August, 2018
US Trade Policy and National Security:
Backwards or Upside Down?
Mark K. Neville, Jr.
As I write these lines the two issues that are crowding the headlines are the upcoming talks with North Korea and relations between the US and its trading partners. Both signify and are the direct result of a policy of deliberate disruption by the Trump Administration. Since this space is all about trade and customs, let’s focus on the trade developments. In doing so, it is important to refer to the promises made in the 2016 Presidential Campaign.
You should recall the prominent role played then by international trade policy. There were many calls for a renegotiation of NAFTA and for a return of manufacturing jobs, a pulling out of ongoing free trade agreement negotiations with the European Union and with trading partners in the Pacific, as well as plans aimed at redressing the trade imbalance with China and the unfair trade practices of China.
What was missing was any detailed strategy on carrying out these overarching goals. When it came time at the end of November 2016, after the election, to look ahead and predict what trade actions the US might take, it was an occasion to break out a crystal ball and make an educated guess on the means that would be taken, as well as the specific goals to be sought. My predictions appeared in this space in February 2017, just a few weeks after the inauguration.1 I though that we might see a return to 1980s activities, with the net result being that trading partners would find it more attractive to set up “transplant factory” production in the US rather than continue to contend with trade roadblocks. After all, that is what many Japanese companies did in the 1980s.
Some of the trade law initiatives that we thought might be taken would be derived from the provision in the trade laws2 that allows for actions taken in the name of national security. Make no mistake, this statute does not redress any unfair trade actions, as it simply looks to take action that will protect domestic industry that is vital for the national security of the US in those instances where that industry has been adversely impacted by imports. You might think of it as a special purpose safeguard action.3 Further, it has been little used, with most of the energy in trade law activities over the past several decades in the US having been concentrated on such unfair conduct as dumping and unfair subsidies. Still, we thought enough of the possible use of the national security statute that we devoted an entire article to it in March 2017.4
Sure enough, the action that has generated the most vigorous response from US trading partners to this point has been the increased duties on basic steel products (25%) and aluminum products (10%).5 Those actions were announced in March 2018 and originally exempted Canada and Mexico and others but many of those exemptions were removed as of May 31, 2018 as NAFTA and some other renegotiation efforts broke down. Beyond the US NAFTA partners, other trading partners and allies of the US, including Japan and the EU, saw their products hit by the action. Still other trading partners (Korea, Argentina, Australia and Brazil) agreed to limit their exports to the US via voluntary restraint agreements (VRAs), a prominent feature of 1980s trade policy, and were thus granted exemptions from the steel and aluminum tariffs.
As students of trade law know, the process of imposing retaliations has gotten increasingly sophisticated over the years. The key is to balance the retaliation at the same macroeconomic level—say, $10 billion of your exports are affected, then you hit $10 billion of imports from the offending trade partner. But here’s what’s most important to grasp—the list of products chosen for retaliation is not limited to or does not even have to come from the same product sector so long as the products retaliated against account for the same volume as the exports hit be the complained of action. The product list shows the retaliation is a sort of “smart bomb” in the sense that the products are carefully selected so as to inflict the most political damage in the US as possible. That is why US farmers are especially worried about these trading partners’ retaliations. They fear that they will be blindsided with restrictions, and the insult added to injury of course is that they had nothing to do with the steel or aluminum sectors, which started the entire process.
In the case of Mexico, a series of tariffs against imports from the US valued at $3 billion will hit various products including pork, apples, potatoes, bourbon as well as different types of cheese.
Canada is planning to levy tariffs of 25% on shipments of U.S. steel and 10% on aluminum, as well as on other products, such as playing cards, inflatable boats and yogurt. The estimated value of the US goods subject to those countermeasures is $12.8 billion.
The EU has said it would respond with tariffs on $3.3 billion imports from the US.. Possible targets include agricultural products, including rice and tobacco, as well as automobiles and motorcycles, whiskey, paper products, shoes, and blue jeans.
If these US actions were taken with the idea of exerting leverage over key trade partners, perhaps to re-balance trade agreements or to conscript them into the team to fight China, then they were a massive failure. Instead of creating openings that would lead to a renegotiated NAFTA or other trade issues on more favorable termsand, instead of closing ranks in a unified effort to face down and break through Chinese intransigence, the US is facing a Herculean task of first defusing this trade war of its own making.
In connection with NAFTA, Art. 2102 provides that
By alleging violations of the safeguard regime, the complainants are arguing that the actions taken by the US are in the nature of safeguards, and should be judged as such, and are denying the national security motivation for the actions. This would suggest that the US might demur for irrelevance against attacks on its action as being inconsistent with the Safeguards Agreement or Art. XIX.
But what this all means is that the bona fides of the US actions should be judged against that national security standard. Any such judgment will raise the questions,
Somehow the comprehensive regime for tariff rates across all product sectors that has been agreed though successive Rounds of Multilateral Tariff Negotiations under the GATT and the WTO over the past sixty+ years has been transmuted into an “unfair trade” ploy by Germany and others. Is he kidding? I’m waiting for someone to claim next that imposing a VAT on imports into Germany while there is no VAT on imports into the US is also somehow unfair.
Setting out to renegotiate trade commitments, whether under NAFTA or another free trade agreement or the tariff rates set under the GATT 1994, is admirable. Seeking to boost domestic manufacture in the US is equally admirable. Applying “disruptive” strategies may also be admirable. Finally confronting China for all of its mercantilist misconduct, based on multiple and repeated violations of agreed WTO norms, is likewise admirable, and long overdue. What is not admirable is to recklessly employ inflammatory tones or to misapply trade remedy measures in a strong-arm effort to apply negotiation pressure only to wind up something of a pariah in a topsy turvy world of one’s own making. This has not been disruption but destruction and self-destruction at that.
One measure of failure is the fact that, rather than entering into the bilateral agreements with trade partners that were touted as an alternative to unfair multilateral trade deals, the US has been rebuffed for the most part. The US is now a bystander. Indeed, that bystander is watching from the sidelines as bilateral trade deals go forward among many of its trading partners.8 Concerted action to apply pressure on China or Iran or indeed to undertake any other action requiring a collective effort to achieve strategic goals will be that much more difficult if the good will and comity that flow from normal trade relations no longer adhere.
...................................................................................................................
What was missing was any detailed strategy on carrying out these overarching goals. When it came time at the end of November 2016, after the election, to look ahead and predict what trade actions the US might take, it was an occasion to break out a crystal ball and make an educated guess on the means that would be taken, as well as the specific goals to be sought. My predictions appeared in this space in February 2017, just a few weeks after the inauguration.1 I though that we might see a return to 1980s activities, with the net result being that trading partners would find it more attractive to set up “transplant factory” production in the US rather than continue to contend with trade roadblocks. After all, that is what many Japanese companies did in the 1980s.
Some of the trade law initiatives that we thought might be taken would be derived from the provision in the trade laws2 that allows for actions taken in the name of national security. Make no mistake, this statute does not redress any unfair trade actions, as it simply looks to take action that will protect domestic industry that is vital for the national security of the US in those instances where that industry has been adversely impacted by imports. You might think of it as a special purpose safeguard action.3 Further, it has been little used, with most of the energy in trade law activities over the past several decades in the US having been concentrated on such unfair conduct as dumping and unfair subsidies. Still, we thought enough of the possible use of the national security statute that we devoted an entire article to it in March 2017.4
Sure enough, the action that has generated the most vigorous response from US trading partners to this point has been the increased duties on basic steel products (25%) and aluminum products (10%).5 Those actions were announced in March 2018 and originally exempted Canada and Mexico and others but many of those exemptions were removed as of May 31, 2018 as NAFTA and some other renegotiation efforts broke down. Beyond the US NAFTA partners, other trading partners and allies of the US, including Japan and the EU, saw their products hit by the action. Still other trading partners (Korea, Argentina, Australia and Brazil) agreed to limit their exports to the US via voluntary restraint agreements (VRAs), a prominent feature of 1980s trade policy, and were thus granted exemptions from the steel and aluminum tariffs.
Retaliations
The steel and aluminum actions have reaped a whirlwind. If the plan was to use the actions as a cudgel to force trading partners to the bargaining table, it has backfired. The EU has refused to be bullied and has pledged to not negotiate at all while the tariffs are in place. Beyond that, while it is still early in the game, both Canada and Mexico as well as the EU, India and China have announced retaliatory tariffs.6As students of trade law know, the process of imposing retaliations has gotten increasingly sophisticated over the years. The key is to balance the retaliation at the same macroeconomic level—say, $10 billion of your exports are affected, then you hit $10 billion of imports from the offending trade partner. But here’s what’s most important to grasp—the list of products chosen for retaliation is not limited to or does not even have to come from the same product sector so long as the products retaliated against account for the same volume as the exports hit be the complained of action. The product list shows the retaliation is a sort of “smart bomb” in the sense that the products are carefully selected so as to inflict the most political damage in the US as possible. That is why US farmers are especially worried about these trading partners’ retaliations. They fear that they will be blindsided with restrictions, and the insult added to injury of course is that they had nothing to do with the steel or aluminum sectors, which started the entire process.
In the case of Mexico, a series of tariffs against imports from the US valued at $3 billion will hit various products including pork, apples, potatoes, bourbon as well as different types of cheese.
Canada is planning to levy tariffs of 25% on shipments of U.S. steel and 10% on aluminum, as well as on other products, such as playing cards, inflatable boats and yogurt. The estimated value of the US goods subject to those countermeasures is $12.8 billion.
The EU has said it would respond with tariffs on $3.3 billion imports from the US.. Possible targets include agricultural products, including rice and tobacco, as well as automobiles and motorcycles, whiskey, paper products, shoes, and blue jeans.
If these US actions were taken with the idea of exerting leverage over key trade partners, perhaps to re-balance trade agreements or to conscript them into the team to fight China, then they were a massive failure. Instead of creating openings that would lead to a renegotiated NAFTA or other trade issues on more favorable termsand, instead of closing ranks in a unified effort to face down and break through Chinese intransigence, the US is facing a Herculean task of first defusing this trade war of its own making.
Defenses for US Action
What is really interesting for me is that the US could conceivably argue that its steel and aluminum actions were justified and are permissible under NAFTA and the General Agreement on Tariffs and Trade 1994 (GATT 1994). Further, the US could argue that it is its trading partners whose actions are unjustified under the NAFTA and GATT 1994..In connection with NAFTA, Art. 2102 provides that
…nothing in this Agreement shall be construed:
(b) to prevent any Party from taking any actions that it considers necessary for the protection of its essential security interests
(i) relating to the traffic in arms, ammunition and implements of war and to such traffic and transactions in other goods, materials, services and technology undertaken directly or indirectly for the purpose of supplying a military or other security establishment.
In the case of the GATT 1994, we find that Art. XXI is quite consistent:(b) 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
(ii) relating to the traffic in arms, ammunition and implements of war and to such traffic and transactions in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment,
WTO Review
In this connection, we should pose a question, under the World Trade Organization (WTO) principles, what should be the proper means of dealing with actions taken by a trading partner? In this case, should the trading partner, say Canada, be free to take retaliatory action before any adjudication at the WTO’s Dispute Settlement Body has taken place? Assume, for the sake of argument, that the US actions on steel and aluminum were justified, or appeared to be more justified? Should the trading partner still be able to take retaliatory action up front, before any Dispute Settlement process has been undertaken? And here’s a more fundamental question, does each contracting party to the GATT reserve the right to take such unilateral pre-emptive action? If so, wherein lies the authority for that reserved right? In other words, Canada and the others are claiming the right to retaliate against the actions taken by the US that are said to be unjustified but at this point that is an arrogated right founded on a matter of opinion only. It is worthwhile to examine the filings at the WTO Dispute Settlement Body which comprise the challenges against the US actions. So far, there are a bevy of such pending matters DS 544 (China), DS 547 (India, joined by Thailand), DS548 (EU, joined by Japan), DS 550 (Canada, joined by Japan) and DS 551 (Mexico, joined by Japan). What is interesting is that the complainants allege violations of the Safeguards Agreement and the GATT 1994. In the case of the latter, they make no reference to Art. XXI and its “essential security interests” criterion, instead focusing on Art. 1 and 2 commitments and also Art. XIX which covers safeguards. What is important to note is that even though there is a similarity between the two such that the national security provision appears to be a special purpose safeguard, the national security construct is distinct from a safeguard regime. Moreover, the Safeguards Agreement (at Art. 11.1 (c)) specifically limits the scope of that Agreement to actions taken under Art. XIX of the GATT:This Agreement does not apply to measures sought, taken or maintained by a Member pursuant to provisions of GATT 1994 other than Article XIX…
Any WTO review of the steel and aluminum actions will almost certainly involve a close scrutiny of the US statute. Such a review will focus upon the provision at Section 1862 (d), which calls for an assessment of domestic production for the national defense and the impact of foreign competition on the economic welfare of domestic industries. The statute sets forth various metrics for that purpose, such as capacity of domestic industries to meet projected national defense requirements, existing and anticipated availability of human resources, products, raw materials and other supplies and services and the capacity of the US to meet national security requirements. I see these as being fully consistent with both the stated purpose of the statute and with the national security exception created by Art. XXI of the GATT 1994.By alleging violations of the safeguard regime, the complainants are arguing that the actions taken by the US are in the nature of safeguards, and should be judged as such, and are denying the national security motivation for the actions. This would suggest that the US might demur for irrelevance against attacks on its action as being inconsistent with the Safeguards Agreement or Art. XIX.
But what this all means is that the bona fides of the US actions should be judged against that national security standard. Any such judgment will raise the questions,
Does anyone, can anyone, at the present time, seriously argue that Canada—Canada!—is unreliable and that the US is overly dependent on Canadian steel or aluminum producers and that, taken together, this case raises actionable national security risks? What about Mexico?
To be clear, I am no apologist for the steel and aluminum Section 232 actions but neither do I condone any retaliations before the matter has been adjudicated.Allegations of Unfair Trade
Apart from the steel and aluminum maelstrom another development that was most unsettling was a recent (June 10) interview on national television in the US of Peter Navarro, who is an influential trade advisor within the Trump Administration. Mr Navarro was defending some of the Administration trade actions and its trade goals. These remarks were “walked back” the very next day, but we should still refer to some quotes[Speaking of Prime Minister Justin Trudeau] there's a special place in hell for any foreign leader that engages in bad faith diplomacy with President Donald J. Trump and then tries to stab him in the back on the way out the door.
* * * * .
we've been the piggy bank for the world and that's got to stop. If you look at Angela Merkel's Europe, you see a continent where we run $151 billion trade deficit in goods every year. Germany has tariffs on autos four times higher than our tariffs on the equivalent German imports here and they sell us three times as many cars as we sell them. .
So, on the issues alone, we have allies strategically. But when it comes to these trade disputes, these allies basically are robbing us blind. The president is not going to put up with that..
* * * *
So I think that the bigger problem here, from my point of view, I'm the trade guy, is that we have a bunch of countries out there, whether it's strategic competitors like China, or allies like Europe and Canada, basically using us as a piggy bank, using unfair trade practices. [Emphasis added]
Somehow the comprehensive regime for tariff rates across all product sectors that has been agreed though successive Rounds of Multilateral Tariff Negotiations under the GATT and the WTO over the past sixty+ years has been transmuted into an “unfair trade” ploy by Germany and others. Is he kidding? I’m waiting for someone to claim next that imposing a VAT on imports into Germany while there is no VAT on imports into the US is also somehow unfair.
Final Comment
To answer the query in the title, I don’t see this so much as going back to the 1980s, though we have seen the reprise of the “free but fair” trade slogans, the VRAs and some “transplant factory” startups that I predicted. Instead, I see this as an upside down time, a time unlike any that has come before. The legitimacy of the existing international trade order that is the sum total of freely negotiated agreements is being challenged.Setting out to renegotiate trade commitments, whether under NAFTA or another free trade agreement or the tariff rates set under the GATT 1994, is admirable. Seeking to boost domestic manufacture in the US is equally admirable. Applying “disruptive” strategies may also be admirable. Finally confronting China for all of its mercantilist misconduct, based on multiple and repeated violations of agreed WTO norms, is likewise admirable, and long overdue. What is not admirable is to recklessly employ inflammatory tones or to misapply trade remedy measures in a strong-arm effort to apply negotiation pressure only to wind up something of a pariah in a topsy turvy world of one’s own making. This has not been disruption but destruction and self-destruction at that.
One measure of failure is the fact that, rather than entering into the bilateral agreements with trade partners that were touted as an alternative to unfair multilateral trade deals, the US has been rebuffed for the most part. The US is now a bystander. Indeed, that bystander is watching from the sidelines as bilateral trade deals go forward among many of its trading partners.8 Concerted action to apply pressure on China or Iran or indeed to undertake any other action requiring a collective effort to achieve strategic goals will be that much more difficult if the good will and comity that flow from normal trade relations no longer adhere.
...................................................................................................................
1. Neville, “U.S. Trade Policy Relaunch,” 28 JOIT Feb. 2017 at 30.
2. Section 232, Trade Expansion Act of 1962, codified at 19 USC § 1862.
3. A “safeguard” statute allows a country to suspend its trade concessions and take actions such as raising duty rates or imposing quotas for limited periods in order to give an impacted domestic industry time to “adjust” to import competition. In the US, the statute, sometimes referred to as an “escape clause,” is at 19 USC § 2251 et seq. At the international level it is provided for at Art. XIX of the GATT 1994 and in the Agreement on Safeguards.
4. Neville, “National Security Actions on Imports and Investments,” 28 JOIT March 2017 at 25.
5. These were promulgated in Presidential Proclamations 9704 (steel) and 9705 (aluminum) of March 8, 2018 which were published in the Federal Register on March 15, 2018, 83 Fed. Reg. 11619-11630.
6. Another development was the introduction of a bi-partisan bill (S. 3013) in the Senate which would amend the statute and require Congressional approval for any national security trade actions contemplated by the president.
7. To be fair, relying on other close but non-contiguous allies of the US such as Germany or Japan raises a different national security dynamic because of the logistics involved in getting such products into the US.
8. E.g., Singapore-EU, Japan-EU, Japan-Vietnam.
2. Section 232, Trade Expansion Act of 1962, codified at 19 USC § 1862.
3. A “safeguard” statute allows a country to suspend its trade concessions and take actions such as raising duty rates or imposing quotas for limited periods in order to give an impacted domestic industry time to “adjust” to import competition. In the US, the statute, sometimes referred to as an “escape clause,” is at 19 USC § 2251 et seq. At the international level it is provided for at Art. XIX of the GATT 1994 and in the Agreement on Safeguards.
4. Neville, “National Security Actions on Imports and Investments,” 28 JOIT March 2017 at 25.
5. These were promulgated in Presidential Proclamations 9704 (steel) and 9705 (aluminum) of March 8, 2018 which were published in the Federal Register on March 15, 2018, 83 Fed. Reg. 11619-11630.
6. Another development was the introduction of a bi-partisan bill (S. 3013) in the Senate which would amend the statute and require Congressional approval for any national security trade actions contemplated by the president.
7. To be fair, relying on other close but non-contiguous allies of the US such as Germany or Japan raises a different national security dynamic because of the logistics involved in getting such products into the US.
8. E.g., Singapore-EU, Japan-EU, Japan-Vietnam.
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.