State of the Union Roundup on Trade Policy

Last night’s State of the Union address by President Trump was curiously light on the topic of trade policy despite the fact that it was continually brought up during his campaign and throughout 2017. In fact, there were a total of 6 sentences in the entire speech devoted to trade. The White House did, however, release a factsheet to fill the gaps. Below are excerpts from this factsheet, entitled “President Donald J. Trump Is Promoting Free, Fair, and Reciprocal Trade,” as well as links to commentary from my colleagues and me on the various issues listed. Though the address was a more reserved take on trade than the president’s past speeches, that doesn’t mean trade policy is now a safe space. Let’s keep a close eye on actions the administration might take in the future.

In outlining ways the administration intends to stand up for American interests, the factsheet begins with a focus on China:

• In August 2017, the Administration initiated an investigation into Chinese practices related to forced technology transfer, unfair licensing, and intellectual property (IP) policies and practices.
  • These practices by the Chinese are estimated to cost the United States billions of dollars each year.
  • Conducted by the USTR, this is the first Section 301 probe since 1997, fulfilling the President’s campaign pledge to use all tools available under U.S. law to combat unfair trade.

As my colleague Scott Lincicome argues, any aggressive, broad-based unilateral tariffs on China through the use of Section 301 would likely be ineffective and harmful to both U.S. exporters and importers. Instead, he suggests the administration pursue concerns with Chinese IPR practices through a WTO dispute (joined by members with similar concerns) as well as a “targeted unilateral response” for those actions that fall outside the scope of the WTO Agreements.

Next, the document turns to address recent safeguard actions:

• In January 2018, the President announced his decision to provide safeguard relief to U.S. manufacturers injured by surging imports of washing machines and solar products.
  • The President’s decision was based on a series of recommendations made by the independent and bipartisan International Trade Commission (ITC).
  • This is the first time Section 201 of the Trade Act has been used to impose tariffs in 16 years.
  • These actions respond to unfair trade practices by China and other countries, including attempts to avoid legally imposed antidumping and countervailing duties.>

These kinds of actions are part of the built-in system of protectionism that works on autopilot irrespective of which party is in power. In both the washers and solar products cases, the ITC made recommendations, and President Trump roughly followed these recommendations. Therefore, while the actions are likely to hurt U.S. consumers (LG just announced it would be raising prices of its washing machines), they are not out of the ordinary (though prior to these actions, a case hasn’t been initiated since 2001).

The factsheet continues by praising the increase in antidumping and countervailing duty investigations in 2017:

• During 2017, the Trump Administration conducted 82 major antidumping and countervailing duty investigations, a 58 percent increase over 2016.
  • This includes the first self-initiation of an antidumping investigation in 25 years.
  • Many of these investigations resulted in import duties to address dumping and subsidies, including one in response to Canada’s unfair trade in softwood lumber.
  • USTR and Commerce are working together to defend the right of the United States to continue treating China as a non-market economy in antidumping investigations until it makes the reforms it agreed to when it joined the WTO.

A few things to note here: first, some trade remedy 101—the use of these trade remedies is not really new, and is something U.S. companies have long utilized to shield themselves from competition from foreign companies. Boeing’s latest trade remedy initiation is a great example of the abuse of this law, which ended last week with the U.S. ITC unanimously agreeing that Boeing was not in fact injured by airplanes made by its Canadian competitor Bombardier, and thus no tariffs could be imposed. It is worth emphasizing here that regardless of the amount of saber rattling by the administration on this issue, the process by which these investigations take place is independent. The problem is not really an uptick in protectionism, but rather, U.S. trade remedy laws that don’t serve U.S. interests.

My colleagues have also written extensively on the issue of China’s nonmarket economy status with regard to the application of U.S. AD/CVD laws and have argued that China should not be treated differently than other countries.

The factsheet was surprisingly positive about the WTO, noting the successful use of the institution’s dispute settlement mechanism:

• The Trump Administration has successfully litigated numerous WTO disputes, helping force countries to abandon unfair practices and preserving the U.S. right to enact fair laws.
  • In November 2017, the United States won a dispute on Indonesia’s unfair import licensing regime that was blocking the export of U.S. agricultural goods.
  • In October 2017, the WTO determined that the U.S. tuna labeling rules were consistent with WTO standards, helping the United States to inform consumers about safe fishing practices.
  • In September 2017, the WTO rejected the EU’s allegations that Boeing was receiving prohibited subsidies.

This is good news considering how critical USTR Lighthizer has been of the WTO, and signals that perhaps the U.S. has not abandoned the institution, but instead is actively using it. Later in the factsheet, reform of the WTO is referenced as follows: “The United States is committed to reforming the WTO to ensure that countries are held accountable for breaking the rules and that U.S. sovereignty is respected.”

This is consistent with previous statements from the administration, but again sends the message of working to improve the WTO, not destroying it. As for “holding countries accountable” it is likely that the prime target here is China. China was the recent subject of criticism with regard to its WTO membership in a recent report on China’s WTO compliance, which stated that “the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market oriented trade regime.” While it may be hyperbolic to suggest this means the U.S. regrets China’s membership entirely, it does point to concerns over the “terms” on which China entered. As my colleague Simon Lester noted, China’s membership to the WTO has been good for the United States, not least because it has prompted significant episodes of liberalization in China, even though there still is much work to be done on that front. Though it is true that China has developed significantly since it joined the WTO in 2001, working within the WTO to address an expansion of China’s obligations may be the best route forward, as opposed to any unilateral actions, particularly over China’s IP and technology transfer policies.

In a section entitled “Putting the American Worker First,” the administration highlights its priorities for undertaking renegotiations of existing trade agreements and the launch of new ones. It states:

• The Trump Administration is renegotiating and modernizing the North American Free Trade Agreement (NAFTA) to ensure that it does not harm American workers and companies. This is the first renegotiation of a major free trade agreement in U.S. history.
  • The Administration is working with Korea to ensure that trade under the U.S.-Korea Free Trade Agreement (KORUS) is more equitable and reciprocal.
  • President Trump withdrew the United States from the Trans-Pacific Partnership (TPP), because the deal negotiated by the past Administration did not sufficiently prioritize the needs of the American workforce.
  • The United States is seeking to enter into new trade agreements with countries that commit to fair and reciprocal trade.

The 6^th round of NAFTA talks concluded this week, and negotiations do seem to be progressing, albeit at a slower pace than the administration might like. It is true that NAFTA would benefit from modernization, in part because it was negotiated at a time when the internet was just taking off, and also because over the course of 20 years, we have learned a lot about things that may not work or could be improved. For instance, eliminating investor-state dispute settlement (Chapter 11) and binational panels that review the administration of domestic AD/CVD laws (Chapter 19) would be a step in the right direction. Not only would this address the controversy surrounding ISDS (which essentially subsidizes foreign investments) but also end a possibly unconstitutional system of adjudication (Chapter 19) that is unnecessary given that foreign companies have access to domestic U.S. courts to address these concerns.

The administration has put forward some controversial “poison pills” in the NAFTA negotiations, such as more stringent rules of origin and government procurement provisions, as well as non-binding state-to-state dispute settlement and a 5 year sunset clause that would automatically terminate the deal unless all parties agree to continue it, but this is really not the type of reform that would be helpful. For instance, state-to-state dispute settlement should be strengthened, not weakened, as NAFTA Chapter 20 has barely functioned in its 20-plus year history. Also, the government procurement market should be open to foreign competition, and the administration should be wary of how it abuses the term “reciprocity” in calls for dollar-for-dollar procurement access. There is also much that can still be done to eliminate unnecessary regulatory obstacles to trade by including a chapter on regulatory cooperation in the new NAFTA.

Aside from renegotiating old deals, the administration has also promised to launch new ones. However, very little progress has been made on this front in 2017, and it is unclear what countries we would be sitting down at the table with.

The Trans Pacific Partnership, which the president withdrew from early last year, is moving along without the U.S. and is a major lost opportunity to expand access to Asian markets and to contribute to the new rules of modern trade agreements. (Even though Trump just raised the possibility of rejoining the TPP, this sudden change of heart should be approached with caution.)

Overall, while the tone of both the president’s address and the content of the factsheet on trade appear subdued, we should remain vigilant about possible trade actions and continue to make the case for more trade liberalization. Sometimes what is more important is not what is said, but rather what goes unsaid. President Trump’s state of the union was striking for one major omission–an acknowledgment of the benefits of free exchange and U.S. leadership in the international economy. This is particularly notable due to fact that increasing skepticism towards international trade is coming from the Republican Party, which used to stand more vociferously for freedom over protectionism. The history of U.S. trade policy reveals that protectionism has consistently failed to promote U.S. interests, and it would be unfortunate if past mistakes are repeated. Let’s hope that the president’s more cautious tone towards trade indicates a softening stance.