This is from testimony by Beth Baltzan at a House Ways and Means Committee hearing yesterday on "Enforcement in the New NAFTA":
The Ultimate Check on Bad Behavior: The Sunset Clause
The history of U.S. trade policy exposes particular challenges with Europe and Japan, who have had a penchant for agreeing to tariff concessions and then using non-tariff means to undermine those concessions. It was one of the motivations for Congress to authorize USTR to negotiate non-tariff barriers in 1974. At least in the run-up to the Uruguay Round, Europe and Japan were viewed as considering GATT rules to be aspirational norms, rather than binding obligations. That does not seem to have changed for the Europeans, at least, as they, of the WTO Members who have lost more than 10 disputes, have the lowest dispute settlement compliance rate, at less than 40%.
In an effort to foreclose these types of dodges, the U.S. response has been to make trade agreements ever-more prescriptive, with increasing constraints on government flexibility, with binding dispute settlement. However, this kind of constraint on government flexibility is precisely why there are more and more complaints that these agreements are, effectively, vehicles for deregulation. It was one of the reasons the Obama Administration’s negotiations with the Europeans became bogged down. The Europeans were concerned about rules that would compromise their food safety regime, and the Americans were worried about rules that would compromise our post-financial crisis regime.
These prescriptive rules do not stop sovereign entities – particularly ones not subject to the same transparency strictures as those in the United States – from blocking imports. Even with binding dispute settlement. Sovereign entities will do what sovereign entities want to do. For this reason, the assumption that the tariff elimination provisions in TPP would automatically mean more access for U.S. exports is inconsistent with the U.S. experience over the past 70 years. As former USTR Sue Schwab pointed out,
I worked with Robert S. Strauss, who was the United States trade representative in the Carter administration at the time and my first mentor. He took me to Capitol Hill when he met with Congressional delegations. We were trying to get beef into the Japanese market, and I’m still trying to do that 30 years later.
Having these agreements be permanent only encourages that kind of behavior. Binding dispute settlement does not address the issue because the actions are taken either within the letter of the agreement, or through non-transparent means that make it impossible to meet the burden of proof.
If, on the other hand, our trading partners were aware that the agreement would not automatically be renewed, but instead would be subject to an affirmative decision by each of the parties, the incentive to comply with the terms of the agreement would be heightened.
Businesses claim they need certainty. Certainty for what? To recoup their investments. This was an intrinsic part of the discussion of the renewal of the African Growth and Opportunity Act in 2015. Democrats wanted a 15-year term, and Senate Republicans wanted a 5-year term. House Republicans, who wanted to see increased investment in Africa, were focused on the amount of time business would need to recoup that investment. The extension was ultimately granted for 10 years.
The Committee Report had this to say about the period of extension:
As part of its oversight function, the Committee has conducted a thorough process of reviewing AGOA legislation and consulting with interested stakeholders about the possibility of extending and renewing AGOA. This process includes congressional hearings, participation in AGOA Forum meetings by Committee Members and staff, informal consultations with interested stakeholders including the African diplomatic corps and senior African officials, as well as studies from the International Trade Commission and the General Accountability Office. All of these efforts have informed the Committee’s development of this legislation and confirmed the need to extend AGOA for another ten years.
There is no reason bilateral or regional agreements should be treated differently.
Beyond encouraging compliance, these sunset clauses also force us to reconsider provisions that seemed appropriate at the time but are eventually obsolete, or even damaging. At one point, we believed prohibitions on capital controls were appropriately included in our trade agreements; then the financial crisis happened, and countries like Iceland found that capital controls were a necessary lifeline. Sometimes certainty means we are certainly wrong.
Her three main points seem to be about: the sunset clause as an enforcement tool; the sunset clause as a way to provide flexibility in terms of regulatory policy space; and the sunset clause as a way to evaluate how trade agreements are working.
First, in terms of the effectiveness of enforcement through dispute settlement, it may not work in every case, but it does work in a lot of them, even when the discrimination is on a de facto basis. Would a sunset clause create a greater incentive to comply? Anything is possible, but it's a little hard to imagine that it would play out this way. I do see how the threat of withdrawal gets you a few concessions on a one time basis, but after that I would think your trading partners would start to ignore you.
As for flexibility, I'm not sure how shifting from dispute settlement to threats of leaving the agreement as a way to achieve compliance leads to more regulatory policy space. Assuming it is effective (which I'm not sure it would be, but just for the sake of argument), I think it would lead to less policy space.
And finally, with regard to reevaluating trade agreements, I do think that reconsidering the content of trade agreement is a good idea. However, a sunset clause that kicks in after a few years and requires a decision whether to stay in or get out seems like a terrible way to do it. What we need instead are permanent committees that meet once or twice every year to talk about issues as they arise.
In addition to all of these points, the specific sunset clause in USMCA transfers power over trade agreements from Congress to the president in a way that should cause some concern.
Summing up, I'm pretty skeptical that a sunset clause in trade agreements is a good idea. More on all this from Inu and me here.
