the US market. The likely result would be that duties would be re-imposed on Mexican imports at the “column 1” duty rates. Those are the rates that apply to countries enjoying Normal Trade Relations (NTR) status, which old-timers and students will recognize as Most Favored Nation (MFN) status. A return to a “half loaf” Maquiladora assembly program may provide some relief but, as discussed below, it is possible that that option could be under review.
These column 1 rates are both the “bound rates” which the US has agreed to through its WTO commitments and the effectively applied rates. They serve as the upper limits that the US can impose without running afoul of those WTO commitments. Any reaching of duty rates that breaches those limits would expose the US to retaliation.
While there have been no indications of what specific NAFTA measures may be addressed, I would surmise that there may be a push for the primacy of US regulations on labeling and environmental issues, so long as there was no evidence of any discrimination, i.e., “national treatment” was being afforded. Alternatively, I would expect that Art. 2005, dealing with GATT dispute settlement, could be on the list. That NAFTA provision allows discretion to a complaining party to bring the issue forward for resolution under the NAFTA dispute settlement program or the GATT, if the complained of action could be actionable in either forum.
We actually have precedents on the intersection of these two routes for dispute resolution under NAFTA: the US food labeling laws were the subject of attack at the WTO by Mexico (dolphin-safe tuna labels)11 and Canada (beef and pork country of origin labels), with the US losing in both cases. This is an area where the US popular support for environmental and wildlife protection measures is aligned with the interests of US companies who are required to meet the burdens imposed by those US measures. If foreign business interests are permitted to escape those burdens, progressives and conservation and consumer advocacy groups could close ranks with US producers and could support a Trump administration initiative to close out access to the WTO on any of these disputes. After all, it could be argued, the NAFTA, and presumably all other FTAs, creates an exceptional relationship between the parties such that any disputes should be and must be resolved under the auspices of the FTA in the same exceptional sense, i.e., outside Geneva and only under the aegis of the FTA.
The major complicating factor in regard to NAFTA revisions is the auto industry, with components and raw materials in a constant shuffle through all three NAFTA members. It is important to note that the automotive industry was the subject of the first free trade agreement with Canada, the Canada-United States Automotive Products Agreement, all the way back in 1965. It is probable that there will be a special and close focus on this industry, as well as on agriculture, in any unwinding of NAFTA and in any replacement bilateral FTAs. Even a superficial reading of the present NAFTA regulations on the motor vehicle sector and of the prolonged schedule that delayed the point of full duty-free treatment of agricultural products reveals their special place.
Two final points of conjecture about NAFTA. First, as discussed below, perhaps currency manipulation will be addressed. We might see a condition placed on investor protections such that there are employment guarantees or export performance requirements, just as there might be some changes to the same effect in the Bilateral Investment Treaties (BITS).
Let’s leave NAFTA and look to the broader issues surrounding international trade.
We can predict that there will be a second closing of ranks by US business and labor. One good example of a joining of forces in the 1970s and 1980s was COMPACT, the Committee to Preserve American Color Television.14 The target then was Japan, and clearly it is China today.
The Japanese response to defend itself against aggressive trade initiatives was to agree to yield to voluntary restraint agreements and also set up “transplant” production factories here in the US. That was especially true in the auto and consumer electronic products sectors, with a number of Japanese auto companies also entering into joint ventures with US companies as another strategic move.15
In looking to return the US heartland to prosperity, and in particular in looking at more manufacturing jobs as a key engine for that success, we should expect that the US should not shrink from the world stage but should get and stay more directly involved in ensuring greater access to foreign markets. This focus would result in the “Plus” characterization, as the 1970s and 1980s “free but fair trade” campaign was singularly focused on defending the US market and was not to any extent focused on ensuring market access for US exports, at least not insofar as there was any US focus on unfair trade in export markets. The agreements on subsidies and on antidumping that were adopted in 1979 were, from the US perspective, focused upon imports into the US. Only if we take the broadest possible view do we see, if we look back, any focus on preventing and no focus on redressing unfair trade in exports.
Unfair trade actions meted out against US products in export markets would be lessened if we had internationally agreed rules for tariff classification and a common system of customs valuation. In fact, we can see these “rules of the road” embedded in the Harmonized Tariff System, which took effect in the US in 1989, and in the Customs Valuation Agreement16 which dates to 1979. We can also cite the Agreement on Trade in Civil Aircraft (1979) as a US effort at trade expansion through exports but it, too, cannot be seen as a principal weapon in enforcing adherence to agreed norms.
What we should see now is a much greater commitment to free and fair trade for US exports than was the case under President Obama, with a level of commitment to match the focus on imports coming into the US market. After all, the world is a vastly different place today than it was in the 1970s and 1980s. The notions of the world as “a global factory” and as “a global marketplace” and the concept of “global value chains” is 1980s-era trade on steroids. Then, too, today’s emphasis on transfer pricing speaks to the proliferation of cross-border trade and investment by related parties over the past 30-40 years.
Because many of those manufacturing jobs that are being sought could be and probably will be dedicated to producing goods for export, trade policy must be marked by attentiveness to growing and protecting those export markets. As an aside, the last time there was serious discussion of a national Value Added Tax (VAT) was in the 1980s. Some will recall that Rep. Al Ullman (D, OR) was a proponent at that time. In the interim, major trading partners such as Australia and Canada have instituted their own border tax regimes, so that the US is the last major holdout without a VAT or consumption tax applied at the border. Perhaps there will be thoughts about a VAT or a consumption tax when income tax reforms are under consideration. And if we focus upon a border tax, then we should be mindful of the harmful impact of border tax manipulations on imports as reflected in the WTO case on Phillip Morris cigarette imports into Thailand.17 That is one more transgression that could hinder US exports that must be guarded against.
If the US pulls back from its role as leader of the free world, a power vacuum is created and others, some of them bad actors and all of them with their own agendas, can, and undoubtedly will, step into the breach. A movement away from the TPP should not signal that the US leaves the field of play. There are already strong signals that China, which had not been a party to the TPP, is offering up its own trade bloc. The Chinese presence in South America and in Africa is crescendo and has implications that extend far beyond international trade.
Any international trade policy that is applied by the Trump Administration should proceed from the basic premise that the US must regain its proper leadership role. The US has simply missed the boat and must reassert itself by assuming more active roles in various bodies such as the World Customs Organization and others. Beyond that point, the message that the international trade law rules should be obeyed is one that should be delivered early and often, in various fora.
One of the most important points to make here is that the US can actually defend itself against a range of trade law violations by invoking the rights it has under the GATT trade agreements. To be direct, now is the time for the Trump Administration to take the offensive in insisting that the various trade rules agreed upon at various times from the 1970s to the present are honored. The various GATT agreements themselves provide the opportunity for the US to defend itself. After all, the domestic statutes on antidumping and countervailing duty law are both provided for in GATT Agreements.18 To be clear, we are talking about the US aggressively pursuing cases where its rights and, by extension, those of its many constituencies, have been violated.
And also to be clear, we are talking not only about the impact of imports into the US, which was a policy that was right for the 1970s and 1980s, but also about actions which restrict market access for US exports, which broadened policy is right for today.
The primary statutory route for US companies whose export efforts have been aggrieved by foreign governments’ restrictive practices is Section 301 of the Trade Act of 1974. This statutory remedy was covered extensively in a two-part discussion in this space in December 2016-January 2017.19 As was discussed there, the US company or workers whose interests have been burdened proceeds by filing a petition with the Office of the US Trade Representative (USTR). The USTR, in turn, on behalf of that petitioner, opens discussions with the foreign government concerned. If those talks fail, a formal WTO case is filed at the Dispute Settlement Body of the WTO.
One example of a WTO initiative taken by USTR against foreign government actions that injure US interests is the case brought against China for violations of Intellectual Property Rights (IPR), which were violations of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).20
Let’s briefly mention two other cases with export market implications which may end up at the WTO via Section 301 filings.
One of the biggest threats to the harmony of global trade is the breakdown of the rule of law as the agreed rules have ceased to exert any normative effect on their own. Instead, more and more countries have adopted a bold “so, sue me” attitude.
Nowhere is this more evident than the degree to which we have seen an explosion of countries’ resort to “reference pricing” in derogation of the Valuation Agreement.21 In fact, this is a retrogression to the defunct Brussels Definition of Value (BDV), whose reliance on “notional values” was discarded officially with the passage of the Valuation Agreement in 1979. The BDV is zombie-like in its staying power, however, and it has re-emerged under the guise of “valuation databases.” Ostensibly to be used only for risk management purposes, in almost every instance they have been used to provide substitute or minimum values, which are strictly prohibited by the Valuation Agreement.
There have been some cases brought to the WTO, all of which have resulted in either the reference pricing programs being struck down or being voluntarily removed in settlement. Nevertheless, anecdotal evidence shows use of the databases in 40 or more countries. The US could be expected to bring actions at the WTO, perhaps starting right at our own doorstep, as Mexico is one of the more flagrant offenders.
There is an ongoing debate that China may have started to actually take moves to strengthen its currency, as for example in installing barriers to foreign remittances. The argument would thus be that, while China had manipulated its currency to the detriment of the US, now it is taking actions that will serve to re-balance the trade deficit. However that analysis proceeds, it is important to note that currency manipulation has not been named as an unfair trade practice in any GATT trade agreement, nor had it been included in the TPP as a proscribed activity. Indeed, the refusal of the Obama Administration to include currency manipulation within the TPP, even though it would not have affected China which was not involved in the TPP, marks a major point of contrast between the two trade policies. This Obama silence on currency manipulation is curious, given that Title VII of the Trade Act of 2015 specifically targeted currency manipulation and, among other requirements, mandated Treasury Department reports to Congress on the macroeconomic and exchange rate policies of all US trade partners.
While currency manipulation may not deny any US rights granted by trade agreements, because the agreements are silent, it is a certainty that Section 301 is nonetheless broad enough to reach currency manipulation as an activity that is “unjustifiable and burdens or restricts United States commerce” to cite to the statutory text.
There should be a closing of agency ranks, with overall responsibility assigned to a specific agency (USTR?). There should be an affirmative pooling of information between and among various US assets, including but not limited to State, the Foreign Commercial Service, customs attachés, USAID (recall the earlier reference to technical assistance missions), the International Trade Commission (for its research capabilities) and, yes, the intelligence community. The 2015 offer by CBP to provide assistance to US persons being hurt by foreign government practices on customs valuation is one small step in this direction.22
On balance, we can be proud of an especially strong government/private sector partnership and this should be built upon. There should be even closer coordination and collaboration with the private sector in these efforts, where such actors as the US Council on International Business (USCIB) and affected trade associations could provide valuable information and support. In this connection, we could say that the Commercial Customs Operations Advisory Committee (COAC), despite its best efforts on inbound issues, is unsuitable as a single source of information, precisely because it is focused on import activity only and also because it only counsels Treasury, DHS and CBP and has no contact with USTR and other agencies potentially involved.
Certainly those arguments will pick up momentum when confronting unfair trade practices. As for efforts to counter unfair activities aimed at capturing US market share, it would be well if trade remedies will be sought to counter not only dumping and unfair subsidies, which are old standbys and were focal points for the 1970s-1980s trade policy, but also various other unfair trade practices. These include IPR-violating imports. Section 337 has been deployed as the primary weapon to parry unfair competition in intellectual property, especially patent violations but increasingly on trademark infringement and other import practices.25 And it is important to note that IPR protections have been a Priority Trade Issue for US Customs and Border Protection (CBP) for several years. And CBP takes this responsibility very seriously, indeed.
One scourge of legitimate business has been the explosion of counterfeit merchandise. If detected at the border, counterfeit goods will be seized and are subject to forfeiture and CBP also has the discretion to levy a civil penalty as well.26 The prime offender is China, and even though there are some few signs of cooperation in dealing with the problem, it remains a major problem. In fact, some US companies are reluctant to begin manufacture in China or have decided to pull back because of their exposure to counterfeiting and other IPR violations. We should see a marked increase in companies recording their trademarks and trade names with CBP.
While there is no doubt that unfair trade activities will be the subject of continued attention, we may also see greater reliance upon “safeguard” actions.27 These were formerly referred to as “escape clause” actions, because the WTO Member invoking the remedy was able to escape its GATT obligations because an industry in the Member was suffering from market disruption caused by a surge in imports.28 Thus, along with antidumping and countervailing duty laws, this “positive adjustment” statute is specifically provided for by a GATT agreement.
Among the safeguard remedies accessible to a petitioning domestic industry is an increase in duties, the levy of quantitative restrictions (quotas) or a combination of the two. Additionally, there are “trade adjustment assistance” (TAA) measures that are available for displaced workers, affected companies and communities and as separate regime for farmers. The measures include re-training, extended unemployment coverage and relocation assistance, among others.29 There is a growing recognition that the TAA program needs to be dramatically improved.
I would add that one point that should be considered at the juncture of US trade and educational policies is that perhaps there should be some re-thinking of the widely held notion that “all students should get a college degree.” To the extent that there is already a real shortage of well-trained, highly skilled workers who can master the precise, finely calibrated tolerances required for such manufacturers as Boeing, Pratt and Whitney and Caterpillar, we might begin to emulate Swiss and German policies. There, only 30% of secondary school graduates advance to university. Many of the others proceed to good vocational education, training and apprenticeships. Eventually they land well-paying jobs. Which is the better course—a US college degree leading to an office job at $35,000 or $40,000 in salary or a vocational school course leading to a $90,000 or more machinist position? And that doesn’t even factor in the drop out rate, leading to young people leaving school with neither a degree nor training.
Especially since there are going to be thorough scrubs of the US educational system and international trade policy, why not anticipate an increase in an already unmet need for well-trained and highly skilled workers for all of those manufacturing jobs to be created? In this connection, you should know that the Swiss government is advising the US on vocational school curricular development and that several major Swiss companies are deeply committed to apprenticeship development here.30 Consistent with that support, it will not come as a surprise to some in the US educational and manufacturing communities that the Swiss government actually awards a prize annually to the top graduates of US vocational schools.
In such a case, we should recognize the role of the program as an incentive for the purchase and use of US parts. As one simple example, most foreign automobiles use US-made windshield glass or emissions control components as they meet EPA and DOT standards. Also, in this connection it is important to note that, if providing the parts free or reduced cost to a foreign assembler is planned, there is an incentive to provide US-parts rather than foreign parts to foreign producers because the use of foreign parts would give rise to dutiable assist status on the importation of the finished products.33
This is not a good idea. The “goose-gander” rule applies here.34 The targeted goods are the products of a foreign country which has trade rights and, just as the US should vigorously pursue violations of its rights, we should expect that the foreign country will defend its rights. And make no mistake, except possibly in one narrow circumstance, a 35% tariff cannot be imposed without crossing the line and constituting a violation, as it would not be excused under any trade law norm in these circumstances. As explored at length in the last two months’ articles on Section 301, we should anticipate a foreign government response that hits imports from the US in an amount that equals the “runaway shop” volumes and specifically targets US-origin products that are especially sensitive politically. Moreover, the goods selected for retaliation may well have no connection whatever with the production-shifted goods, leading to de facto embargoes without any advance warning on those other goods.
That one narrow circumstance? Perhaps if the US succeeds in renegotiating any of the FTAs, it is conceivable that a “carve out” is agreed, whereby the products of US runaway companies would not be eligible for duty-free treatment and, instead, would be subject to 35% duties at the US border.
.......................................................................................................................................
Summary
As elaborated below, here is my summary of those predictions and suggestions for new directions and new priorities in trade policy:- Adopt as an overarching trade policy theme the slogan “Free and fair trade-plus”.
This will signal an energized effort to remedy unfair practices on imports into the US by applying the antidumping and countervailing duty laws, which has been widely acknowledged as a goal, but add (plus) a renewed commitment to (a) protect intellectual property rights (Section 337) and (b) a new commitment to redress unfair burdens on US exports (Section 301 and WTO Dispute Settlements). Taken altogether, these measures will lead to a re-balancing of our trade account. - Insist on our right of foreign market access and aggressively act to curtail customs valuation law valuations, currency manipulation and other impairments of our rights
- Ramp up our capability to gather information on foreign government unfair activities, clearly assigning overall responsibility to a single agency and build an even stronger capability for close collaboration with the private sector
- If the consistent pledge is honored, formally withdraw from TPP and TTIP
- Negotiate with Canada and Mexico and revise or terminate NAFTA, as appropriate
- Design new model for Bilateral Free Trade Agreements (FTAs) with greater protections for US and pursue FTAs with the UK, Japan and other selected partners
- Review the impact of Bilateral Investment Treaties on trade and industrial policies
- Shut any immigration law “backdoor” in trade agreements
- Re-assert US Leadership Role in trade institutions such as the World Customs Organization and the WTO, where US lassitude has permitted China to achieve leadership roles in furtherance of its own strategic initiatives
- Where and when possible, build coalitions in attacking the unfair trade practices of foreign competitors but be prepared to go solo in protecting US interests
- Insist on adherence to trade law norms in context of development assistance, capacity building and technical assistance in recipient countries
- Marry Trade Adjustment Assistance with educational policy reform, with emphasis on vocational and technical training in lieu of misplaced emphasis on 4-year college degree programs and with a focus on replicating apprenticeship programs in partnership with private sector on the Swiss and German model
- Coordinate foreign trade zone policies for consistency with overall trade policy
- Review the impact of programs that encourage “offshoring” such as the Assembly Abroad program
- Caveat: avoid actions that are not justified under international law and can trigger foreign government retaliations that stifle US exports
What is being discarded?
We could start with major reversals of immigration policy, repeal or reformation of Obamacare and with trade policy, as these were all central features of both the Trump campaign and the immediate post-election period.We plan to touch only upon probable/possible directions for international trade but we should begin with what we do know as a matter of fact. As a matter of fact, the US electorate has repudiated Obama policies fully as much as they have rejected candidate Hillary Clinton, who had pledged more of what had been served up during the two terms of the Obama presidency.
Trade policy was the one major exception to that continuity, as candidate Clinton sought to distance herself from positions on trade issues she had earlier espoused while serving under President Obama. Candidate Clinton’s trade positions owed much to rival Bernie Sanders and, in fact, they were not markedly different from those of President Trump, at least insofar as there was a move away from the TPP, although they were an anemic version of Mr. Trump’s own bold prescriptions.
In any event, elections have consequences, and it is the policy choices decided by President Trump and no one else that will be pursued for at least the next four years. Here endeth the lesson.
Restoring Manufacturing Base
Let’s first be clear about President Trump’s oft-stated goal, which is to bring back manufacturing jobs to the US. His trade policy agenda is a means to that end. The present case changed character of the US as a service provider rather than a “maker of things” is clearly shown in the international trade statistics, where we consistently run a trade surplus in services and a trade deficit in goods. For 2015, those figures were $262.5 bio and $762.5 bio, respectively.1 Plainly stated, reversing those numbers—or at least eliminating the deficit in goods trade--is the goal of the Trump Administration trade policy.A bit of perspective—the Census Bureau’s Labor Statistics show that manufacturing jobs for October, 2016 were projected to be 12.258 million.2 The last time we saw this level was in July 1941, when the US population was 132 million. We’ll get to many Obama trade policies that are being repudiated, but let’s first focus on the prizes that were pursued so stoutly, the jumbo-sized free trade agreements with our Asian and European partners.
Free Trade Agreements (FTAs)
In the trade field, one central effort by the Obama Administration has been its failed attempts to pass wide-ranging, multi-party free trade agreements (FTAs) with Asia (the Trans-Pacific Partnership, TPP) and with the soon-to-be-27 countries in one-EU (the TTIP).3 These unsuccessful efforts followed after the stalled bilateral FTAs with Korea, Panama and Colombia entered into force in the final year of the first Obama term. As noted, students of the past election cycle will recall that one major parting of the ways between Obama and Clinton policies was over FTAs—with Clinton famously retreating from her “gold standard” characterization of the TPP. Bernie Sanders also was of the view that “globalism” was answerable for many social ills.With President Trump in charge and with the Sanders/Warren progressive wing of the Democratic Party in the ascendancy, it is a dead certainty that no new wide-ranging FTAs will be negotiated. But we could see some bilateral FTAs, perhaps starting with the post-Brexit UK and with Japan. As a brief aside, in my experience, Japan’s position is very often aligned with that of the US at the WCO and, in fact, it would be a natural ally of the US. In fact, in the brief two-minute plus webcast of his First 100 Days’ projects, President Trump announced that we would drop out of the TPP discussions and that he would vigorously pursue bilateral FTAs.
Published trade statistics show the trade imbalances being run with many of our various FTA partners. For example, for 2016 (year to date), the following trade deficits apply:
Mexico—$46.8 bio
Canada--$5.8 bio
Colombia--$642 mio
Korea--$22.8 bio4
In consequence, any bilateral FTAs should prove to be markedly different from the model that has been developed, as there should be carve-outs and built-in protections for sectors that would otherwise be sorely impacted. One such device that could be employed could be more restrictive eligibility rules. This would help ensure that exporters in FTA partner countries will not be able to make use of simple “screwdriver factories” to gain duty-free access to the US market because of low threshold eligibility rules. We might see a move to preclude the inclusion of US-origin parts or components in Mexican or Canadian products’ NAFTA-eligibility—that would keep those US parts and components at home for manufacture of the finished goods.
One feature of the FTAs that should not need much revision is the inclusion of labor and environmental protections, which have been baked into the FTA cakes for some time. Still, we would be remiss if we did not acknowledge the part that such “soft” standards can play in either imposing or in removing cost burdens on foreign competitors.
Whenever we consider FTAs it is well for us to focus on their broad nature. They go well beyond free trade in goods and embrace trade in services and establish direct investor protections as well.5 The creation of rights under those latter two areas of FTAs might be subject to closer scrutiny.
Trade/Immigration Nexus
While a slight digression, the reference to services brings up a notable point of intersection between the trade and immigration laws. The effect of NAFTA is that a citizen of a party to the agreement has a special status in the immigration laws. In the case of NAFTA, a special nonimmigrant visa status (“TN”) has been set up for Mexican and Canadian citizens as NAFTA professionals, to work in the United States in prearranged business activities for U.S. or foreign employers.In the case of the General Agreement on Trade in Services (GATS), some have argued that there is a spillover impact on US immigration law. With the GATS, at Art. I, para. 2 (d), a service supplier of one Member may supply services through the presence of natural persons in the territory of any other Member. Let us see what that grant of right means.
What if India is a signatory of the GATS (it is), and the US is a signatory to the same agreement (and it is), and an Indian citizen working for a services company in India wants to get speedier access to the US market via a non-immigrant visa, but that visa process is expensive or there are quotas in place? Could India complain and initiate an action before the Dispute Settlement Body of the WTO in Geneva, complaining that its, and by extension its citizens,’GATS rights have been abridged? The argument would be that a trade agreement, the GATS, trumps the US immigration laws. And that is exactly what has happened, with such a case having been filed at the WTO by India in 2016.6 7 Three guesses as to a Trump Administration reaction to and proposed disposition of this case.
Restoring US jobs, and especially manufacturing jobs, is a primary goal of the new Trump Administration, just as it was a top-of-mind campaign issue. A bit of perspective—the Labor Statistics show that manufacturing jobs for October, 2016 were projected to be 12.258 million.8 The last time we saw this level was in July 1941, when the US population was 132 million.
Because the FTA that got the most attention from candidate Trump was NAFTA, which was called a “US job killer,” it makes sense to focus a bit on NAFTA.
NAFTA
President Trump has made no secret of his intention to renegotiate or terminate NAFTA. First, let’s ask the question, “Can he do that?” The short answer is that, yes, he can. Article 2202 of NAFTA provides for amendments: “The Parties may agree on any modification of or addition to this Agreement.” As for an exit from NAFTA, Article 2205 of NAFTA specifically provides, “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.”9 The effect of any such withdrawal is that NAFTA would remain in force for the remaining parties, i.e., the NAFTA would be transformed into a bilateral Canada/Mexico FTA.While it is certainly true that NAFTA itself creates the right to amend or terminate the agreement, it is also true that neither Canada nor Mexico would remain idle but would instead seek to defend their interests.10 While there are some indications that Mexico is not prepared for discussions about changing NAFTA, Mexico’s first move in its own self-defense might be to sit down with the US. One reason for that meeting is that the details for what changes to the NAFTA the US will press for have been missing.
And this prompts us to pose our second question, “Exactly what NAFTA changes will the US want?”
A closer look at Mr. Trump’s remarks about NAFTA reveals that his concerns are primarily about Mexico. There has been much less said about NAFTA’s impact on the US due to the impact of bilateral trade with Canada. That is ironic, since there have been more complaints brought by US companies under NAFTA against Canada than against Mexico. The overt focus on Mexico may be due to complaints against immigration from Mexico acting as a “thumb on the scale” as well as the post-NAFTA expansion of assembly and light manufacturing operations in Mexico which is the source of the runaway trade deficit with Mexico, which was noted above.
With 75% of Canadian exports going to the US, there are already signals that Canada would be perfectly prepared to sit down and re-negotiate NAFTA or to enter into a successor bilateral FTA with the US to protect itself. This would be a reprise of the Canada-United States Free Trade Agreement which entered into force in 1988 but was effectively superseded by NAFTA in 1994. Canada would then be free to enter into a separate bilateral FTA with Mexico.
For its part, Mexico has signaled its opposition to any amendment of NAFTA. Mexico could refuse to entertain a separate bilateral agreement with the US and thereby lose duty-free access to the US market. The likely result would be that duties would be re-imposed on Mexican imports at the “column 1” duty rates. Those are the rates that apply to countries enjoying Normal Trade Relations (NTR) status, which old-timers and students will recognize as Most Favored Nation (MFN) status. A return to a “half loaf” Maquiladora assembly program may provide some relief but, as discussed below, it is possible that that option could be under review.
These column 1 rates are both the “bound rates” which the US has agreed to through its WTO commitments and the effectively applied rates. They serve as the upper limits that the US can impose without running afoul of those WTO commitments. Any reaching of duty rates that breaches those limits would expose the US to retaliation.
While there have been no indications of what specific NAFTA measures may be addressed, I would surmise that there may be a push for the primacy of US regulations on labeling and environmental issues, so long as there was no evidence of any discrimination, i.e., “national treatment” was being afforded. Alternatively, I would expect that Art. 2005, dealing with GATT dispute settlement, could be on the list. That NAFTA provision allows discretion to a complaining party to bring the issue forward for resolution under the NAFTA dispute settlement program or the GATT, if the complained of action could be actionable in either forum.
We actually have precedents on the intersection of these two routes for dispute resolution under NAFTA: the US food labeling laws were the subject of attack at the WTO by Mexico (dolphin-safe tuna labels)11 and Canada (beef and pork country of origin labels), with the US losing in both cases. This is an area where the US popular support for environmental and wildlife protection measures is aligned with the interests of US companies who are required to meet the burdens imposed by those US measures. If foreign business interests are permitted to escape those burdens, progressives and conservation and consumer advocacy groups could close ranks with US producers and could support a Trump administration initiative to close out access to the WTO on any of these disputes. After all, it could be argued, the NAFTA, and presumably all other FTAs, creates an exceptional relationship between the parties such that any disputes should be and must be resolved under the auspices of the FTA in the same exceptional sense, i.e., outside Geneva and only under the aegis of the FTA.
The major complicating factor in regard to NAFTA revisions is the auto industry, with components and raw materials in a constant shuffle through all three NAFTA members. It is important to note that the automotive industry was the subject of the first free trade agreement with Canada, the Canada-United States Automotive Products Agreement, all the way back in 1965. It is probable that there will be a special and close focus on this industry, as well as on agriculture, in any unwinding of NAFTA and in any replacement bilateral FTAs. Even a superficial reading of the present NAFTA regulations on the motor vehicle sector and of the prolonged schedule that delayed the point of full duty-free treatment of agricultural products reveals their special place.
Two final points of conjecture about NAFTA. First, as discussed below, perhaps currency manipulation will be addressed. We might see a condition placed on investor protections such that there are employment guarantees or export performance requirements, just as there might be some changes to the same effect in the Bilateral Investment Treaties (BITS).
Let’s leave NAFTA and look to the broader issues surrounding international trade.
“Back to the Future” Plus
The notion of time travel was central to the 1985 blockbuster motion picture of that name. Buckle up in your DeLorean--we are going to experience the 1980s all over again. The Obama trade policy has been marked by some aggressive actions in defending US interests, chief among them the Trade Facilitation and Trade Enforcement Act of 2015 (Trade Act of 2015),12 which showed Congressional resolve to defend US trade rights.13 With President Trump there is a turn to a comprehensive “free and fair trade” policy has been announced. This is nothing less than a vigorous reprise of the “free but fair trade” rallying cry from the late 1970s and into the 1980s.We can predict that there will be a second closing of ranks by US business and labor. One good example of a joining of forces in the 1970s and 1980s was COMPACT, the Committee to Preserve American Color Television.14 The target then was Japan, and clearly it is China today.
The Japanese response to defend itself against aggressive trade initiatives was to agree to yield to voluntary restraint agreements and also set up “transplant” production factories here in the US. That was especially true in the auto and consumer electronic products sectors, with a number of Japanese auto companies also entering into joint ventures with US companies as another strategic move.15
In looking to return the US heartland to prosperity, and in particular in looking at more manufacturing jobs as a key engine for that success, we should expect that the US should not shrink from the world stage but should get and stay more directly involved in ensuring greater access to foreign markets. This focus would result in the “Plus” characterization, as the 1970s and 1980s “free but fair trade” campaign was singularly focused on defending the US market and was not to any extent focused on ensuring market access for US exports, at least not insofar as there was any US focus on unfair trade in export markets. The agreements on subsidies and on antidumping that were adopted in 1979 were, from the US perspective, focused upon imports into the US. Only if we take the broadest possible view do we see, if we look back, any focus on preventing and no focus on redressing unfair trade in exports.
Unfair trade actions meted out against US products in export markets would be lessened if we had internationally agreed rules for tariff classification and a common system of customs valuation. In fact, we can see these “rules of the road” embedded in the Harmonized Tariff System, which took effect in the US in 1989, and in the Customs Valuation Agreement16 which dates to 1979. We can also cite the Agreement on Trade in Civil Aircraft (1979) as a US effort at trade expansion through exports but it, too, cannot be seen as a principal weapon in enforcing adherence to agreed norms.
What we should see now is a much greater commitment to free and fair trade for US exports than was the case under President Obama, with a level of commitment to match the focus on imports coming into the US market. After all, the world is a vastly different place today than it was in the 1970s and 1980s. The notions of the world as “a global factory” and as “a global marketplace” and the concept of “global value chains” is 1980s-era trade on steroids. Then, too, today’s emphasis on transfer pricing speaks to the proliferation of cross-border trade and investment by related parties over the past 30-40 years.
Because many of those manufacturing jobs that are being sought could be and probably will be dedicated to producing goods for export, trade policy must be marked by attentiveness to growing and protecting those export markets. As an aside, the last time there was serious discussion of a national Value Added Tax (VAT) was in the 1980s. Some will recall that Rep. Al Ullman (D, OR) was a proponent at that time. In the interim, major trading partners such as Australia and Canada have instituted their own border tax regimes, so that the US is the last major holdout without a VAT or consumption tax applied at the border. Perhaps there will be thoughts about a VAT or a consumption tax when income tax reforms are under consideration. And if we focus upon a border tax, then we should be mindful of the harmful impact of border tax manipulations on imports as reflected in the WTO case on Phillip Morris cigarette imports into Thailand.17 That is one more transgression that could hinder US exports that must be guarded against.
US as Trade Leader
Much ink has been spilled on the perils of the “lead from behind” policy on national security. When there were regime changes, such as in Libya, and the US in a bid to show “smart power” remained absent, bad things happened. While on his farewell foreign tour, even President Obama has tacitly admitted as much.If the US pulls back from its role as leader of the free world, a power vacuum is created and others, some of them bad actors and all of them with their own agendas, can, and undoubtedly will, step into the breach. A movement away from the TPP should not signal that the US leaves the field of play. There are already strong signals that China, which had not been a party to the TPP, is offering up its own trade bloc. The Chinese presence in South America and in Africa is crescendo and has implications that extend far beyond international trade.
Any international trade policy that is applied by the Trump Administration should proceed from the basic premise that the US must regain its proper leadership role. The US has simply missed the boat and must reassert itself by assuming more active roles in various bodies such as the World Customs Organization and others. Beyond that point, the message that the international trade law rules should be obeyed is one that should be delivered early and often, in various fora.
Foreign Aid
It makes sense that AID and other US-funded development projects should emphasize the primacy of the rule of law. In every instance where there is such a project in a country and there is evidence of a failure to abide by those rules the US should make it clear that there is an expectation that the rules should be honored. To paraphrase Customs and Border Protection, a country that complies with its trade law obligations is a country that will be a good partner.Making Use of Technical Assistance and Capacity Building
There is a continuing swirl of missions sponsored by the WCO, the WTO, the IMF and other international agencies as well as by the US and other countries. The US should step up this activity and, as above, convey its interpretations of and its respect for the trade law agreements. There is strong evidence of these country-led missions being used to advance the policies of the donor countries, many of which are counter to US interests. And to be perfectly clear, the US interest is simply in ensuring administrative practices that are faithful to the GATT agreements.Pursuing GATT Remedies
The Trump administration can be expected to take the initiative at Geneva in more direct fashion than has been the case under the Obama presidency. We can expect that the US mission to the WTO will become very busy.One of the most important points to make here is that the US can actually defend itself against a range of trade law violations by invoking the rights it has under the GATT trade agreements. To be direct, now is the time for the Trump Administration to take the offensive in insisting that the various trade rules agreed upon at various times from the 1970s to the present are honored. The various GATT agreements themselves provide the opportunity for the US to defend itself. After all, the domestic statutes on antidumping and countervailing duty law are both provided for in GATT Agreements.18 To be clear, we are talking about the US aggressively pursuing cases where its rights and, by extension, those of its many constituencies, have been violated.
And also to be clear, we are talking not only about the impact of imports into the US, which was a policy that was right for the 1970s and 1980s, but also about actions which restrict market access for US exports, which broadened policy is right for today.
The primary statutory route for US companies whose export efforts have been aggrieved by foreign governments’ restrictive practices is Section 301 of the Trade Act of 1974. This statutory remedy was covered extensively in a two-part discussion in this space in December 2016-January 2017.19 As was discussed there, the US company or workers whose interests have been burdened proceeds by filing a petition with the Office of the US Trade Representative (USTR). The USTR, in turn, on behalf of that petitioner, opens discussions with the foreign government concerned. If those talks fail, a formal WTO case is filed at the Dispute Settlement Body of the WTO.
One example of a WTO initiative taken by USTR against foreign government actions that injure US interests is the case brought against China for violations of Intellectual Property Rights (IPR), which were violations of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).20
Let’s briefly mention two other cases with export market implications which may end up at the WTO via Section 301 filings.
Customs Valuation
This is a topic I know well. As many will already know, the three elements which govern the amount of duty levied on an imported article are its tariff classification (what is it?), its value (how much is it worth?) and its origin (where is it from?). Given the fact that most duties are levied on an ad valorem basis and that Value Added Tax (VAT) and other indirect border taxes are assessed on an ad valorem basis, customs valuation is a major factor in revenue collection.One of the biggest threats to the harmony of global trade is the breakdown of the rule of law as the agreed rules have ceased to exert any normative effect on their own. Instead, more and more countries have adopted a bold “so, sue me” attitude.
Nowhere is this more evident than the degree to which we have seen an explosion of countries’ resort to “reference pricing” in derogation of the Valuation Agreement.21 In fact, this is a retrogression to the defunct Brussels Definition of Value (BDV), whose reliance on “notional values” was discarded officially with the passage of the Valuation Agreement in 1979. The BDV is zombie-like in its staying power, however, and it has re-emerged under the guise of “valuation databases.” Ostensibly to be used only for risk management purposes, in almost every instance they have been used to provide substitute or minimum values, which are strictly prohibited by the Valuation Agreement.
There have been some cases brought to the WTO, all of which have resulted in either the reference pricing programs being struck down or being voluntarily removed in settlement. Nevertheless, anecdotal evidence shows use of the databases in 40 or more countries. The US could be expected to bring actions at the WTO, perhaps starting right at our own doorstep, as Mexico is one of the more flagrant offenders.
Currency ManipulationM
One of the biggest flashpoints in trade relations has been the charge that China, and to a lesser extent others as well, have kept their currencies at exchange levels that are artificially low vis-à-vis the US dollar. The method is for the foreign country to buy up US dollars, which is said to artificially prop up the dollar. This is “artificial” because, absent that activity in the currency market, the normal consequence of an exporting country success, i.e., one whose export volumes have swollen, is for its currency to weaken. The effect of the manipulation is to make US exports to China more expensive and imports from China less expensive. Obviously, that tends to keep the trade deficit in goods with China at alarming levels--$257.6 bio for 2016 (through September).There is an ongoing debate that China may have started to actually take moves to strengthen its currency, as for example in installing barriers to foreign remittances. The argument would thus be that, while China had manipulated its currency to the detriment of the US, now it is taking actions that will serve to re-balance the trade deficit. However that analysis proceeds, it is important to note that currency manipulation has not been named as an unfair trade practice in any GATT trade agreement, nor had it been included in the TPP as a proscribed activity. Indeed, the refusal of the Obama Administration to include currency manipulation within the TPP, even though it would not have affected China which was not involved in the TPP, marks a major point of contrast between the two trade policies. This Obama silence on currency manipulation is curious, given that Title VII of the Trade Act of 2015 specifically targeted currency manipulation and, among other requirements, mandated Treasury Department reports to Congress on the macroeconomic and exchange rate policies of all US trade partners.
While currency manipulation may not deny any US rights granted by trade agreements, because the agreements are silent, it is a certainty that Section 301 is nonetheless broad enough to reach currency manipulation as an activity that is “unjustifiable and burdens or restricts United States commerce” to cite to the statutory text.
Heightened Emphasis on Intelligence
In meeting these challenges, foreign government unfair activities must first be identified and quantified. I would urge a much more coordinated approach at gathering information and evidence on these trade challenges.There should be a closing of agency ranks, with overall responsibility assigned to a specific agency (USTR?). There should be an affirmative pooling of information between and among various US assets, including but not limited to State, the Foreign Commercial Service, customs attachés, USAID (recall the earlier reference to technical assistance missions), the International Trade Commission (for its research capabilities) and, yes, the intelligence community. The 2015 offer by CBP to provide assistance to US persons being hurt by foreign government practices on customs valuation is one small step in this direction.22
On balance, we can be proud of an especially strong government/private sector partnership and this should be built upon. There should be even closer coordination and collaboration with the private sector in these efforts, where such actors as the US Council on International Business (USCIB) and affected trade associations could provide valuable information and support. In this connection, we could say that the Commercial Customs Operations Advisory Committee (COAC), despite its best efforts on inbound issues, is unsuitable as a single source of information, precisely because it is focused on import activity only and also because it only counsels Treasury, DHS and CBP and has no contact with USTR and other agencies potentially involved.
Leveling the Playing Field on Imports
As was the case in the 1970s and 1980s, there is a decided national security dimension to the country’s current trade posture and the impact of imports. In fact, Congress has explicitly connected the economic welfare of the US and its national security. We may start to see more trade initiatives proceeding from the starting premise of “an economically strengthened nation is a more secure nation.” In the same fashion, Congress has authorized the President to impose import surcharges of up to 15% ad valorem and/or quotas for balance-of-payments (BOP) crises, although there is a 150-day limitation on such actions, unless Congress extends that period.24Certainly those arguments will pick up momentum when confronting unfair trade practices. As for efforts to counter unfair activities aimed at capturing US market share, it would be well if trade remedies will be sought to counter not only dumping and unfair subsidies, which are old standbys and were focal points for the 1970s-1980s trade policy, but also various other unfair trade practices. These include IPR-violating imports. Section 337 has been deployed as the primary weapon to parry unfair competition in intellectual property, especially patent violations but increasingly on trademark infringement and other import practices.25 And it is important to note that IPR protections have been a Priority Trade Issue for US Customs and Border Protection (CBP) for several years. And CBP takes this responsibility very seriously, indeed.
One scourge of legitimate business has been the explosion of counterfeit merchandise. If detected at the border, counterfeit goods will be seized and are subject to forfeiture and CBP also has the discretion to levy a civil penalty as well.26 The prime offender is China, and even though there are some few signs of cooperation in dealing with the problem, it remains a major problem. In fact, some US companies are reluctant to begin manufacture in China or have decided to pull back because of their exposure to counterfeiting and other IPR violations. We should see a marked increase in companies recording their trademarks and trade names with CBP.
While there is no doubt that unfair trade activities will be the subject of continued attention, we may also see greater reliance upon “safeguard” actions.27 These were formerly referred to as “escape clause” actions, because the WTO Member invoking the remedy was able to escape its GATT obligations because an industry in the Member was suffering from market disruption caused by a surge in imports.28 Thus, along with antidumping and countervailing duty laws, this “positive adjustment” statute is specifically provided for by a GATT agreement.
Among the safeguard remedies accessible to a petitioning domestic industry is an increase in duties, the levy of quantitative restrictions (quotas) or a combination of the two. Additionally, there are “trade adjustment assistance” (TAA) measures that are available for displaced workers, affected companies and communities and as separate regime for farmers. The measures include re-training, extended unemployment coverage and relocation assistance, among others.29 There is a growing recognition that the TAA program needs to be dramatically improved.
I would add that one point that should be considered at the juncture of US trade and educational policies is that perhaps there should be some re-thinking of the widely held notion that “all students should get a college degree.” To the extent that there is already a real shortage of well-trained, highly skilled workers who can master the precise, finely calibrated tolerances required for such manufacturers as Boeing, Pratt and Whitney and Caterpillar, we might begin to emulate Swiss and German policies. There, only 30% of secondary school graduates advance to university. Many of the others proceed to good vocational education, training and apprenticeships. Eventually they land well-paying jobs. Which is the better course—a US college degree leading to an office job at $35,000 or $40,000 in salary or a vocational school course leading to a $90,000 or more machinist position? And that doesn’t even factor in the drop out rate, leading to young people leaving school with neither a degree nor training.
Especially since there are going to be thorough scrubs of the US educational system and international trade policy, why not anticipate an increase in an already unmet need for well-trained and highly skilled workers for all of those manufacturing jobs to be created? In this connection, you should know that the Swiss government is advising the US on vocational school curricular development and that several major Swiss companies are deeply committed to apprenticeship development here.30 Consistent with that support, it will not come as a surprise to some in the US educational and manufacturing communities that the Swiss government actually awards a prize annually to the top graduates of US vocational schools.
Foreign Trade Zones
At the present time there is close scrutiny of applications by the Foreign-Trade Zones Board to ensure that foreign trade zones (FTZs) will not be used to facilitate any circumvention of trade remedy relief. We expect that this approach will be continued in the Trump Administration.Buy American
For many government projects with Buy American requirements, the US must extend equal status to goods of those foreign countries which are fellow signatories of the WTO Agreement on Government Procurement or FTA partners.31 The Trump Administration might withdraw from the Agreement, per Art. XXIV.10, so as to limit Buy American participation in government projects to US companies. Of course, such a withdrawal would come at the cost of US companies being precluded from bidding on foreign contracts. It would also mean that the FTA preferences would remain in place.US Goods Returned
One final observation. Ever since 1956 there has been an “assembly abroad” provision which allows a partial duty exemption for imported goods which contain US fabricated components assembled abroad. The value of the US components is deducted from the value of the complete article, and this leads to the customs duty being assessed on the foreign value only. The current iteration is at item no., 9802.00.80, HTSUS.32 This provision is a “half loaf” solution, not the full duty relief of an FTA, but it delivers a sizable benefit to US importers. In fact, this assembly abroad program was the principal driver for the Mexican maquila industry in the pre-NAFTA era. It has long been criticized as an incentive to “offshoring” and it would not be a surprise if it, too, is placed under close scrutiny.In such a case, we should recognize the role of the program as an incentive for the purchase and use of US parts. As one simple example, most foreign automobiles use US-made windshield glass or emissions control components as they meet EPA and DOT standards. Also, in this connection it is important to note that, if providing the parts free or reduced cost to a foreign assembler is planned, there is an incentive to provide US-parts rather than foreign parts to foreign producers because the use of foreign parts would give rise to dutiable assist status on the importation of the finished products.33
To be avoided: taking unjustified actions
What should be avoided is the temptation to take any action that might be an “own goal” in the sense that a foreign government has the right, under the trade laws, to respond in ways that hurt US exports. An example could be any tariff increase that targets the incoming goods of a US company that has shifted production to a foreign country. A 35% punitive duty has been floated.This is not a good idea. The “goose-gander” rule applies here.34 The targeted goods are the products of a foreign country which has trade rights and, just as the US should vigorously pursue violations of its rights, we should expect that the foreign country will defend its rights. And make no mistake, except possibly in one narrow circumstance, a 35% tariff cannot be imposed without crossing the line and constituting a violation, as it would not be excused under any trade law norm in these circumstances. As explored at length in the last two months’ articles on Section 301, we should anticipate a foreign government response that hits imports from the US in an amount that equals the “runaway shop” volumes and specifically targets US-origin products that are especially sensitive politically. Moreover, the goods selected for retaliation may well have no connection whatever with the production-shifted goods, leading to de facto embargoes without any advance warning on those other goods.
That one narrow circumstance? Perhaps if the US succeeds in renegotiating any of the FTAs, it is conceivable that a “carve out” is agreed, whereby the products of US runaway companies would not be eligible for duty-free treatment and, instead, would be subject to 35% duties at the US border.
Conclusion
The Trump Administration will be vigorously pursuing these new trade policy directions. What should be abundantly clear is that it is not all about dumping and countervailing duties. It is so much more. It is about protecting US interests in export markets and it is about marrying educational policy with trade policy in crafting solutions that will support a resurgent manufacturing base. While these efforts may generate some push back or retaliation from those whose activities are being curtailed, we should not stay our hand where we are protecting our rights. At the same time, we should be careful to avoid acting in ways that expose US interests to retaliations that would be fully justified under the GATT regime........................................................................................................................................
1. Available at http://www.bea.gov/newsreleases/international/trade/2016/pdf/trad0916.pdf
2. Available at http://data.bls.gov/pdq/SurveyOutputServlet
3. Neville, “Proposed Transatlantic Trade and Investment Partnership: An FTA with the EU,” 24 JOIT 22 (Sept. 2013).
4. Available at p. 16 of http://www.bea.gov/newsreleases/international/trade/2016/pdf/trad0916.pdf
5. Neville, “NAFTA Investor Arbitrations,” 24 JOIT 23 (March 2014).
6. United States — Measures Concerning Non-Immigrant Visas, WT/DS503 (challenges on (a)increased fees on certain applicants for L-1 and H-1B categories of non-immigrant visas, and (b) relating to a numerical commitment for H-1B visas). El Salvador has filed a reservation of rights as well.
7. Immigration issues have also been flagged as an impediment to UK/India free trade. See, e.g., the Nov. 7, 2016 discussion in http://www.nytimes.com/2016/11/08/world/europe/uk-britain-india-theresa-may-narendra-modi.html
8. Available at http://data.bls.gov/pdq/SurveyOutputServlet
9. The other FTAs contain similar provisions. For example, the FTA with Korea provides for amendments at Art. 24.2 and for termination at Art. 24.5.
10. Mexico retaliated against US intransigence in allowing Mexican truckers access to US highways. See Neville, “Trade Policy’s Two-Way Street: A Political Wake-Up Call,” 21 JOIT 21 (Jan. 2011).
11. Neville, “WTO Issues Seriously Flawed Panel Report on “Dolphin-Safe” Tuna,” 22 JOIT 19 (Feb. 2012).
12. Neville, “Trade Facilitation and Trade Enforcement Act of 2015,” 27 JOIT 22 (May 2016).
13. There was close attention on preventing the evasion of antidumping and countervailing duties and on protecting intellectual property rights.
14. COMPACT members were: Industrial Union Department, AFL-CIO; the Allied Industrial Workers of America, International Union; the American Flint Glass Workers Union of North America; the Communications Workers of America; the Glass Bottle Blowers' Association of the U.S. and Canada; the Independent Radionic Workers of America, the International Association of Machinists; the International Brotherhood of Electrical Workers; the International Union of Electrical, Radio and Machine Workers; the United Furniture Workers of America; the United Steelworkers of America; Corning Glass Works; Owens-Illinois, Inc.; Sprague Electric Company; and Wells-Gardner Electronics Corporation.
15. To the extent that we see an uptick in foreign investment, we would expect that there will be a heightened scrutiny undertaken by the Committee on Foreign Investment in the United States (CFIUS). Strictly speaking, this is not a matter of international trade but it is closely related to warrant a mention.
16. Its current formal title is the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.
17. Neville, “The Next Frontier: Border Taxes in Emerging Markets,” 22 JOIT 17 (Sept. 2011) (case brought by Philippines on behalf of Filipino affiliate of Phillip Morris).
18. One domestic trade law statute that is still in the books but is of doubtful status under the GATT is the “flexible tariff” provision of 19 USC § 1336, which allows for a 50% increase of current duties in order to equalize costs of production between foreign and US-produced goods. An earlier version of the statute dates back to the Tariff Act of 1922.
19. Neville, “Section 301, or, How do I Get a Foreign Government to Open its Borders?” 27 JOIT _ (Dec. 2016) and 28 JOIT__( Jan. 2017).
20. China — Measures Affecting the Protection and Enforcement of Intellectual Property Rights, WT/DS362 (Panel Report 2009); available at https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds362_e.htm
21. Neville, “Reference Pricing: A Disturbing Trend in Customs Valuation,” 25 JOIT 21 (Dec. 2014).
22. General Notice of Opportunity and Procedures To Request Assistance on Tariff Classification and Customs Valuation Treatment by Other Customs Administrations Affecting United States Exports, 80 Fed. Reg. 34924 (June 18, 2015).
23. 19 USC § 1862 (d). This statute, Section 232 of the Trade Expansion Act of 1962, allows the President to forestall a reduction or elimination of duty if that would threaten to impair national security. It would be advisable to scrutinize this provision and, if necessary, to expand its reach so as to increase duties or to impose quantitative restrictions if there are national security implications. Such a carefully drafted statute would presumably be permissible under or consistent with Article XXI of the GATT 1994. Further, the International Economic Emergency Powers Act, codified at 50 USC §§ 1701-1707, grants wide-ranging authority to the President up to and including a prohibition of imports from or exports to named countries.
24. 19 USC § 2132. Article XII of the GATT 1994 exceptionally allows quantitative restrictions in order to deal with BOP crises. Likewise, Art. XII of the GATS allows restrictions on imports. Parenthetically, Art. XVIII B. of the GATT 1994 countenances a regime of import restrictions to counter the BOP difficulties of developing countries.
25. Codified at 19 USC § 1337; See Neville (ed.), International Trade Laws of the United States: Statutes and Strategies (International Trade Laws), chapter 13 (full discussion of the emerging trends in Section 337 jurisdiction).
26. 19 USC § 1526. See Neville, “Counterfeit Goods: Seizure at the Border,” 19 JOIT 20 (Aug. 2009) (discussion of administrative practice under Section 1526).
27. 19 USC § 2251; Neville, “Safeguards, A Lifeline or an Anchor?” 27 JOIT 23 (Jul. 2016).
28. Title XIX of the General Agreement on Tariffs and Trade 1994.
29. Neville, “Trade adjustment assistance: trade law for the unemployed and others,” 20 JOIT 14 (Jul. 2009).
30. July 9, 2015 Dep’t of Commerce Press release, “Swiss Companies Bring Long Tradition of Apprenticeships to the U.S. – Creating Jobs, Building Skills, Sharing Prosperity,” available at https://www.commerce.gov/news/fact-sheets/2015/07/swiss-companies-bring-long-tradition-apprenticeships-us-creating-jobs
31. See Neville, “Government Procurement: Another Customs Touchpoint,” 20 JOIT 13 (July 2009).
32. Neville, “Importers are free to hire latter-day Michelangelos,” 23 JOIT 25 (Aug. 2013).
33. Codified at 19 USC § 1401a (b) (1) (C); see International Trade Laws at ¶5.20 [2].
34. “What is sauce for the goose is sauce for the gander,” as in, “what’s good for one is good for the other.”
2. Available at http://data.bls.gov/pdq/SurveyOutputServlet
3. Neville, “Proposed Transatlantic Trade and Investment Partnership: An FTA with the EU,” 24 JOIT 22 (Sept. 2013).
4. Available at p. 16 of http://www.bea.gov/newsreleases/international/trade/2016/pdf/trad0916.pdf
5. Neville, “NAFTA Investor Arbitrations,” 24 JOIT 23 (March 2014).
6. United States — Measures Concerning Non-Immigrant Visas, WT/DS503 (challenges on (a)increased fees on certain applicants for L-1 and H-1B categories of non-immigrant visas, and (b) relating to a numerical commitment for H-1B visas). El Salvador has filed a reservation of rights as well.
7. Immigration issues have also been flagged as an impediment to UK/India free trade. See, e.g., the Nov. 7, 2016 discussion in http://www.nytimes.com/2016/11/08/world/europe/uk-britain-india-theresa-may-narendra-modi.html
8. Available at http://data.bls.gov/pdq/SurveyOutputServlet
9. The other FTAs contain similar provisions. For example, the FTA with Korea provides for amendments at Art. 24.2 and for termination at Art. 24.5.
10. Mexico retaliated against US intransigence in allowing Mexican truckers access to US highways. See Neville, “Trade Policy’s Two-Way Street: A Political Wake-Up Call,” 21 JOIT 21 (Jan. 2011).
11. Neville, “WTO Issues Seriously Flawed Panel Report on “Dolphin-Safe” Tuna,” 22 JOIT 19 (Feb. 2012).
12. Neville, “Trade Facilitation and Trade Enforcement Act of 2015,” 27 JOIT 22 (May 2016).
13. There was close attention on preventing the evasion of antidumping and countervailing duties and on protecting intellectual property rights.
14. COMPACT members were: Industrial Union Department, AFL-CIO; the Allied Industrial Workers of America, International Union; the American Flint Glass Workers Union of North America; the Communications Workers of America; the Glass Bottle Blowers' Association of the U.S. and Canada; the Independent Radionic Workers of America, the International Association of Machinists; the International Brotherhood of Electrical Workers; the International Union of Electrical, Radio and Machine Workers; the United Furniture Workers of America; the United Steelworkers of America; Corning Glass Works; Owens-Illinois, Inc.; Sprague Electric Company; and Wells-Gardner Electronics Corporation.
15. To the extent that we see an uptick in foreign investment, we would expect that there will be a heightened scrutiny undertaken by the Committee on Foreign Investment in the United States (CFIUS). Strictly speaking, this is not a matter of international trade but it is closely related to warrant a mention.
16. Its current formal title is the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.
17. Neville, “The Next Frontier: Border Taxes in Emerging Markets,” 22 JOIT 17 (Sept. 2011) (case brought by Philippines on behalf of Filipino affiliate of Phillip Morris).
18. One domestic trade law statute that is still in the books but is of doubtful status under the GATT is the “flexible tariff” provision of 19 USC § 1336, which allows for a 50% increase of current duties in order to equalize costs of production between foreign and US-produced goods. An earlier version of the statute dates back to the Tariff Act of 1922.
19. Neville, “Section 301, or, How do I Get a Foreign Government to Open its Borders?” 27 JOIT _ (Dec. 2016) and 28 JOIT__( Jan. 2017).
20. China — Measures Affecting the Protection and Enforcement of Intellectual Property Rights, WT/DS362 (Panel Report 2009); available at https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds362_e.htm
21. Neville, “Reference Pricing: A Disturbing Trend in Customs Valuation,” 25 JOIT 21 (Dec. 2014).
22. General Notice of Opportunity and Procedures To Request Assistance on Tariff Classification and Customs Valuation Treatment by Other Customs Administrations Affecting United States Exports, 80 Fed. Reg. 34924 (June 18, 2015).
23. 19 USC § 1862 (d). This statute, Section 232 of the Trade Expansion Act of 1962, allows the President to forestall a reduction or elimination of duty if that would threaten to impair national security. It would be advisable to scrutinize this provision and, if necessary, to expand its reach so as to increase duties or to impose quantitative restrictions if there are national security implications. Such a carefully drafted statute would presumably be permissible under or consistent with Article XXI of the GATT 1994. Further, the International Economic Emergency Powers Act, codified at 50 USC §§ 1701-1707, grants wide-ranging authority to the President up to and including a prohibition of imports from or exports to named countries.
24. 19 USC § 2132. Article XII of the GATT 1994 exceptionally allows quantitative restrictions in order to deal with BOP crises. Likewise, Art. XII of the GATS allows restrictions on imports. Parenthetically, Art. XVIII B. of the GATT 1994 countenances a regime of import restrictions to counter the BOP difficulties of developing countries.
25. Codified at 19 USC § 1337; See Neville (ed.), International Trade Laws of the United States: Statutes and Strategies (International Trade Laws), chapter 13 (full discussion of the emerging trends in Section 337 jurisdiction).
26. 19 USC § 1526. See Neville, “Counterfeit Goods: Seizure at the Border,” 19 JOIT 20 (Aug. 2009) (discussion of administrative practice under Section 1526).
27. 19 USC § 2251; Neville, “Safeguards, A Lifeline or an Anchor?” 27 JOIT 23 (Jul. 2016).
28. Title XIX of the General Agreement on Tariffs and Trade 1994.
29. Neville, “Trade adjustment assistance: trade law for the unemployed and others,” 20 JOIT 14 (Jul. 2009).
30. July 9, 2015 Dep’t of Commerce Press release, “Swiss Companies Bring Long Tradition of Apprenticeships to the U.S. – Creating Jobs, Building Skills, Sharing Prosperity,” available at https://www.commerce.gov/news/fact-sheets/2015/07/swiss-companies-bring-long-tradition-apprenticeships-us-creating-jobs
31. See Neville, “Government Procurement: Another Customs Touchpoint,” 20 JOIT 13 (July 2009).
32. Neville, “Importers are free to hire latter-day Michelangelos,” 23 JOIT 25 (Aug. 2013).
33. Codified at 19 USC § 1401a (b) (1) (C); see International Trade Laws at ¶5.20 [2].
34. “What is sauce for the goose is sauce for the gander,” as in, “what’s good for one is good for the other.”
Mark K. Neville, Jr., LL.M. (International Legal Studies), NYU, is a long-time member of the Board of Advisors. He is Principal of International Trade Counsellors and may be reached at mkneville@itctradelaw.com. He has served as an adjunct professor at The University of California, Berkeley’s Haas School of Business and NYU’s Stern School. He is The Journal’s Customs & Trade correspondent.