At a Brookings event yesterday, Josh Meltzer of Brookings had some interesting exchanges with U.S. Trade Rep. Katherine Tai on USMCA dispute settlement and the USMCA six year review. Here's the one on dispute settlement:
Meltzer: What I'd like to do is ask you a question about how you see [USMCA] dispute settlement, at the state-to-state level, working at the moment, anything you might want to say about any of the specific disputes as well?
Tai: Sure. So I want to really reinforce something for folks in terms of understanding the trade agreement. An enforcement mechanism is important ... for making real the commitments and the obligations and responsibilities, right. But you have to understand that in a trade agreement, it is essentially a contract between sovereigns. And so a dispute settlement system within a trade agreement has to balance the rendering of a decision and conclusions from a legal process with the fact of the sovereignty that's retained by the parties to the agreement. And so whether it's in the USMCA, any of our other trade agreements, or at the WTO, the dispute settlement process is something that gives you a right at the end to take away something from your trading partner. It's not supposed to be a punishment, although you can see it as a punishment. But the theory behind the way we do dispute settlement in trade agreements between sovereigns is, your right to suspend a concession, to take back something that you had promised under the trade agreement, is intended to be an inducement to finding a solution, compliance or an accommodation. Whatever is going to work at the political level between the sovereigns, right. So it is never meant to be something that you can shove down the throat of the other side because that's just not the way that international agreements between sovereign countries work.
So under the NAFTA, I think that there were four cases that were brought until we collectively broke the system. So it was important in the USMCA to revive a functioning dispute settlement system. But when you get to the end of the system, and we see this in the examples that you've given, at the end, the question is always going to be, do you have enough, have you changed the leverage composition, to get to the political solution that you need. And in the case of dairy, the answer is no. That despite two cases that we have brought, and the expectation under the agreement that American dairy farmers and producers would have more access to the Canadian market, we still do not have that access. And frankly we're not the only ones. It turns out that Canada has been sued under the CPTPP by New Zealand around the same set of policies with the same result.
So there what I would say is we have a political conundrum. Despite the best efforts of our dispute settlement system, we've still not been able to crack the political nut there. That is something for us to continue to work on and think through. How do we address that concern that we have with Canada?
So I want to put the dispute settlement system into that context. It is really important to have those systems be able to work but we also have to understand what we're trying to accomplish.
In the auto rules context, I want to pick up a couple additional historical contextual data points. Recall that the USMCA, the NAFTA was renegotiated into the USMCA, and I think that the three parties concluded the first iteration of USMCA at the end of 2018. Then came the second renegotiation of the USMCA that was driven by the Trump administration needing to get it through the Congress, and that Trump administration-congressional Democrat renegotiation of the USMCA. That happened over the course of 2019. The House voted on a broad bipartisan basis. 385 members voting for it happened on I believe is December 19 of 2019. It passed through the Senate at the end of January in 2020. I give you these dates because what I want to emphasize is, by the time that USMCA enters into force, it is July 1 of 2020 and the pandemic has happened. And that was the first indication we had that the world that we had renegotiated the USMCA for was in the process of fundamentally changing again. In the meantime, since July 1 of 2022, today, March of 2024, the other aspect of what we've seen is an acceleration in countries', including US, Canada and Mexico, motivation to act on the climate crisis and the urgency around counterbalancing the market's failure to activate the kinds of clean energy technology boosts that we're going to need to respond to the climate crisis. ... the pandemic and I would say the Clean Energy Transition necessities have fundamentally changed the equation around multiple aspects of this trade relationship, but with a special focus on autos.
So I think that the conversation within the USMCA on autos has to be something larger than what has happened in this dispute. This dispute is important, those rules of origin and our lack of agreement on what those rules of origin mean, is an important component. But with an eye towards 2026, ... the third challenge is the Chinese overcapacity challenge on EVs. How are we as these three countries going to reassert our interest in each other's success, reassert our stakes in this supply chain to to keep pace with the changes and the pressures that are affecting all three of us at the same time.
So the dispute settlement system, an incredibly important component, but I want to put it in the context of leading us to a political solution, and then that political solution needing to address the changes that are happening even as we speak to our most modernized and most updated trade arrangement.
At the beginning of her response, I think Tai offers a good explanation of the political realities of how trade dispute settlement works. Some U.S. critics of trade agreements seem to think that rulings by WTO panels and the Appellate Body, and by FTA panels, can "strike down" U.S. laws and in that way they undermine U.S. sovereignty. Tai's explanation shows that this is not the case (to be clear, I'm not saying she was trying to rebut that argument, but I think she does so in a helpful way). There are political realities here, which is why the EU still bans hormone-treated beef.
With regard to more recent realities, in the dairy case, the U.S. won the first complaint it brought, but has not followed up with a suspension of benefits to induce compliance. It later brought another complaint, but the panel hearing that complaint found no violation. With regard to New Zealand's CPTPP case, the panel found a violation, and we will find out soon how hard New Zealand wants to press Canada for compliance, and what strategy it chooses to do so.
As for the future of the autos dispute, I think that depends a lot on who wins the U.S. presidential election. If it's Trump, I think it's safe to assume that clean energy and EVs will be much less of a concern in U.S. policy, and the more traditional concerns about auto rules of origin will take precedence again.
Here was the second exchange, focusing on the USMCA review process:
Meltzer: I want to pick up, you mentioned the review in 2026. Obviously, we've framed the report thinking about the review in 2026. There's going to be elections here, in Canada, [and] in Mexico as well between now and then. But to the extent that you've given this thought, how do you see the joint review mechanism? What would you think it should be trying to accomplish? How do you think about the importance of renewing USMCA?
Tai: This review mechanism when it was first proposed was tremendously controversial. So the amount of time it took for you to explain how the mechanism works is a reflection of a compromise that had to be reached in order to land a review mechanism at all. I think that the first iteration of this proposal was at the five year mark, you come together, you either pledge, this is working, we're going to continue, or the agreement stops. And so this very complex, it happens at the six year mark, if you don't have agreement, you have 10 years for it to peter out, if it renews it's another X number of years. It's a negotiated outcome. But I think the most important piece is, as you rightly focused on, it is an inflection point for essentially a reevaluation of how the agreement is working.
I think that the disputes and the disputes outcomes need to be a part of this, to the extent that we're not able to resolve the disputes using the dispute settlement system itself only.
The other piece of it is going to have to be, how has the world changed since the pandemic? [How] is the clean tech revolution and the climate crisis affecting this arrangement between the three countries? And then also the China piece cannot be ... overstated ... . It is going to be, and it already is, a really important element of tension and concern that is coming up in this very intimate trade relationship that we have between three countries. We are now contending with the fact that there are other players that are every day impacting how we relate to each other and how we compete globally.
So there's a lot for us to work on working towards 2026, and it's the type of thing where we can't just wake up on January 1, 2026, and say, well, now what are we doing, which is why I think that this series of reports that you are putting out, this conversation that I am participating in, that you are hosting, is so incredibly important. We have to be tracking everything along the way so that we're prepared for that moment.
One question that you posed, which was how do we take up this review in 2026 without fundamentally destabilizing the relationship? I think that that's absolutely valid and important, but I do also want to caution, you do not want that review to happen in a way that all three parties come to the conversation too comfortable. The whole point is to maintain a certain level of discomfort, which may involve a certain level of uncertainty, to keep the parties motivated to do the really hard thing, which is to continue to reevaluate our trade policies and our programs to ensure that they're really responding to the changes that are happening around us. These changes, they are on multiple levels. They're happening really, really fast. And if we don't stay motivated to respond, then we are going to lose. And so that review mechanism is important. It is important for us to come to that conversation responsibly. But we also have to be honest, and we also have to understand that that discomfort is actually a feature, not a bug.
I don't have high hopes for this review, given the nature and structure of the process. On the U.S. side, I think we will see some heavy lobbying by interest groups, and then that lobbying will get mixed in with the ideology of whoever is president at that point. What will come out is some U.S. demands, and no doubt some of these demands will make Canada and Mexico uncomfortable. Perhaps Canada and Mexico will put forward demands that make the U.S. uncomfortable too. To me, this does not seem like a great way to make trade policy, but it's where we ended up and we'll see how it goes. Will there be significant changes to the text? Will the parties find resolutions to some existing disputes? Will China, as Tai hints at, become the biggest issue to deal with here? (For what it's worth, my main suggestion for the review is to rethink the review process!)
