International Economic Law and Policy Blog

The Anti-Neoliberal View of Where Things Went Wrong on China Trade

Farah Stockman of the New York Times recently had a piece about former Biden administration official Jennifer Harris. If I understand their views correctly, Stockman and Harris are part of a group of people who are skeptical of past "neoliberal" policies, whereas I -- as I mention here from time to time -- am in the group that is skeptical that "neoliberal" is a useful term in the U.S. politics and policy debate (at least until people who use it can get on the same page about what exactly they mean by it). But beyond those general disagreements, I want to focus here on U.S.-China economic relations. Stockman says the following about how Harris's views changed during a previous government stint with the Bush administration in the 2000s:

... After she joined a student delegation to a NATO summit in Prague in 2002, a faculty adviser on that trip offered her a job in Washington working at the National Intelligence Council. In those early years, she believed what everyone else in Washington believed about the economy — that governments ought not meddle with it.

Her outlook changed in 2007, after she joined the policy planning staff at the State Department. It was her job to track China’s use of subsidies, industrial espionage and currency manipulation to fuel its rise as a manufacturing powerhouse. Ms. Harris argued that tariffs on China were a necessary defense. Nobody agreed. “I was kind of just banging my head against this wall,” she told me. “The wall was a foreign policy establishment that saw markets as sacrosanct.”

In reaction, let me first note that in this period of U.S. policymaking (like at all other times!), I think it's an exaggeration to say the U.S. foreign policy establishment, or any other part of the establishment, saw markets as "sacrosanct"; and along the same lines, I don't think it's the case that everyone in Washington believed that governments "ought not to meddle with" the economy. Of course, I'm sure you can find a few people in government who believed that, but in practice those people generally got outvoted. U.S. economic policy at that time involved a wide range of government intervention in the economy (in trade policy, that meant ordinary tariffs, trade remedy tariffs, farm subsidies, Buy America provisions, etc.). Were people in Washington more in favor of markets in the 2000s than, say, during the 1960s and 1970s? Probably. But I can assure you that the free market folks (like me!) were pretty frustrated with all the government intervention in the economy during this period. (To illustrate this, you can see what my former Cato colleague Dan Ikenson was complaining about at the time here.)

At the same time, while that characterization of U.S. economic policy may be an exaggeration, I can imagine that Harris got pushback from free market advocates within the Bush administration on issues such as the possibility of imposing tariffs on Chinese imports under Section 421. There were six petitions filed under Section 421 during the Bush administration, four of which resulted in affirmative determinations of market disruption, but the Bush administration rejected the use of tariffs in each of these. In terms of the pure economic considerations, these tariffs would have helped specific companies but harmed the overall economy, and that probably led many of the economics folks in the Bush administration to argue against them (AD/CVDs were widely used though, so it's not as though all Chinese imports were coming in duty-free). In addition, the foreign policy establishment had their own non-economic objectives during this period of the War on Terror, and challenging China on trade would have interfered with their goals. In this regard, the U.S. needed China's non-objection on various foreign policy initiatives, so I can imagine it was the view of this group that it was best to avoid trade confrontation with China.

Turning now -- finally! -- to the main point of this post, an important consideration that I think gets overlooked in the context of how to address concerns with China's trade practices is what would actually be effective. There seems to be an assumption from the critics of neoliberalism that taking measures such as the Section 421 tariffs would have been the tough approach to China's trade practices, but I'm not sure that's right. Which measures are actually toughest may depend on the objectives. If your objective is to change China's trade practices, I don't think Section 421 tariffs are likely to get you there. (Indeed, tariffs were imposed on Chinese tires under this provision during the Obama administration, and I don't think anyone would suggest this changed China's trade practices). Instead, WTO complaints would likely have been -- and in many instances actually were -- more effective for inducing policy change. 

All of that leads to me some questions for the people, on both the left and the right, who seem to be believe that the U.S. was not tough enough on China's trade practices during this period:

• What is your specific goal with respect to Chinese trade practices? Do you want China to become more market-oriented? Or are you not interested in that one way or the other, and would rather just keep China out of the U.S. market and/or have the U.S. adopt industrial policies of its own?
• If you do want China to become more market-oriented, do you think unilateral actions such as Section 421 tariffs or Section 301 tariffs will help achieve that? And if you think they will, why do you think this, given past experience?

What Would a Second Trump Administration Mean for Tariffs and Trade?

In case you hadn't heard, there is a U.S. presidential debate coming up this week. I'm not expecting an in-depth and wonky policy discussion in general, and trade policy sometimes doesn't even get a mention at these things. Nevertheless, I've been gathering statements Trump has made on tariffs over the past few months, and this debate seems like as good an excuse as any to post them. I'm not sure what to say about all of the quotes that follow, except maybe ... read 'em and weep? Anyway, here are some things from Trump, and then at the end of the post are a couple brief points on how some of it might actually be implemented.

First, last year Trump laid out his trade agenda here: Agenda47: Cementing Fair and Reciprocal Trade with the Trump Reciprocal Trade Act. The core of his "reciprocity" plan is the following:

- Under the landmark legislation, if any foreign country imposes a tariff on American-made goods that is higher than the tariff imposed by the U.S., President Trump will have the authority to impose a reciprocal tariff on that country’s goods.

- To ensure fairness, the Act will empower President Trump to negotiate the reduction of tariffs on foreign goods if foreign countries agree to reduce their tariffs on American goods.

The first item is the key one: Where foreign tariffs are higher than U.S. tariffs, the Trump administration would raise tariffs to the foreign levels. As to the second item, I would be shocked if the Trump administration negotiated tariff reductions, but it would be fun if a foreign government made a public proposal that it would lower its tariffs on U.S. products to zero if the Trump administration did the same.

Next up, Jeff Stein of the Washington Post, in an article entitled "Donald Trump is preparing for a massive new trade war with China," reported on Trump discussing a 60 percent tariff on Chinese imports:

"Privately, Trump has discussed with advisers the possibility of imposing a flat 60 percent tariff on all Chinese imports, according to three people familiar with the matter who spoke on the condition of anonymity to relay private conversations."

"Despite tariffs’ destabilizing impact on the global and U.S. economies, Trump has promised to dramatically expand their use in a second term. He has floated enacting a “universal baseline tariff” on virtually all imports, or roughly $3 trillion worth of goods, which would amount to more than a ninefold increase in the amount of goods subject to tariffs compared with his first term. He has also talked about pushing legislation to have the United States automatically impose “reciprocal” tariffs matching those of all countries on U.S. exports, which would almost certainly lead to a sharp rise of trade hostilities."

Trump's conversation about a general 10% tariff (the “universal baseline tariff”) is here.

And here is a Trump interview with Maria Bartiromo of Fox News that discusses tariffs: 

Bartiromo: Is it possible to decouple, or is it just tariffs, the way you dealt with it? You used tariffs and sanctions against China.

Trump: I did, and I did very well with it. As you know, we took in hundreds of billions of dollars in taxes with the tariffs, taxes and tariffs ...

Bartiromo: Is that what you want to do again?

Trump: We have to do it. I mean, look, their stock market almost crashed when it was announced that I won the Iowa primary in a record, and then when I won New Hampshire, their stock market went down like crazy. So you know, obviously, I'm not looking to hurt China. I want to get along with China, I think it's great. But they've really taken advantage of our country, and we turned it around. We put big tariffs on steel. I saved the steel companies, and now Japan is buying US Steel. US Steel. You know what a name that is? That's the most important name, 50 years ago there was no company like US Steel. Now Japan is buying it. I don't think I'd let that deal go through by the way.

Bartiromo: Well, your critics are saying that you're gonna start another trade war.

Trump: It's not a trade war, I did great with China, with everything. Look, China came in, they were going to destroy our steel industry, and I put tariffs, big tariffs. 50%, 100%, but 50% for the most part. It stopped it. I have steel people that every time they see me, they start to cry. They hug me. They say, you saved our industry. But now we're letting it go

Bartiromo: Now the Washington Post is saying that you're talking about 60% tariffs on Chinese goods. Is that in the cards?

Trump: No, I would say maybe it's gonna be more than that. Because we're going to have ... look, I want China to do great. I do. And I like President Xi a lot. He was a very good friend of mine during my term ...

...

Look, it's not sustainable for this country to lose $500 billion a year every year like, like, like the sun rises. We lose $500 billion a year. No country can sustain that. And we're not going to do it because the people that ran our country allowed it to happen.

And then there's a Bloomberg article that starts off this way: "Donald Trump is targeting the European Union for a potential slew of punitive trade measures designed to address long-standing grievances should he retake office, according to people familiar with his team’s nascent economic-platform discussions. ... If Trump wins in November, the EU undoubtedly will be one of his chief targets on trade, according to conversations with several Trump advisers." Targeted how? Like this:

A likely starting point in a second Trump administration would be the EU’s inclusion in a broad minimum 10% tariff, which would also be applied to China, his allies said. He might also assemble counter-measures against European digital services taxes that implicitly go after US technology champions, using Section 301 of the US trade law, the allies added.

And here's Trump speaking at a campaign rally and identifying India and Brazil as targets too:

I will pass the Trump reciprocal trade act. If China or any country makes us pay a 100 or 200% tariff, we will make them pay a reciprocal tariff of 100 or 200% right back. In other words, if you screw us, we will then screw you. It's very easy, very simple, a very simple plan. Very simple plan. China charges us 100% and 200%. And others do. India's very, very, a very big abuser. Brazil. They charge us, we don't charge them. We were charging them a lot. We took in billions of dollars. We took hundreds of billions from China, we never took in anything. And as the tariffs on foreign countries go up, taxes on American workers and families will come down dramatically. Because we will be taking in a lot of money. You know, we have this tremendous deficit. We're not going to have much of a deficit, we'll do the reciprocal trade act, that's gonna get rid of a big chunk of our deficit, and you won't have to pay a damn thing. You won't have to pay a thing. Don't let the fake news tell you that it costs you, no, it doesn't cost you.

And here was Trump on CNBC:

SORKIN: Mr. President, I just wanted to ask you, though, you’ve also talked about proposing a 10% tariff, ... . I wanted to ask you about that because the center right American Action Forum, which is a think tank, said that they thought the plan would "distort global trade discourage economic activity and have broad negative consequences for the U.S. economy."

PRESIDENT TRUMP: Well, they’re wrong. It would distort international trade. It would bring it back to the United States. We have companies, if you look at India, you look at China, you look at so many different countries, they’re smart, much smarter than our country. We were getting ready to do this and I had it just about set –

SORKIN: But you don’t think it would result in higher prices for American families? By some estimates, it could be the equivalent of $2,000 a family according to the economist.

PRESIDENT TRUMP: No, I think taxes could be cut, I think other things could happen to more than just that. But I’m a big believer in tariffs for two reasons. Number one, I fully believe in them economically when you’re being taken advantage of by other countries. For instance, China was taking advantage of us on the steel, they were destroying our entire steel industry, which was never doing very well over the last 25 years anyway, but you know, because it’s been eaten alive by foreign competition, and they were dumping steel. I put a 50% tax on China’s steel coming in and every person in the steel industry when they see me they started crying. They were to hug me, they would kiss me, sir you saved our industry. I put a very strong 50% tariff on dumping steel, on their dumped steel. And by the way, it, nothing was perfect. Frankly, the tariffs should have been higher. I was getting ready to do that by the way but the tariffs should have been higher. This saved a whole industry but one thing, let me just say beyond the economics, it gives you power in dealing with other countries because China would come in and said no, no, no more tax. They were absolutely fine for me to deal with because they were so petrified of me putting on additional tariffs. And we don’t use that, China is right now our boss. They are the boss of the United States, almost like we’re a subsidiary of China and that’s because the Biden administration has been so weak.

MELISSA LEE: Mr. President is there no concern that China could impose retaliatory tariffs or retaliatory actions that would make doing business in China difficult for American companies, which are dependent on China for growth?

PRESIDENT TRUMP: That’s ok, yeah sure they might do that.

LEE: So tell Starbucks, tell McDonalds that is going to be all of a sudden maybe more difficult to do business there.

PRESIDENT TRUMP: Sure but they didn’t do it with me. You know, we went through years and they didn’t do it with me. And they never pulled that trigger. That’s a big trigger for them to pull. But even if they do, let American companies come back to America. If you want to sell a car in China, you can’t okay, you pay a massive tax or massive tariff. If we make our cars, we can’t sell in China, they charge tremendous tariffs. Well, they’re very smart. They’re saying, come over to this country. Look at Apple. I’ve had a great relationship with Apple and everybody over there was fine. But I said you got to build your plants here. They built a big plant in Texas. I was working on that very, very hard with various companies that they build in China because if they build in China, they have no tax on it so they make it in China. I said we want you to make it here. They were coming back, they did. They came back with a very big plant here said I’m not doing this unless you – the whole topic of tariffs to me is so simple. Number one, it’s great economically for us and it brings our companies back because if you charge tariffs to China, they’re going to build their car plants here and they’re going to employ our people. They’re right now building big plants because of Biden. They’re building big plants in Mexico. So they build a big giant of plants in Mexico then they sell it across the border with very little tax. It’s ridiculous. We want them to build their plants in the United States. We don’t want to get cars from China. We want to get cars made by China in the United States using our workers but it also gives us a big political power. Tariffs are tremendously powerful in terms of stopping wars, because they don’t want tariffs. And frankly, I made them sing, I made other countries sing with the threat of tariffs. And if you don’t have tariffs, we have nothing whatsoever on them. We have lost such an opportunity when I’ve seen if you want to build a Harley Davidson as an example. I said, How are you doing in India? They were in the White House. How are you doing in India? No good. Why? They have a 100% tariff, but more than that even and therefore we basically get it because you have to double and triple the price in India. It’s just so, what are you going to do? Well, they want us to build a plant in India that way we don’t have so they go, they go and they build a big plant in India. We started, under me we started doing the same thing here. And we have the pot of gold. We have the best pot of gold, but eventually we won’t have that because our country is going down and we’re not going to have it. We’re losing our economic power.

China building car factories in the U.S. is kind of interesting! I'm not sure how many politicians would support this right now, but I'd love to see them asked about it. Trump repeated this at a subsequent campaign rally:

Mexico has taken, over a period of 30 years, 34% of the automobile manufacturing business in our country, think of it, went to Mexico. China now is building a couple of massive plants where they're going to build the cars in Mexico and think they think that they're going to sell those cars into the United States with no tax at the border. Let me tell you something to China. If you're listening, President Xi, and you and I are friends, but he understands the way I deal, those big monster car manufacturing plants that you're building in Mexico right now, and you think you're going to get that, you're going to not hire Americans and you're going to sell the cars to us now, we're going to put a 100% tariff on every single car that comes across the line, and you're not going to be able to sell those cars.  ... And I'll tell them if they want to build a plant in Michigan, in Ohio, in South Carolina, they can, using American workers. They can't send Chinese workers out there, which they sometimes do. But if they want to do that, we're welcome. Right? But they're not going to build them in Mexico and they're not going to do that. We're going to tariff them at 100%.

Then here's Trump in an interview with Time magazine:

Let’s shift to the economy, sir. You have floated a 10% tariff on all imports, and a more than 60% tariff on Chinese imports. Can I just ask you now: Is that your plan?

Trump: It may be more than that. It may be a derivative of that. A derivative of that. But it will be somebody—look when they come in and they steal our jobs, and they steal our wealth, they steal our country.

When you say more than that, though: You mean maybe more than 10% on all imports?

Trump: More than 10%, yeah. I call it a ring around the country. We have a ring around the country. A reciprocal tax also, in addition to what we said. And if we do that, the numbers are staggering. I don't believe it will have much of an effect because they're making so much money off of us. I also don't believe that the costs will go up that much. And a lot of people say, “Oh, that's gonna be a tax on us.” I don't believe that. I think it's a tax on the country that's doing it. And I know. Look, I took in billions of dollars from China. Nobody else ever did anything on China. I also let people know what the threat of China was. China was going along making $500 to $600 billion a year and nobody was ever even mentioning it until I came along. What's happening in Detroit is very sad because electric cars with this EV mandate, which is ridiculous, because they don't go far. They cost too much and they're going to be made in China. They're all going to be made in China.

Mr. President, most economists—and I know not all, there isn't unanimity on this—but most economists say that tariffs increase prices. 

Trump: Yeah. 

Are you comfortable with additional inflation?

Trump: No, I've seen. I've seen—I don't believe it'll be inflation. I think it'll be lack of loss for our country. Because what will happen and what other countries do very successfully, China being a leader of it. India is very difficult to deal with. India—I get along great with Modi, but they're very difficult to deal with on trade. France is frankly very difficult on trade. Brazil is very difficult on trade. What they do is they charge you so much to go in. They say, we don't want you to send cars into Brazil or we don't want you to send cars into China or India. But if you want to build a plant inside of our country, that's okay and employ our people. And that's basically what I'm doing. And that’s—I was doing and I was doing it strongly, but it was ready to really start and then we got hit with COVID. We had to fix that problem. And we ended up handing over a higher stock market substantially than when COVID first came in. But if you look at the first few years of what we did, the numbers we had were breathtaking. There's never been an economy—

Sir, the economy was certainly humming during your first term. There's no question about it. But, you know, Moody's did say that your trade war with China cost the U.S. economy $316 billion and 300,000 jobs. [Editor’s note: The estimate of $316 billion was made by Bloomberg Economics, not Moody’s.]

Trump: Yeah. Moody’s doesn’t know what they’re talking about. We had the greatest economy in history. And Moody's acknowledges that. So how did it cost us if we had such a good economy? Everybody admits it. If we didn't do that, we would have no steel industry right now. They were dumping steel all over this country. And I put a 50% tariff on steel. It was gonna go higher. And the people that love me most are businesses, but in particular, the steel industry. They love me because I saved their industry. I've had owners of steel companies and executives of steel companies come up and start crying when they see me. They say, nobody, nobody helped us until you came along. China was dumping massive amounts of steel into our country. And we saved the steel industry.

Do you think that businesses pass along the cost of a tax to the consumer?

Trump: No, I don’t believe so. I believe that it cost the country that—I think they make less. I actually think that the country that is being taxed makes less. I don't believe—

You don't believe that businesses pass on the cost? 

Trump: No, I think what happens is you build. What happens to get out of the whole situation is you end up building, instead of having your product brought in from China, because of that additional cost, you end up making the product in the United States. And that's been traditionally what happened. If you look at what goes on. If you look at China, they don't want our cars. They charge them tremendous numbers. You look at India. India is a very good example. I get along very well with the people, representatives of India. Modi is a great guy, and he's doing what he has to do. But we had a case with Harley Davidson, I had Harley Davidson on the White House. I said, “How are you doing? How's business? Very good? Everything's good?” I said, “Just out of curiosity, how do you deal with India?” “Not Well.” Now you’ve got to remember, this is five years ago, four years ago, they said, “Not well. We can't do business with India, because they charged us such a big tariff, it was over 100%.” And at that price, you know, there's a point at which the consumer breaks and can't buy. They said, “But they will do anything for us to build a Harley Davidson plant in India. They don't want us to give motorcycles to India, but they do want us to build a plant.” I said, “Well, I'm not going to be very happy with that.” But that's ultimately what happened. They built a plant in India. And now there's no tax, and I'm saying we're doing the same thing. We're gonna build plants here. Now something that's taking place that nobody's talking about, maybe don’t know, but I have a friend who builds auto plants. That's what he does. If you ask him to build a simple apartment someplace, he wouldn't know how to do it. But he can build the plant, millions of feet, the biggest plants in the world. He's incredible. And I said to him, “I want to see one of your plants.” And he said to me, “Well, are you ready to go to Mexico? Are you ready to go to China?” I said, “No, I want to see it here.” He said, “We're not really building them here, not the big ones, the big ones are being built right now in Mexico or China.” China now is building plants in Mexico to make cars to sell into the United States. And these are the biggest plants anywhere in the world. And that's not going to happen when I'm President, because I will tariff them at 100%. Because I'm not going to allow them to steal the rest of our business. You know, Mexico has taken 31% of our auto manufacturing, auto business. And China has taken a much bigger piece than that. We have a very small percentage of that business left and then you have a poor fool like the gentleman is at the United Auto Workers who is okay with the fact that we're going to do all electric cars and it's so sad to see because the all electric cars are just not what the consumer wants.

...

Just to clarify something you said a moment ago: You're considering a 100% tariff on Chinese and Mexican imports?

Trump: I didn't say that. They charge us 100%. But they charge us much more than that. India charges us more than that. Brazil charges us what—Brazil's a very big, very big tariff country. I ask people, Who are the worst to deal with? I'm not going to give that to you because I don't want to insult the countries because I actually get along with them. But you'd be surprised. The E.U. is very tough with us. They don't take our foreign products. They don't take our cars. We take Mercedes Benz and Volkswagen and BMW. They don't take our cars. If we want to sell a Chevrolet, even if we want to sell a Cadillac, a beautiful Cadillac Escalade, if we want to sell our cars into Germany, as an example, they won't take them. 

Let's come back to Europe later.

Trump: I said to Angela Merkel, “Angela, how many Chevrolets are in the middle of Berlin?” She said none. I said, “You're right about that. But we take your cars, including cars that aren't that expensive, like Volkswagen, relatively speaking.” I said, “Do you think that's fair?” She said, “Probably not, but until you came along, nobody ever mentioned it.”

And here's Trump at a New Jersey rally talking again about tariffs on cars made by Chinese factories in Mexico (42:35 of video):

China is building massive automobile plants. I'm sure you gonna be thrilled to hear this. A friend of mine builds automobile plants. ... I said, I want to see one of the plants. He said, Well, you'll have to go to Mexico. I said why? He said the big ones are being built in Mexico. I said what about the United States? No, the big ones are being built in Mexico. Biden has taken so much incentive away and they're moving into Mexico. And what's happening is the really big ones are being built by China in Mexico to make cars in Mexico, by China, to sell into the United States, to come across the border with no tax. I said wait a minute, you mean, the big automobile plants under construction now being built in Mexico? That's right. ... I said, so they're being built in Mexico, and they're owned by China. And China's running them right now. And they're doing that to avoid tax and labor expensive, more expensive labor and they're gonna sell all those cars into the United States. Yeah, they're built so that he makes the cars in Mexico, China, and they sell them here. I said that won't happen. I said, I will put a 200% tax on every car that comes in from those plants, and they're not going to do that because they'll destroy our automobile business, and Biden doesn't want to get involved. And those aren't electric vehicles necessarily. Those are gas powered vehicles, which he's not doing anything about. Do you notice he's trying to save the electrical vehicle but not the gas powered, which is the vehicle that everybody wants? So you don't have to worry about those plants, if I'm elected. If I'm not elected, those plants are going to close up every automobile job in America, you won't be making one automobile in the United States of America.

And then most recently, there have been reports that Trump "floated the concept of eliminating the income tax and replacing it with tariffs." The math doesn't work at all on this, but regardless, given everything else that was said above, it's not too surprising to hear this sort of thing. In addition, Trump appears to think the McKinley tariffs were some sort of great success, something he made reference to years ago as well.

So how would the executive branch accomplish all of this under a Trump presidency? A Washington Post article tells us that "[a]llies of the former president are searching for legal justifications for charging duties on all imports." For more specifics, we turn to former U.S. Trade Rep. Robert Lighthizer, who said this last December:

... Mr. Lighthizer said that given the size of the U.S. trade deficit and its impact on the American economy, a president would have “clear authority” under two laws — the International Emergency Economic Powers Act and Section 338 of the Tariff Act of 1930 — to impose tariffs unilaterally.

IEEPA has probably become familiar to people at this point. Section 338 was explained by John Veroneau and Catherine Gibson of Covington & Burling here. In a nutshell:

Section 338 permits the president to impose “new or additional duties” on countries that have discriminated against commerce of the United States. Section 338 authority is triggered when the president finds that a foreign
country has either (1) imposed an “unreasonable charge, exaction, regulation, or limitation” on U.S. products which is “not equally enforced upon the like articles of every foreign country”; or (2) “[d]iscriminate[d] in fact” against U.S. commerce “in respect to customs, tonnage, or port duty, fee, charge, exaction, classification, regulation, condition, restriction or prohibition” so as to “disadvantage” U.S. commerce as compared to the commerce of any foreign country.

There was also this from Politico: "One legal tool that’s been floated is Section 122 of the Trade Act of 1974, which authorizes tariffs of up to 15 percent against countries that have “large and serious” trade surpluses with the U.S."

I thought it might be difficult to match the intensity of trade policy during Trump's first term, but it seems like they plan to give it a shot!

Situating Labor in a Trade Agreement: Questions from the First RRM Panel

This is the second of two posts that take a look at the submissions and recount some of what was said at the hearing in the first USMCA Rapid Response Labor Mechanism (RRM) dispute between the United States and Mexico.  If you’re new to the discussion, check out the prior post here.  Since my last post, however, the panel’s 119-page determination (including a separate view by one panelist and three annexes) was made public so I will comment briefly also on its findings where applicable.

In this post, I concentrate on two interrelated issues.  One is the parties’ discussion about the meaning of “Covered Facility,” and the other is the parties’ dialogue with the panel about the panel’s purpose and the purpose of the RRM.    If you're short on time, here are the two bottom-line points that came through from the panel proceedings: (1) the intersection of trade and labor and the issue of how the latter fits into the former are far from settled, and, (2) despite the extensive customs data that governments now collect, specific details about goods crossing borders remain challenging to prove – a point that is relevant also to other sustainability and due diligence laws beyond the RRM.

To be sure, the panel’s decision did not turn on either of these issues.  Rather, the panel’s determination that it did not have “jurisdiction” over the dispute rested on its conclusion that, under the USMCA, a denial of rights finding “can only be applied to events . . . that are subject to [Mexico’s] 2019” Federal Labor Law and that the events alleged by the United States in this instance did not meet that criterion.  I take up that analysis in a forthcoming case note; in the meantime, colleagues have summarized the panel’s discussion on their law firm websites in case of interest.

Covered facilities and their sales profiles

To remind us again, the Agreement defines “Covered Facility” as a facility in Mexico or the United States that “(i) produces a good or supplies a service traded between” Mexico and the United States; “or (ii) produces a good or supplies a service that competes in the territory of a Party with a good or a service of the other Party.”  I will confess that, among all the topics that one could find legally or institutionally interesting (and, I suppose, controversial) in the RRM when the RRM was first announced, the definition of Covered Facility was relatively low on my list.  It was on the list, sure, but I did not expect the extended discussion that played out among the parties and the panel, and perhaps I was not alone among stakeholders.

Throughout the hearing, the panel asked several questions about the meaning of “Covered Facility.”  The issue was contentious as an evidentiary matter because the United States did not provide evidence to show that substances being mined at the San Martín facility were entering the United States. Rather, the United States took the position that it was sufficient to rely on the operating company’s U.S. Securities and Exchange Commission Form 10-K demonstrating that the company, which also operates other facilities, had recorded sales in the United States.  Mexico later called out the United States on this point, saying that if the United States had wished to show that minerals from the mine were exported to the United States, it could have and should have submitted documents from U.S. Customs and Border Protection, but it did not.  The panel subsequently had no difficulty dismissing the U.S. arguments with respect to the first possible definition, (i), of Covered Facility. 

More challenging was the question of whether the facility produces something that competes in Mexico with a U.S. good or service under definition (ii).  Let’s look back at the parties’ arguments.

The United States argued that the panel’s interpretation should “reach as many facilities as possible” to ensure that employers do not evade coverage under the RRM.   Consequently, the U.S. position was that the good produced at a covered facility does not have to be exported or be put on the market to be considered a good that is traded between the parties or that competes in the territory of a party with a good of the other party.  Rather, the United States maintained that where a good is a traded good, the circumstances of production of that good in any particular facility will affect the market for that good more generally.  When questioned, the United States argued that “whether or not goods from the San Martín facility themselves are exported does not change the fact that if the labor rights of the workers producing those goods are not protected, costs are likely to fall,” affecting both the labor market and the economic market in which the facility operates. 

Now this assertion sounds a lot like some of the arguments that arose in the U.S.-Guatemala dispute concerning the phrase “manner affecting trade” – a phrase that comprises part of an obligation on the parties to the CAFTA-DR.  In the context of that dispute, there was some discussion as to whether a government’s failure to effectively enforce its labor laws would give firms in that country an economic advantage.  It came to light that some economic studies have suggested that the opposite is true: firms -- and their host countries -- benefit financially where higher labor standards are enforced, not the other way around.  Surely there are various layers of generality and nuance to such studies, and likely there is countervailing research.  The point remains that these really complex interacting factors have contributed to the creative and still evolving experimentation in trade agreement drafting.  For its part in the present dispute, Mexico offered that the United States failed to identify any U.S.-origin merchandise competing with the products from the mine.

Spoiler alert: The panel agreed with Mexico that the United States did not meet its burden in this regard.  However, the panel nevertheless concluded that the mine was a Covered Facility on the basis of a statement made by the mine itself in its written submission.  The mine argued, like Mexico, that the United States did not show that minerals produced at the mine competed against U.S.-origin goods, and that it could not do so, because the mine “has not sold any copper ore or concentrates to unaffiliated facilities in Mexico. It is all captively consumed.”  This statement – that something is captively consumed – was sufficient for the panel to find that “production from the San Martín mine was in fact captured internally . . . presumably in Mexico”.  The panel concluded that this statement “shows that the San Martín mine does indeed sell in Mexico and prima facie competes with other suppliers in the Mexican market.”

The place of “trade” in “trade & labor” disputes

The issues surrounding the RRM’s scope and the participants’ corresponding arguments are reflective of a broader conversation about the relationship between trade and labor and why we have labor chapters in trade agreements.  Obviously, that is a question that many scholars and practitioners have addressed in the last 30 years.  But it came to a clear point when the panel chair asked the following question on the second day of the hearing:

“As I sit here listening to the parties talk about USMCA as a trade agreement, I’m forced to wonder why I’m sitting in this chair. I was selected . . .  because I have experience in labor matters.  . . . Your repetition, both of you, that this is a trade agreement makes me wonder how you see the labor relations lens superimposing itself on a trade agreement.”

This debate about the panel’s role came up in several moments during the hearing.  Mexico repeated more than once that “USMCA is not a labor treaty.  It is a trade treaty.” A panel member at one point asked both sides whether the purpose of the Mechanism was to provide protection to the most workers possible.  And, on another occasion, a panel member questioned the United States on the “ultimate purpose” of the RRM and whether it was to support a “notion that violations of freedom of association and collectively bargaining are a form of unfair competition.”  As per the arguments I recounted above, the United States replied that the purpose was to prevent companies from producing in Mexico with an unfair advantage, which led the panelist to ask whether the panel ought to take into account in this dispute whether the actions complained of were giving Mexico an economic advantage.  The conversation continued to the point where the panelist suggested that it would likely be to the advantage of the United States not to intervene on behalf of the striking workers as it would potentially eliminate a competitor for U.S. exporters.

These exchanges again showed the complications of the trade-labor relationship and the multiple functions of labor chapters in trade agreements: leveling the playing field and protecting human rights to name two common, but not obviously complementary, narratives.  A footnote in the panel’s determination revealed just how many U.S. and Mexican companies are part of the corporate structure of this one mine.  And some customs practitioners strongly believe that the RRM as presently structured inflicts more pain on U.S. companies (importers) than it does on the “misbehaving” facilities in Mexico.

In this context, these questions also intersect with issues of complementarity – is the RRM about strengthening Mexican institutions and what place for them in the story?  At the hearing, Mexico raised concern that the United States was trying to broaden the Mechanism by creating “universal jurisdiction” over violations of Mexican labor law whereas, in Mexico’s view, the only law of relevance is the 2019 Federal Labor Law.  Mexico argued that the panel could not act in this instance because to do otherwise would make it an appellate body over Mexican courts, which it is not. 

Similarly, the panel did not get much into the standard for a “denial of rights,” but the parties did discuss it during the hearing.  The United States argued that a denial of rights could be shown through a demonstration of a violation of Mexican law.  Mexico replied a denial of rights is a term that is defined by the international agreement, not by domestic law, and must involve something more than just an ordinary violation of Mexican law.  These questions about the relationship between Mexican law and treaty interpretation will have to wait for another day.

Looking ahead

As the next RRM panel gets underway, it will face its own set of interpretive challenges.  What is clear thus far is that the language of the instrument has made it hard to square some of the parties’ intended review processes with traditional dispute settlement proceedings.  The parties and the panel all appear to have struggled with reconciling these expectations and the text. 

In the meantime, we will see if the United States carries on with accepting more RRM petitions in the months leading up to the election and, perhaps more importantly, in the period leading up to the USMCA review where both the United States and Mexico seem poised to want to make some changes to the current RRM arrangement.

What does Mexico's Impending Return to Single Party Government Mean for Attracting FDI?

While the election of Lopez-Obrador's anointed candidate, Claudia Sheinbaum, in the elections June 2 was no surprise in itself, her margin of more than 30 points over the principal opposition candidate Xochitl Galvez (and over 58% of the total vote) was a surprise to many observers. Similarly, few were shocked when Morena achieved a supermajority in the Chamber of Deputies (372 out of 500). However, most pollsters and observers did not predict that Morena would come within a few votes of a supermajority in the Mexican senate (83 out of 128), so that AMLO would only have to persuade three opposition deputies to cross over to achieve the necessary 86 votes in the senate.[1]

Proposed Legislative and Constitutional Changes

Why is this important? Because AMLO and his supporters have promised that at the beginning of September, when the new congress is installed, but before Sheinbaum takes office on October 1, AMLO will seek to take full advantage of Morena’s congressional super-majorities. AMLO reiterated his intent in mid-June to enact legislation which will permit the firing of  the current (more or less independent) Supreme Court as well as other federal courts with elected judges—approximately 1600 judges in total—to be replaced by judges effectively chosen by AMLO and Morena. [2] He and Morena would also enact other major changes that would threaten the rule of law and further weaken Mexico's negative investment climate, plagued by turbulence in the government and administrative agencies.

This conclusion assumes that the loose Morena coalition will hold together after October 1, when AMLO is no longer president. If even a few of the legislators who are currently part of the Morena coalition—perhaps if any do not want Mexico to return to pre-2000 single party government in the Hungary/India/Iran mold—any major legislative changes that are not made prior to October 1 could be deferred or abandoned. Whether that possibility is a realistic one or pie in the sky remains to be seen.

 In February 2024, President Lopez Obrador submitted to the Chamber of Deputies a package of 18 constitutional amendments and two legal reform initiatives that aim, among other aspects, to modify the functioning of the Legislative and Executive and judicial branches and the electoral system. If all the legal and constitutional reforms were to be enacted, they would, inter alia, eliminate various autonomous constitutional bodies and regulatory organisms, as well as simplify the structure of the federal public administration sector. Significantly, the changes would further strengthen the Federal Electricity Commission ("CFE") near monopoly and further modify the power sector, in part by establishing constitutional prohibitions on various matters such as fracking, open-pit mining, and the use of vaping systems and fentanyl.[3] Many of these proposals were originally made earlier in AMLO’s term but failed either because of adverse Mexican court decisions or because Morena lacked a supermajority in the upper house. At that time, the opposition parties united to defeat the measures.[4]

Mexico’s Adverse Investment Climate

In a country where foreign direct investment has been discouraged inter alia by nearly six years of AMLO's efforts to roll-back the 2013 energy sector reforms to re-establish the virtually complete Pemex and CFE state monopolies by curtailing private investment in the power sectors, the result has been investor uncertainty and looming electric power shortages.[5] Such uncertainty would be further exacerbated, and most aspects of the rule of law eroded, if the judicial reforms noted above are implemented. Added to serious water shortages in some parts of the country, uncertain access to natural gas, continued rampant corruption, strengthened drug cartels, reduced personal security, generally low productivity, and expanded government military control in customs, transportation and other sectors, FDI is likely to remain stagnant or decline from its current levels. FDI has been essentially unchanged since 2018 at around $33 billion annually, despite enormous nearshoring investment opportunities resulting from US attempts to de-link production and supply chains from China. For the first half of 2023, one bank estimates that of the $29 billion dollars of direct investment that had  occurred, 78% corresponded to the reinvestment of profits, 15% to transactions between companies, and only 7% to new investments.[6]

Addressing the Electric Power Crisis

Although it is reasonable to hope that Ms. Sheinbaum becomes her own person after she becomes president on October 1, such independence is likely be very difficult for her to achieve, particularly in the short to medium-term. She has the advantage of being a PhD in environmental science, and a reputation that suggests a level of interest in green energy which has escaped AMLO and most Morena members of congress, who remain totally enamored with Pemex and oil.[7] Yet she lacks AMLO's charisma and his overwhelming influence over Morena party officials, not only in the congress but also in state and local offices. For example, Morena now will control 23 of 32 governorships, and those governors effectively owe their positions to AMLO.[8]

Mexico faces an energy crisis in large part because of AMLO's dislike of FDI in the green power sector, which has resulted in the effective expropriation of a series of US, Spanish and Italian-owned windmill and solar panel projects in order to strengthen the CFE's near-monopoly. The government under AMLO also pressured one of Mexico’s largest foreign investors in clean energy, Iberdola, to give up on the Mexican market and sell its assets to CFE.[9]  The lack of CFE's funds or technology to expand Mexico's electricity production, or power transmission capabilities, has resulted in a series of short-term brownouts in some parts of the country, and continued dependence on fossil fuels including natural gas (around 55%), coal (about 6%) and dirty Pemex fuel oil (about 14%). Less than 10% is solar and wind generated. [10] Mexican authorities, such as the energy regulator CRE, have also largely ceased authorizing independent power projects (IPPs), whereby a large factory could arrange for its own energy supplier, independent of CFE.[11] While "distributive generative" projects are allowed without CRE authorization, the paltry 0.5 megawatt limitation (contrasted with the US cap of 5.1 MW) means their use is limited, “presenting a significant hurdle for companies whose energy consumption often exceeds this limit,” with some experts calling for an increase in the 0.5 MW cap.[12] The Mexican Supreme Court ruled in January 2024 that an electricity law favoring state-owned utilities over private firms violates constitutional guarantees of free competition in the power sector,[13] but with Morena’s supermajorities in the congress and likely soon in the Supreme Court, whether this decision will survive remains unclear.

In my view any new investor in Mexico that believes they will have a 24/7 dependable, reasonably priced supply of even partially clean electric power for the medium or long term, or access to a functioning judiciary, is naive. Any multinational enterprise that has made commitments toward achieving carbon neutrality in 2040 or 2050 should understand that establishing facilities in Mexico will challenge their global commitments, perhaps for several decades.

Dependance on US Natural Gas

To some extent it has been feasible for manufacturing enterprises in the Mexican border states to purchase electricity in small quantities from the United Stares, principally Texas but also Sonora. [14] Enterprises in the border states and CFE are heavily dependent on natural gas imported from the US, primarily from Texas, in part because Pemex’s production of natural gas has declined by 30% between 2009 and 2023.[15]  In 2022, Mexico imported about  5.7 billion cubic feet of US natural gas per day per day, about 69% of Mexico's natural gas consumption by some estimates.[16] Fortunately,  the US for the foreseeable future is likely to have excess natural gas to sell to buyers in Mexico. However, much of Mexico beyond the northern border states does not have natural gas pipelines available to transport imported gas.  

Other Disincentive to FDI

In addition to energy, other AMLO reforms are expected to further increase the arbitrariness and unpredictability of investing in Mexico. AMLO's administrative initiative, if approved, would allow the executive branch to act arbitrarily, revoke and modify administrative licenses or certifications at any time, including after they are issued, only subject to the interpretation the government will make of vague concepts, such as "public interest", "national security" or "to protect individuals’ fundamental rights".[17] Such vagueness is also in my view tailor-made for increased corruption. Moreover, court review could become useless under the new system of elected judges..

At a time when the likelihood of arbitrary government action is increasing, the protection for foreign investors is less comprehensive under the USMCA than it was under NAFTA, meaning that in many cases a US or Canadian investor's only recourse is to the Mexican courts or administrative tribunals--which are less likely to be independent of the government than before the planned reforms leading to the election of judges (undoubtedly chosen by AMLO or Sheinbaum or other Morena politicians). Canadian investors no longer have any recourse to independent third-party investor-state dispute settlement (ISDS). US investors in government contracts relating to petroleum, electric power, transportation, telecommunications and certain infrastructure projects enjoy NAFTA-like protections. All others must exhaust local court or administrative remedies before becoming eligible for ISDS. The scope of challenging regulatory actions is significantly decreased, as an international arbitral tribunal appointed under USMCA authority has no jurisdiction to review arbitrary actions ("fair and equitable treatment") or indirect or creeping expropriation.[18]

Probable Return to Single-Party Government

No one really knows in mid-2024 whether AMLO and Morena, with at least tacit concurrence by Sheinbaum, will be able in September to make the major changes in Mexico's laws and constitution that if enacted would make Mexico's investment climate even weaker than it is today. But there is also a strong possibility that whatever is not accomplished in September will take place under Sheinbaum soon thereafter, if she feels obligated to do so and the Morena coalition holds. AMLO, Sheinbaum and Morena appear to have sufficient power to return Mexico to single-party government, as was the situation in Mexico for more than 70 years prior to 2000, where the Institutional  Revolutionary Party (PRI) exercised during most of that period near complete control over the presidency, the congress, the judiciary and the administrative agencies, once termed the “perfect dictatorship.”[19] One might have hoped that fewer Mexican voters wished to risk return to autocratic government, but that was not evidenced on June 2.

A key post-election question is the extent to which if any President Sheinbaum will be able to act independently of AMLO in the future on such vital issues as increasing Mexico's supply of electric power, clean or otherwise. Many potential investors may take a wait and see attitude, at least until the end of 2024 to judge whether the Sheinbaum presidency is likely to become more, less (with the attempted AMLO September "reforms"), or similarly neglectful of Mexico's investment climate. Sheinbaum's background as a climate scientist may give hope to some. For others, the knowledge that AMLO will effectively control the Congress long after October 1, retain his charismatic hold on public opinion, and may find it difficult to refrain from looking over Sheinbaum's shoulder well into her "sestenio” may well cause a high level of skepticism that will be translated into less new investment in 2024 and the future.

Conclusion 

As noted earlier, no one will really know until after October 1 whether the rollback of many elements of Mexico’s current mostly democratic system by the legal and constitutional changes backed by AMLO and the congress will become effective. It is clear, however, that virtually none of them will repair Mexico’s poor investment climate. Even initial action on energy, such as increasing the current limit on distributive generative projects from 0.5 megawatts to 5, 10 or even 25 megawatts, would be helpful, but in itself such improvements would not convince many potential investors to make long term investment commitments given the high risk of arbitrary government interference.

 

[1] Michael Oboyle and Maya Averbuch, “ Mexico Ruling Party Coalition Just Shy of Supermajority,” June 9, 2024, Bloomberg, https://www.bloomberg.com/news/articles/2024-06-09/morena-party-just-shy-of-supermajority-in-senate-delgado-says.

[2] See Christine Murray, “Mexico’s outgoing president pushes ahead with plan to fire 1,600 judges,” June 13, 2024, Financial Times, https://www.ft.com/content/3319d056-7522-4e36-8210-f908346c9f41?shareType=nongift (confirming plans to make such changes in September).

[3] See Francisco de Rosenzweig et al, “Constitutional and Legal Reform Initiatives proposed by President Andrés Manuel López Obrador,” February 12, 2024, White and Case, https://www.whitecase.com/insight-alert/constitutional-and-legal-reform-initiatives-proposed-president-andres-manuel-lopez (providing a detailed and comprehensive summary of AMLO’s proposed reforms).

[4] See, e.g., Juan Montes, “Mexico’s Congress Defeats President’s Bill to Overhaul Election Agency,” December 6, 2022,  Wall Street Journal, https://www.wsj.com/articles/mexicos-congress-defeats-presidents-bill-to-overhaul-election-agency-11670376590.

[5] See, e.g., David A. Gantz, “AMLO’s Energy and Investment Policies Will Make Mexico Poor Again,” August 4, 2022, Baker Institute for Public Policy, https://www.bakerinstitute.org/research/amlos-energy-and-investment-policies-will-make-mexico-poor-again.

[6] “Mexico | Foreign Direct Investment: positive performance,” September 4, 2023, BBVA Research, https://www.bbvaresearch.com/en/publicaciones/mexico-foreign-direct-investment-positive-performance/ .

[7] See Gavin Maguire, “Mexico's energy transition hits reverse in 2023, February 13, 2023, Reuters, https://www.reuters.com/markets/commodities/mexicos-energy-transition-hits-reverse-2023-2024-02-13/ ; Cassandra Garrison, “Can Mexico's Sheinbaum, a climate scientist, shake Lopez Obrador's oil legacy?,” June 6, 2024, Reuters, https://www.reuters.com/world/americas/can-mexicos-sheinbaum-climate-scientist-shake-lopez-obradors-oil-legacy-2024-06-04/.

[8] Carin Ziss and Chase Harrison, “Mexico Elects: Ongoing Coverage of the 2024 Race—The Results Are in,” June 3, 2024, AS/COA,  https://www.as-coa.org/articles/mexico-elects-ongoing-coverage-2024-vote.

[9] Belén Carreño and Adriana Barrera, “Mexico Snares Iberdrola Power Plants for $6 biln in ‘New Nationalization,’” April 4, 2023, Reuters, https://www.reuters.com/markets/deals/mexico-buy-13-power-plants-spains-iberdrola-6-billion-2023-04-04/.

[10] “Distribution of electricity generation in Mexico in 2022, by source,” May 14, 2024, Statista, https://www.statista.com/statistics/1237496/mexico-distribution-of-electricity-production-by-source/.

[11] “Mexico's 'door is still closed' to private energy investment,” August 30, 2023, Bnamericas, https://www.bnamericas.com/en/features/mexicos-door-is-still-closed-to-private-energy-investment.

[12] Ian de la Garza, “A Brief Study of Distributed Generation: Mexico vs. the World,”  June 16, 2023, Mexico Business News, https://mexicobusiness.news/energy/news/brief-study-distributed-generation-mexico-vs-world.

[13] “Mexico’s Supreme Court rules against electricity law favoring state-owned utility over private firms,” January 31, 2024, Associated Press, https://apnews.com/article/mexico-power-sales-unconstitutional-060ab7b4918d6af511a610088f167655#.

[14] In the past, Arizona Public Service, based in Phoenix exported electricity from Yuma, southwest of Phoenix, across the international border to two large industrial users (Bose and Daewoo Electronics) located in San Luis del Rio Colorado. At the time CFE did not have the generating capacity to supply the plants, which employed more than 4,000 workers at their peak. (Based on the author’s personal recollections as counsel for one of the firms.)

[15] “Pemex’s Natural Gas Production from 2008to 2023,” May 22, 2024, Statista Research Department, https://www.statista.com/statistics/543608/natural-gas-production-of-pemex/.

[16] “Energy trade between Mexico and the United States reached a record $81.9 billion in 2022,”  June 28, 2023, U.S. Energy Information Administration, https://www.eia.gov/todayinenergy/detail.php?id=56960; Ira Joseph and Diego Rivera Rivota, “Lucrative Reward or Mounting Risk? Mexico’s Growing Reliance on US Gas,” October 24, 2023, Columbia SIPA,  https://www.energypolicy.columbia.edu/publications/lucrative-reward-or-mounting-risk-mexicos-growing-reliance-on-us-gas/.

[17] See Alejandro Lopez Ortiz et al, “Proposed Mexican Legislative Reform Threatens Private Sector Interests,” April 3, 2023, Mayer Brown, https://www.mayerbrown.com/en/insights/publications/2023/04/proposed-mexican-legislative-reform-threatens-private-sector-interests.

[18] USMCA, Chapter 14.

[19] See, Jo Tuckman, “Mexican Democracy’s Lost Years,” June 23, 2012, New York Times, https://www.nytimes.com/2012/06/24/opinion/sunday/mexican-democracys-lost-years.html?pagewanted=all (quoting Peruvian novelist Mario Vargas Llosa because of the PRI’s “tight control of public life without resort to military juntas and their everyday brutalities”).

David A. Gantz

Will Clayton Fellow, Baker Institute for Public Policy, Mexico Center

SAIELN’s 4th Biennial Conference: Local Approaches to International Economic Law

This is from the South Asia International Economic Law Network:

SAIELN’s 4th Biennial Conference will take place on 16th - 18th December 2024 in Colombo, Sri Lanka, in collaboration with the Open University of Sri Lanka.

An abstract of 500 words should be submitted no later than 30th July 2024. Authors of selected abstracts will then be required to submit a working draft of their contribution of at least 3,000 words by 1st October 2024.

Non-exhaustive list of themes and topics of the conference:

• Civil society perspectives on IEL
• Local communities and IEL
• Impact of IPR on public health
• Interaction of ISDS with indigenous people
• Impact of IEL on climate justice
• Localising the International - IEL experiences
• Re-evaluating trade and investment policy for grassroots-level actors
• Democratic participation and inclusivity in IEL
• Impact of international-standard setting on local actors
• Inclusive participation of consumers in international standard-setting
• The interplay between international human rights law and IEL
• Role of trade agreements in enhancing inclusivity and sustainable development
• Leveraging IEL for benefiting local actors
• Interdisciplinary analysis of IEL

We welcome critical and interdisciplinary perspectives, South Asian and global case studies and approaches.

Please make submissions and enquiries to [email protected]

Getting Ready for the USMCA Review

I noticed that the Canadians had started their preparation for the six year USMCA review and extension decision under Article 34.7, so I wrote a short piece for the Baker Institute about all this. This is the conclusion:

The USMCA review and extension process is new and untested, and its impact could range from modest adjustments to full-scale renegotiation. Every stakeholder with an interest in the review — businesses, NGOs, unions, academics, and others — should start preparing their views now so as to communicate them clearly to the government officials who will be in charge of the negotiations. 

Canada has begun that process, and Mexico and the United States should follow suit quickly. In Mexico, controversies over party control of the Mexican legislature, along with laws and constitutional amendments proposed by the Morena party, may be distracting government officials at the moment. And in the United States, the upcoming presidential election is the primary focus of political attention. Nonetheless, both governments would be well advised to begin efforts similar to Canada’s.

I have been a skeptic about this provision from the start. Doing a review of a trade agreement is fine, but I thought the original proposal for an automatic termination after five years unless everyone agrees to extend was a bad idea, and the modified version we ended up with is complex and convoluted. But it's very hard to say how this will turn out in practice, and I guess we'll find out soon enough whether I was right to worry.

What I might do instead of the current Article 34.7 process -- which perhaps could be tweaked as part of the 2026 review -- is have reviews more frequently than every six years. That may not be worth doing for every trade agreement out there, but North American economic integration is important enough that it's worth taking a close look at periodically. Additional reviews might be of particular value for transparency. The three governments have USMCA meetings regularly, but the general public only gets little snippets of information about was said. A review process could, at least in theory, provide more details on what the governments are talking about under the agreement.

Then in terms of the extension provisions, given that withdrawal is already possible under Article 34.6, I'm not sure a provision requiring an affirmative decision on extension adds much value. However, if there is going to be such a provision, what I think would be useful on the U.S. side is a clarification that Congress gets a formal say in this decision. For example, there could be legislation requiring that in order for the U.S. government to decide not to extend (or, for that matter, to withdraw pursuant to Article 34.7), the House and Senate must both vote in favor. It's not clear to me if Congress meant to delegate away its power here, but now that people are aware of the issue, they should reassert their authority.

When I was writing the piece, all I had was the first session of the Canadian parliamentary committee's meetings, but since then there have been a few more. You can see all of them here.

Call for Papers: 2024 Roundtable in International Business Law at Brooklyn Law School

Law prof Stratos Pahis sends this along:

The Dennis J. Block Center for the Study of International Business Law at Brooklyn Law School is organizing a Roundtable in International Business Law. The Roundtable will take place on September 27, and proposals are due by June 28. The call is here.

 

Journal of International Economic Law Announces Fourth Junior Faculty Forum

The Journal of International Economic Law (JIEL) is pleased to announce its fourth annual Junior Faculty Forum (JFF) to be held virtually September 20-21, 2024.  The JIEL JFF brings together early career scholars (including junior faculty, visiting assistant professors, PhD candidates, post-doctoral fellows, etc.) working in the field of international economic law.  The purpose is to allow scholars to present their work before an audience of peers and experts and receive feedback from senior scholars.  In addition, at least one piece will receive an offer of publication to appear in the 28th volume of JIEL.

Junior scholars are encouraged to submit their abstracts for consideration by no later than July 1, 2024. 

For more information on eligibility and how to submit, go here.

Comments on the Biden Administration's Proposed New Tariffs on Imports from China

Comments on the Biden Administration's Proposed New Tariffs on Imports from China

Steve Charnovitz

Docket USTR-2024-0007

USTR-2024-0007-00106921

6 June 2024

The proposed United States (US) tariffs modifications noted in the Federal Register on 28 May 2024 undermine both international law and United States-China relations.  Therefore, the counterproductive existing tariffs on China (Lists 1-4) should be modified by terminating them.

On 15 September 2020, a World Trade Organization (WTO) panel ruled that the Section 301 tariffs violate the fundamental law of the General Agreement on Tariffs and Trade (GATT), in particular Articles I and II.  The United States should uphold and respect international law, not be a casual violator of it.  When the US violates conventional international law, it signals a green light to other scofflaw countries that they do not need to take their international law obligations seriously. 

As of June 2024, the well-reasoned WTO panel decision has not yet been adopted by the WTO judiciary.  That's because the US has engaged in a bad faith appeal to an Appellate Body that was out of service at that time, and has remained out of service since January 2021 due to resistance by the Biden Administration to reconstituting the WTO appellate court.  

Yet in the second decade of the 21st century, the importance of international courts and tribunals to managing conflict is manifest.  The need for the rule of law is especially vital in the multilateral trading system when large economies like the US partake in persistent protectionism in violation of WTO rules.

In using Section 301 against China, the US is engaging in discriminatory trade policies.  Before the WTO court, the US sought to justify this discrimination by claiming that its discrimination against China protected US public morals.  The panel rightly dismissed this fatuous argument on legal grounds.  A fuller analysis of the effects of the tariffs would show that federal discriminatory actions against the Chinese people in China undermine US morals.  From the time of the 1882 Chinese Exclusion Act to the present, the US government has too often treated the Chinese people unfairly.  The continuing legacy of US racism demoralizes the American public.

Employing WTO-illegal trade sanctions against China is especially counterproductive now when achieving cooperation from China is so important in dealing with aggression by the Russian Federation, nuclear threats by several totalitarian countries, worsening climate change, and unstable relations between WTO members China and Taiwan.  Rather than poke China in the eye again with aggressive US unilateralism, the US should be looking for ways to improve relations with China.  Modifying the Section 301 tariffs downward — or better yet withdrawing them entirely — would be a good first step toward US foreign policy sanity.

The Request for Comments asks whether higher tariffs on China will be effective in counteracting the actions China that China is alleged to be undertaking regarding technology transfer, intellectual property, and innovation.  As I pointed out years ago (see "Grading Trump's China Strategy," 2019 European Yearbook of International Economic Law, 217-256), tariffs will be poor substitutes for efficient direct responses to domestic or foreign policies by China that the US finds objectionable.  For example, if it is true that "China has ...  become more aggressive, particularly through cyber intrusions and cybertheft, in its attempts to acquire and absorb foreign technology," the solution to that to better enforce US law against those individuals doing such practices. 

The Request for Comments asks about the effect of higher US tariffs on the US economy and consumers.  Obviously, tariffs create economic distortions that cannot possibly be welfare enhancing.  Moreover, as Ambrose Bierce pointed out in 1911, tariffs are "taxes on imports designed to protect the domestic producer against the greed of his consumer."  US consumers will continue to suffer from higher prices directly caused by the Trump-Biden tariffs on China.

The Request for Comments asks whether US tariffs should be higher on facemasks, medical gloves, syringes and needles.  The answer is no they should not because these public health products should be available at as low a cost as possible.  It is troubling that USTR would even ask this question at a time when the US is still recovering from its worst pandemic since 1918 and may be facing a new bird flu pandemic for which the US remains woefully underprepared.

The Biden Administration's Position on ISDS Removal

In April, I mentioned an exchange between Senator Sheldon Whitehouse (D-RI) and U.S. Trade Rep. Katherine Tai on getting rid of ISDS in existing investment treaties/trade agreements. There was a bit of uncertainty about what exactly Tai meant, but now we have some additional context thanks to a FOIA request filed by the U.S. Chamber of Commerce for communications between USTR officials and the office of Senator Elizabeth Warren (D-MA). The Chamber was focused on digital trade policies, but the USTR FOIA reply also included some exchanges on ISDS.

The first ISDS communication from the Biden administration came in response to a letter sent by Warren, Rep. Lloyd Doggett (D-TX) and others to Tai and Secretary of State Antony Blinken in May 2023 (which I blogged about at the time), in which the members of Congress call for removing the consent to arbitrate and removing ISDS provisions from existing trade agreements and investment treaties. Tai's response (p. 83 of the FOIA reply) states the following:

President Biden does not believe corporations should receive special tribunals in trade agreements that are not available to other organizations, and he opposes the ability of private corporations to attack labor, health, and environmental policies through ISDS. I share these views, and the United States is not currently pursuing any trade or investment agreements that would establish ISDS.

Then in October 2023, there was an email from someone in Senator Warren's office to people at the State Department, who later brought in a USTR person and therefore the whole exchange was included in this set of communications (p. 175 of the FOIA reply), discussing the use of APEP as a forum to deal with ISDS removal:

I'd like to specifically discuss the [State] Department's role in ISDS and its thinking about pathways to removing ISDS from the US's existing FTAs, BITs, etc. and the potential use of APEP as a forum for that. We of course appreciate the Department's commitment to opposing the inclusion of ISDS in future agreements, but existing ISDS obligations continue to pose a problem for us and our trading partners.

And then finally, in response to a letter from Warren, Rep. Steve Cohen (D-TN) and others, Tai said the following in December 2023 (p. 209 of the FOIA reply):

Your letter further raised the idea of removing ISDS provisions from the United States' existing trade and investment agreements, including through the Americas Partnership for Economic Prosperity (APEP). I look forward to working with you and other Members of Congress to identify the best path forward, recognizing the role of Congress in amending existing agreements.

I'm not sure any of this tells us where we are going on ISDS, but it will at least help us explain how we got there!

Katherine Tai on the ITO Charter

At an Atlantic Council event yesterday, U.S. Trade Rep. Katherine Tai talked about the ITO charter and some policy issues that did not make it into the international economic system at that time:

Tai: The original vision for trade in the Bretton Woods institutions went above and beyond the General Agreement on Tariffs and Trade, the GATT, which is what ended up making it across the finish line. The original vision to pair with the World Bank and the IMF was an international trade organization, the ITO charter, that had tariff pieces that were coupled with enforceable and meaningful worker standards based on a goal of full employment for all members, environmental equities, and also anti-monopoly provisions, to address the fact that it's not just the private sector companies that can behave as monopolies and distort economic opportunity, but entire countries. ...

...

Question: ... Talk about what role trade plays in this contest of democracy and autocracy.

Tai: Here's where I'll get into a bit of diagnosis in terms of where our successes have come up short. And I think that what I would do is go back to that original vision for the ITO charter, understand that it was more than just the GATT. And imagine what would have happened if the ITO charter had made it across the finish line. Now, one historical note, the ITO charter in full didn't succeed, and it was one Senator Taft, who really put the spoke in the wheel, and it was the same Senator Taft who had rolled back a lot of the New Deal worker protections that FDR had put into place. Now what was left on the cutting room floor, the enforceable, meaningful labor standards, the environmental standards, and then also the anti-monopoly rules. So instead what you ended up with was a tariff program and a program of trade liberalization standing on its own without the safeguards addressing the interests of working people, of the planet, and of ensuring a healthy and vital amount of economic opportunity that could happen within economies and between economies.

I'm not sure what she has in mind for environmental provisions that were in the ITO charter but not the GATT, but putting that aside, it's interesting how broad a view of global governance this is. Having binding and enforceable international rules on labor, the environment, and antitrust that apply to the U.S. would be a big deal. We have some rules in these areas to a limited extent today, but they don't have much impact on U.S. policy (e.g. right to work laws), and that's by design. I have serious doubts that the U.S. government would ever agree to a set of international rules that intruded into its sovereignty/policy space in a significant way on these issues. The U.S. did agree to such rules on trade issues that focus on protectionism, but doing something similar on labor, the environment, and antitrust would be asking a lot more. 

A related issue is that the U.S. government changes its view on issues such as these over time as governance shifts back and forth between the parties. As we alternate between Democrats and Republicans running things, which we will continue to do, I'm not sure it is possible to find a set of international rules on these issues that both parties could support.

Katherine Tai on Digital Trade Rules

Here's something U.S. Trade Rep. Katherine Tai said, at an Atlantic Council event yesterday, about pulling back on the formulation of international digital trade rules:

Isn't it time for us to hit pause on this, come back, reconnect with all of the other policy silos, break them down, talk to our Congress, talk to our industry, the bigs and also the littles, the companies and also the workers, the platforms and also the creative content producers, and try to get our arms around what is actually happening here and what is in the public interest, because that is not the question that has informed the proposals that we've developed over time. So what I would say is, for all of those who are yearning for a leadership from the executive branch and USTR to tell everybody else what the answer is, my argument is the real leadership is in stepping back and saying, this is not an answer that is going to come from USTR alone. And that if that's what you're looking for, a USTR-led answer to how we should be regulating tech and data, that is not going to be the right answer. This is, again, a project for our collective wisdom, and it's only once we've achieved that wisdom, first here in the United States, and then with our trading partners, are we actually going to be assured of any kind of success that the world order we're creating that has rules for digital trade and technology is going to support economic opportunity for working people and democracy.

Let me offer two thoughts on this.

First, I do think the Biden administration needs to come up with a position on digital trade policies, including data flows obligations and exceptions, that can be put forward in international discussions. Most other governments have a position; it should be possible for the U.S. to have one too. There is lots of scope for playing around with language to develop a balance that everyone can live with, so maybe all the agencies with an interest in this should put forward their proposal, argue it out, talk it over with people in Congress, and then have someone in the White House make the final call.

Second, in terms of who exactly should take the lead on this, I think I agree with Tai, if I understand her correctly, that USTR may not be the best positioned to lead on this policy. In this regard, I have been wondering recently if we need a dedicated tech agency or office to lead on matters like this. I don't have strong feelings about where exactly in the federal government this tech expertise should be located, but it seems like it might be a good idea to have this sort of thing somewhere.

Katherine Tai on Bob Lighthizer

This is from an exchange with U.S. Trade Representative Katherine Tai at an Atlantic Council event today (starts around 48:30):

Q: Ambassador, I wondered if you could tell us where your views overlap with those of Bob Lighthizer and where your views differ.

Tai: ... Where our views are similar, and where I find an alliance with Bob, is a commitment to the fact that we have to change our approach to trade, that the world is significantly different, and that the benefits here in the United States are not inclusive enough. Those are my words, and that's in my very much ... Democratic vocabulary. But I think that one of the really important and not foregone conclusions in the trade community internationally is that we do need to change. From my perspective, it's that we need to evolve the way we do trade. And you can't do that by yourself. You have to build that collective and that community to do it together. And I think that basing that community on a community of democracies is really important. In terms of where our views are different, I hope that that's obvious, and if it's not, I would definitely take some feedback on how I can make that more obvious.

Q: You want to throw out one example where it's different? Maybe deal with China, where do you think you're the same or different on China?

Tai: On China, I think we share a lot of the same diagnoses. I think one of the ways where Bob and I are most obviously different, again, is in rhetoric. Although, you know, Bob inside the room versus Bob outside the room can be different, just like for all of us. But you know, I think that one aspect of the Biden administration's approach, and this very much reflects President Biden's just innate internationalism, is this point of view that you have to build partnerships.

Normally I have some commentary on things Katherine Tai said (and I will have comments on other things she said at the event!), but here I just wanted to highlight the exchange because I thought people might find it interesting.

Cross-Border Subsidies and Non-Violation Complaints

Weihuan Zhou and Victor Crochet have a new working paper called "Attribution to the State: A Critique of Cross-Border Subsidies," which combines two of my favorite issues: Cross-border subsidies and non-violation complaints. Here's the abstract:

While industrial policy and subsidies proliferate worldwide, the emergence of cross-border subsidies is intensifying legal and policy debate on how the rules of the World Trade Organization (WTO) can be applied to address the spillover effects of such subsidies. Amid this debate, this paper tackles a relatively more fundamental, yet under-explored, issue relating to attribution of state responsibility. We argue that the European Commission’s approach to attributing subsidies provided by one government to another government has overstretched the attribution rules under public international law and the WTO subsidy rules, setting a harmful precedent for similar abuses beyond subsidies. We propose non-violation claims as a viable and more balanced response to the challenges posed by cross-border subsidies. We call upon governments to retreat from unilateralism and resolve these challenges via cooperation.

After arguing that the EU approach to cross-border subsidies is not permitted, they say that non-violation claims can be useful here:

2. Developing non-violation claims

A more, and perhaps the only, sensible option is to bring non-violation claims (NVCs) pursuant to Article XXIII:1(b) of the GATT. This provision came out of the original GATT negotiations in the 1940s. It was applied and clarified by several GATT panels and was further negotiated in the Uruguay Round before it was also codified in Article 26.1 of the WTO’s Dispute Settlement Understanding (DSU).72 Article XXIII:1(b) and Article 26.1 maintain the avenue for governments to challenge measures which are not in breach of any WTO rules but which nullify or impair benefits under, or impede the attainment of objectives of the relevant covered agreement(s). It is clear from the historical development of these provisions that governments saw the importance of NVCs in addressing the issue of an incomplete GATT/WTO contract where the outcomes of tariff negotiations may be undermined by acts which were not foreseen at the time of the negotiations and hence were not captured by the GATT/WTO rulebook.73 At the same time, however, governments have resorted to NVCs with caution and generally accepted the interpretative approach taken by GATT/WTO panels to confine the application of NVCs to limited circumstances. Thus, governments brought and won NVCs only in a few disputes throughout the life of the GATT/WTO. These disputes were predominantly concerned about action taken by an importing Member subsequent to the negotiation of its tariff concessions with an exporting Member leading to the nullification or impairment of benefits (i.e. market access opportunities) derived from the concessions for the latter. 74 In Japan – Films (1998), the WTO panel summarised the legal conditions for an NVC: (1) the existence of a governmental measure, (2) a benefit accruing to the complaining Member from the relevant tariff concession or agreement, and (3) the benefit is nullified or impaired as the result of the application of the measure. 75 The panel also iterated that “the non-violation remedy should be approached with caution and should remain an exceptional remedy.”76

While GATT/WTO panels have developed restrictive interpretation of NVCs,77 we argue that their interpretation still provides room for establishing an NVC against cross-border subsidies. At a general level, there are at least three reasons for that optimistic observation. First, the legal conditions for NVCs remain unsettled. In the Uruguay Round negotiations, governments deliberately left out the conditions developed by GATT panels from the text of Article 26.1 of the DSU,78 arguably leaving the flexibility for WTO tribunals to further develop or refine these conditions. In a handful of disputes where NVCs were raised, WTO panels seem to have maintained GATT panels’ restrictive approach. 79 However, WTO panels also recognised that NVCs must be assessed on a case-by-case basis and can be applied to benefits unrelated to a tariff concession but stemmed from a WTO agreement.80 Second, a majority of the past NVCs, including the few successful ones, involved subsidy schemes, hence providing a solid precedent for applying NVCs to cross-border subsidies which as shown in Section III, are typical forms of financial contributions contemplated in the ASCM. Third, in adjudicating NVCs, GATT/WTO panels have focused on assessing whether a measure frustrated the competitive opportunities generated by tariff concessions rather than the impact on actual trade flows.81 This means that an NVC may be brought even before cross-border subsidies have caused an increase of subsidised imports into adversely affected countries.

Thus, more specifically, affected Members like the EU can argue that the cross-border subsidies provided by the Chinese government to its investors overseas have the effect of upsetting the competitive opportunity that EU producers should have enjoyed in their home market. The benefit, which must be interpreted broadly,82 comes out of the EU’s right to seek multilateral remedies or impose countervailing measures pursuant to GATT Article VI, as elaborated by the ASCM. Two complications can arise in this claim of “benefit”. One pertains to the fact that the benefit is related to the EU’s own tariff concessions. This presents an atypical situation compared to past NVCs, which consistently involved a tariff concession of a responding Member that created more favourable market access for the relevant exports of a complaining Member.83 The other complication involves the EU’s evidentiary burden to show that the Chinese subsidies were not reasonably anticipated at the time when the concessions were made,84 essentially during China’s WTO accession negotiations.

These hurdles, however, are not so difficult to overcome. A plausible argument would be that when the EU offered reciprocal tariff concessions, there was a legitimate expectation that it would have access to WTO-permissible remedies to offset the impact of subsidised imports to maintain certain degree of market opportunities for domestic industries. That China now provides harmful subsidies not captured by GATT Article VI or the ASCM nullifies or impairs the benefit that the EU should have enjoyed via these remedies. Here, it should be noted that the “adverse effects” claims under Article 5 of the ASCM would not apply as it requires the existence of a subsidy within the meaning of the ASCM in the first place.85

On the question of whether the subsidies could have been reasonably anticipated during China’s accession negotiations, the Working Party Report on the Accession of China (WPR) suggests that Members were unaware of issues related to cross-border subsidies. The discussions recorded in the WPR focussed on how the relevant economic policies, regulations, conduct of state entities, industrial subsidies may affect imports or investments into China, or how subsidised exports from China may impact trading partners.86 It follows that Chinese cross-border subsidies, which only became prominent after the launch of the BRI twelve years after China’s WTO accession, were not reasonably foreseeable by WTO Members.

Normally, I'm a non-violation skeptic, often on the basis that whatever measures were taken could have been anticipated. But here, as the authors point out, cross-border subsidies were not well known at the time of the Chinese accession negotiations, so it is plausible for a WTO Member to argue that it did not anticipate the Chinese government taking such measures in the way it did. Fleshing out the history of cross-border subsidies, in China and elsewhere, would be of great important to this claim.

Zhou and Crochet also make two other points that I want to highlight:

Not only is an NVC against cross-border subsidies viable, but it also provides a more balanced approach to tackle such subsidies for three reasons. First, a successful NVC does not require the removal of the contested measure but merely requires the disputing parties to reach a mutually satisfactory adjustment (Article 26.1(b) of the DSU). This provides the flexibility for the subsidising government to maintain the subsidies in pursuit of its policy goals and for the affected government to take action to rebalance the relevant rights and obligations under the WTO framework. Such action may involve withdrawal of tariff concessions (which would lead to an outcome similar to what a countervailing measure can achieve), compensation, or even cooperation between the parties in other areas of trade and investment. NVCs therefore provide a better avenue for the subsidising and aggrieved governments to negotiate a compromise that would work for both without causing a decision on whether the subsidies are WTO-unlawful.

... Third, compared to a violation claim, an NVC can be adjudicated more efficiently. As some have proposed in the context of using NVCs to address security-based measures, a “shortened and simplified dispute settlement procedure” can be developed to determine “nullification or impairment of benefits”, and the actual level of benefits can be agreed upon by the parties or decided by an arbitrator under Article 21.3(c) of the DSU.87 An NVC therefore can facilitate the settlement of disputes and the provision of remedies for the affected Member in a more timely fashion.

As to the resolution of successful non-violation complaints, we may not all agree on how DSU Article 26.1 is likely to work in practice, but I suspect that the first such complaint is going to lead to a good deal of confusion and controversy over how exactly things are supposed to proceed after a finding of nullification or impairment.

Relatedly, on their efficiency of adjudication point, maybe I am still scarred from my experience on the Japan - Film case, but I have doubts about whether non-violation complaints can be made significantly shorter and simpler than violation complaints. Among other factors here is that the responding party is unlikely to agree to something shorter and simpler. For obvious reasons, responding parties tend to try to drag the proceedings out, and I'm not sure why this would be any different in the non-violation context.