William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS), a “think tank” based in Washington, D.C. CSIS was established in 1962 by David M. Abshire and Admiral Arleigh Burke and it is described as “a bipartisan, nonprofit policy research organization dedicated to providing strategic insights and policy solutions to help decision-makers chart a course toward a better world.”
Reinsch also served as the under-Secretary of Commerce for export administration during the Clinton Administration. Prior to that, he spent 20 years on Capitol Hill, most of them as senior legislative assistant to the late Senator John Heinz (R-PA) and subsequently to Senator John D. Rockefeller IV (D-WV). He holds a B.A. and an M.A. in international relations from Johns Hopkins University and the Johns Hopkins School of Advanced International Studies.
Edited slightly for context and clarity, Reinsch and CSIS have prepared a series of questions and answers related to the details of the pending U.S.-Mexico-Canada Agreement (USMCA) and other North American trade issues:
Q: What are some the most significant changes in USMCA compared to the North American Free Trade Agreement (NAFTA)?
A: The following areas will see the largest changes from USMCA:
- Automotive rules of origin: USMCA will require that 75 percent of auto content be made in North America in order for automobiles to qualify for preferential, duty-free treatment. By comparison, NAFTA’s auto rule of origin was 62.5 percent. Of the 75 percent content threshold required by USMCA, 40-45 percent must be made by workers that earn at least $16 an hour.
- The wage requirement will be phased in over five years. It is essentially a U.S. or Canada content requirement as wages for Mexican autoworkers are not close to that level. The Trump Administration may have traded some additional auto manufacturing jobs in the United States for higher car prices and a less globally competitive auto industry. The higher rule of origin in USMCA and wage requirement may disrupt existing supply chains designed around the NAFTA rule of origin. USMCA rules may constrain where automakers can source certain parts, which could boost manufacturing costs.
- Investor-state dispute settlement: The special arbitration mechanism contained in NAFTA that allowed investors to sue NAFTA countries for discriminatory actions will be phased out between the United States and Canada, and its coverage will be significantly trimmed for investors in Mexico. The investor-state dispute settlement provision (ISDS) of USMCA will cover investments in Mexico only in oil and gas, power generation services, telecommunication services, transportation services, and the management of ownership of infrastructure. The paring back of ISDS is a major win for U.S. Trade Representative Robert Lighthizer, who views it as a means for corporations to undercut country’s sovereignty and as political risk insurance that encourages outsourcing.
- Digital trade: USMCA contains provisions on digital trade similar to those negotiated in TPP (the Trans-Pacific Partnership). One significant improvement from TPP is a blanket ban on data localization requirements that does not provide an exception for financial services firms.
- De Minimis: USMCA will raise the threshold at which imports from Canada and Mexico will be subject to customs duties, a priority for many in the U.S. business community. For Canada, the de minimislevel will be raised from C$20 to C$40 for taxes and allow duty-free shipments of up to C$150, from C$20. Mexico will allow duty-free shipments of up to $117, from $50. The U.S. de minimisthreshold is $800.
- Sunset: USMCA contains a renewable 16-year term, a huge improvement for Canada and Mexico over the five-year sunset clause originally pushed by the Trump Administration. The three countries will meet six years after the agreement comes into force to decide whether to renew the pact for another 16 years.
- Currency: For the first time, the United States has managed to include rules regarding currency manipulation and monetary policy in the core text of a trade agreement. Requirements related to transparency in foreign exchange activity will be subject to USMCA’s state-to-state dispute settlement mechanism.
Q: How likely is it that Congress passes legislation to implement USMCA?
A: USMCA certainly isn’t dead on arrival on Capitol Hill. Thus far, Republican lawmakers have voiced tepid support for the agreement while some key Democrats have remained neutral and stopped short of opposing USMCA outright.
President Trump has conceded that he is “not at all confident” about his trade pact’s fate in Congress and added that “anything you submit to Congress is trouble.” Republicans are likely to throw their weight behind President Trump’s first signature trade win despite some aspects of the deal introducing managed trade that run counter to the traditional Republican embrace of free trade.
While some Democrats could be pleased with the USMCA rules on investor-state dispute settlement, auto rules of origin, and even maybe labor, it will be a tough ask for them to support what could be a legacy item for a president that is deeply unpopular with the Democratic Party.
Q: What happens to the Section 232 national security tariffs on steel and aluminum from Canada and Mexico? What about potential Section 232 tariffs on automobiles?
A: The steel and aluminum tariffs were not resolved as part of the USMCA deal, although Canada and Mexico were granted some protection from potential tariffs on autos and auto parts. Talks on the steel and aluminum tariffs are expected to begin now that USMCA has been completed.
If the United States imposes Section 232 national security tariffs on autos and parts, 2.6 million passenger vehicles and $32.4 billion of auto parts from Canada will be exempt from the duties. For Mexico, 2.6 million passenger vehicles will also be exempt, as well as $108 billion worth of auto parts.
Q: Trump delivered his second State of the Union address on Feb. 5; what was said about trade?
A: President Trump mourned the United States’ “decades of calamitous trade policies” that allowed countries like China and deals like NAFTA to “take advantage of us;” he explained that with his presidency comes a new era of trade policies that will no longer permit other countries to steal U.S. jobs and wealth.
In China’s case, that involves intellectual property theft and the specific “targeting” of U.S. industries. The tariffs imposed on Chinese goods, he argued, raise billions of dollars for the government (though in actuality tariff revenue has only raised $6 billion, compared to the $12 billion government bailout to farmers due to tariff retaliation). He discussed the ongoing trade negotiations with China, saying that the solution must include “real, structural change” that will prioritize U.S. jobs and focus on balancing the U.S. trade deficit.
In the case of NAFTA, Trump applauded the formation of the new USMCA and urged Congress to ratify it. With the objective of creating more goods that are “Made in the USA,” Trump explained that the USMCA and a better trade agreement with China would create more jobs and protect intellectual property. As well as asking Congress to ratify the USMCA, President Trump urged the passage of the United States Reciprocal Trade Act, which gives the executive branch power to impose reciprocal tariffs.
The official response to the State of the Union, given by former Georgia gubernatorial candidate Stacey Abrams, only mentioned trade once, saying “we owe more to the millions of everyday folks who keep our economy running, like the . . . farmers caught in a trade war.” The Spanish-language response, delivered by California State attorney general Xavier Becerra, did not mention trade.
Q: What did his remarks signal about the Administration’s trade agenda?
A: Trump’s requirement of structural changes to China’s economy for a trade deal to occur helps to clarify the priorities of further trade negotiations with China for the public and Congress. These “structural changes” could include provisions ending heavy subsidization of state-owned enterprises and a state-backed industrial policy, increasing intellectual property protection, and ending forced technology transfer and joint venture requirements for foreign companies to do business in China.
Some factors may pressure President Trump into making a quick deal with China that does not require structural changes to the Chinese economy. This pressure may continue to increase as Trump looks ahead to his 2020 reelection prospects and the economy feels the negative effects of the trade war. The president could spin as a win a quick deal that only includes Chinese purchases of U.S. goods but does not require changes to the Chinese economy. That could help stabilize President Trump’s base, including farmers and manufacturers who are bearing negative consequences of his trade deal, to reposition him as a skilled negotiator after the messy government shutdown, and lead to a stock market uptick.
In the past, China hawks in the Trump Administration, including White House trade adviser Peter Navarro and U.S. Trade Representative Robert Lighthizer, as well as industry experts, were concerned that Trump would be too hasty in securing a deal, compromising on structural changes in exchange for shorter-term market access. After the State of the Union, however, broad concessions are less likely as President Trump publicly promised to reduce the trade deficit and protect U.S. jobs through mandating Chinese structural change. This all does not even touch upon the significant domestic pushback in China of a foreign power demanding it fundamentally restructure its economy, nor does it consider China’s likely unwillingness to reform its economy in a way that weakens the Communist Party’s control over it.
According to congressional leadership, the ratification of USMCA will be an uphill battle for the Trump administration. It will be a highly contested issue in the upcoming year as Trump will have to negotiate with critics and skeptics from both sides of the aisle in Congress. Concerns including environmental and labor standards, enforcement, pharmaceutical pricing, section 232 tariffs, and arbitration procedures will likely make negotiations with Congress a slow and complicated process.
The proposed United States Reciprocal Trade Act (USRTA) gives power to the executive branch to raise tariffs for a country that levies a higher tariff on the same good. For example, European duties on U.S. cars are 10 percent, compared to the United States’ 2.5 percent level on European cars. USRTA would allow President Trump to increase the U.S. tariff rate on European cars to 10 percent.
Experts say that by focusing on the tariff rates for individual products, the USRTA ignores the larger picture of rates; while Europe has higher tariff rates on U.S. cars, the United States has higher tariff rates on European trucks.
Though the United States has low tariff rates on certain goods, on average its tariff rates are on par with the other large economies, including Germany and the United Kingdom. As well, the Mercatus Center reported that reciprocity is likely to ensnare the United States in tit-for-tat tariff spats, harming U.S. consumers and businesses, and raising the average tariff on U.S. imports from 2.1 percent to 5.4 percent.
There have been previous pieces of legislation that expand the president’s powers over imposing tariffs sans congressional approval. The Trading with the Enemy Act of 1917 helped President Nixon to impose a 10 percent tariff on all imports.
The International Emergency Economic Powers Act of 1977 was used by Presidents Clinton and Carter against Iran during national states of emergency. Section 232 of the Trade Expansion Act of 1962 was ratified to allow the president to impose tariffs that the secretary of commerce sees as impacting national security. The Trade Act of 1974 gave the president power to impose duties on countries whose exports create significant adverse effects for U.S. businesses and consumers.
The USRTA furthers the principle of retaliation outlined in Section 301 of the Trade Act of 1974. Like the USRTA, Section 301 uses tariffs to force other countries to depart from their protectionist policies rather than to protect their domestic markets, the traditional rationale for protectionist measures.
USRTA also shares parallels with the Reciprocal Trade Agreement of 1934(RTAA). The RTAA was a response to the Smoot-Hawley tariff laws of 1930, protectionist legislation that drastically increased import duties. It attempted to reduce the barriers to initiating tariff reduction by giving the president the power to negotiate bilateral tariff reduction agreements.
While Representative Duffy (R-WI), who introduced USRTA claims that USRTA, like the RTAA, aims to “encourage the rest of the world to lower their [tariffs],” the USRTA focuses on giving the president the power to increase, not decrease, tariffs in the same way as the Trade Act of 1974, incentivizing by force instead of agreement.
The original RTAA ended with the ratification of the Doha Round of the General Agreement on Tariffs and Trade (GATT) in 1994. The Doha Round passed the Most-Favored-Nation (MFN) principle of nondiscrimination, outlawing different tariff rates on similar products from different countries (apart from in the case of free trade agreements). While the principle of MFN solved the same problem that the RTAA was attempting to ease (reducing tariff rates), the new USRTA would abandon MFN, giving the president the power to levy discriminatory tariff rates on individual countries and breaking World Trade Organization’s (WTO) rules.
Q: Can the Administration follow through on its trade agenda?
A: The Trump Administration faces a number of challenges to implementing the trade agenda laid out at the State of the Union. With a Democratic-controlled House of Representatives, implementing legislation for the USMCA and the Reciprocal Trade Act will be more difficult to pass. With the 2020 election rising to the forefront, Trump feels increasing pressure to fulfill promises and prove himself as a negotiator, but a Democratic House may be less inclined to hand him any wins.
Negotiating a deal with significant structural reform to the Chinese economy will continue to prove difficult. Neither China nor the United States has the power to unilaterally decide the terms of the trade agreement; the inevitable compromise must contain concessions. The trade war has spanned more than 200 days and five negotiation sessions yet has failed to produce significant headway on structural reforms. President Trump’s negotiation failure during the government shutdown may be interpreted as a sign of weakness by the Chinese, causing them to resist compromise in hopes that they can reach a more favorable outcome.
In addition, pressure continues to mount on Trump to achieve a deal. Though being “tough on China” at the State of the Union shows commitment to a serious deal, a choppy stock market, concerns over long-term global growth, and the heartland shouldering the downsides of the trade war may weaken Trump’s resolve.
Farmers continue to feel the negative effects of the trade war as they approach planting season. If they continue to suffer, it will be difficult for Trump to draw out an agreement, as farmers make up a significant portion of Trump’s base. President Trump will face even more pressure to come to a quick agreement if the economy sours; slowing U.S. growth in exchange for an ongoing stalemate with China would not help Trump’s reelection efforts.
The road ahead for the ratification of the USMCA also has significant barriers. In addition to the politics of resisting the optics of assisting Trump to fulfill a core campaign promise, Democrats have concerns about the actual content of the agreement. These include the leniency of drug price provisions and the weakness of labor and environmental standards enforcement.
Additionally, some Republicans are unhappy with the agreement in its current form. Many demand changes to the investor-state dispute settlement rules, and Republican members have also demanded ending the section 232 tariffs on steel and aluminum before voting on USMCA. To pass the USMCA, the Trump administration will need to balance the priorities of both sides, a process that is expected to be long and difficult.
Despite President Trump’s endorsement of the USRTA, it is very unlikely to get congressional approval. Currently, there are multiple bipartisan bills to curb presidential power to levy tariffs. These include a bill from Senator Toomey (R-PA) and Senator Warner (D-VA) that would require congressional approval for tariffs enacted because of national security concerns and a bill from Senator Portman (R-OH) and Senator Jones (D-AL) that would preserve some executive powers but increase legislative oversight of national security-related tariffs. All three of these bills are likely to fail as neither of the executive power-limiting bills have enough support to override Trump’s veto and the executive power-enhancing bill does not have the support it needs in Congress to pass. This stalemate means that the status quo on power to impose tariffs is likely to hold.
