International Economic Law and Policy Blog

Call for Papers: Law and Economic Development

This is from the ASIL International Economic Law interest group:

The University of Hawai'i at Mānoa, William S. Richardson School of Law and the Law and Development Institute are co-hosting a conference in December 2025 in Honolulu, Hawai'i. The conference theme is "Law and Economic Development," and the call for papers is available here. Abstract submissions are due May 1, 2025. 

Guest Post: How to retaliate against looming Trump tariffs

This is a guest post from Simon Schropp (BRG and George Washington University) and Kornel Mahlstein (Sidley Austin LLP)

Eight weeks into the Trump Administration it appears that the “Trump tariffs” on America’s closest allies are not mere posture.  Treasury Secretary Scott Bessent announced on March 18 that the Trump Administration plans to slap extra tariffs on goods imported from about 15 percent of nations with which the United States has run a persistent trade deficit—a group with the catchy moniker “Dirty 15”.  These discriminatory tariffs, billed as “Reciprocal tariffs” by the White House, are expected to come into force on April 2.  While the Trump Administration has not officially released a list of the Dirty 15 yet, political insiders have indicated that it will most certainly include the European Union (EU), next to Australia, Brazil, Canada, China, India, Japan, South Korea, Mexico, Russia, and Vietnam.

The EU appears inclined to retaliate against the looming imposition of the Trump tariffs against its exports, most likely by invoking its new Anti Coercion Instrument.[1]  Practical questions for the EU Commission will then include the following:  (i) what is the most appropriate (set of) countermeasure(s)?; (ii) how should countermeasure(s) be calibrated?; and, (iii) which U.S. imports should be targeted?

If past is prologue, the EU will engage in “tit-for-tat” punishment, i.e., reciprocate with additional tariffs on U.S. goods imports.  One does not have to be an economist to comprehend that blanket retaliation covering all imported U.S. products and sectors is not productive:  There are U.S. imports that the EU desperately needs, and an imposition of additional tariffs may cause more economic self-harm than it causes pain to the United States.  It would thus behoove the EU to devise retaliatory action such that it inflicts the highest pain on the U.S. economy, while at the same time causing the least self-harm to EU welfare.

We apply a sector-by-sector partial equilibrium model co-developed by the authors.[2] The model covers roughly 5,300 sectors (product groups), categorized along the six-digit level of the Harmonized System (HS).  It allows us to simulate, among others, welfare gains and losses experienced by both the U.S. and the EU economies resulting from retaliatory EU tariffs on U.S. imports.  Lacking further detail, we assume that the EU would impose an even 25 percent tariff on U.S. products in all selected sectors.

Three tables below present a sample of our results.  Table 1 contains a list of the 25 sectors in which retaliatory EU tariffs would inflict the highest welfare losses on the United States. Table 2 provides the top-25 ranking of sectors in which EU tariff retaliation would generate the highest welfare gains for the EU through improvement of the EU’s terms of trade (TOT).[3]  And, combining the results of the first two tables, Table 3 presents the top-25 sectors in which the balance of pain inflicted on the U.S. economy and self-harm to the EU is particularly favorable (calculated here as the maximum distance between EU gains and U.S. losses). 

Table 1: Sectors in which EU tariff retaliation generates highest welfare losses to U.S

Sources: UN WITS (latest available bilateral trade-flow data).
Notes: EU tariffs of 25% are assumed; welfare gains/losses are measured as the sum of terms-of-trade gains/losses, efficiency losses from inefficiently low import/export levels, and losses from inefficient resource allocation; for more information on model methodology, see Latipov et al. (2022; 2023).

 

Table 2: Sectors in which EU tariff retaliation generates the highest welfare gains to EU

Sources: UN WITS (latest available bilateral trade-flow data).
Notes: See notes accompanying Table 1.

 

Table 3: Sectors in which the balance of harm to the U.S. economy and self-harm to the EU economy is most favorable

Sources: UN WITS (latest available bilateral trade-flow data).  
Notes: see accompanying notes to Table 1 and 2; “maximum distance” is calculated as the sum of welfare gains to the EU and welfare losses to the United States (in absolute terms).

 

While our cut-off point of 25 product groups is arbitrary, the tables illustrate the considerable potential that smart retaliation in only a few selected industries could unleash:  For example, Table 1 shows that with retaliation in only 25 selected sectors (that, together, are responsible for roughly 46 percent of all U.S. imports), the EU could cause 54 percent of all achievable U.S. welfare losses, while at the same time securing 62 percent of achievable terms-of-trade gains. 

We appreciate that many factors other than Union-wide welfare—such as strategic, political, environmental, or public-health considerations—play into the Commission’s decision whether and how to retaliate in a particular sector or the other.  Our objective here was simply to highlight one economic perspective on tariff retaliation.

The analysis presented above can easily be extended.  For example, one may be interested in lists featuring the bottom-50 industries, i.e., those sectors in which the EU should avoid any retaliation, simply because higher EU retaliation would cause no, or negligible, economic harm to the United States, and/or distressing levels of economic self-harm to the EU.  One could also imagine that the EU would also want to take into consideration tariff pass-through rates (see column (2)) so as to avoid situations in which EU consumers bear an outsized burden of the tariff incidence that retaliation would entail.  Moreover, instead of focusing on welfare measured in absolute dollar/euro values, one may equally consider optimizing percentage changes in welfare (see columns (7) and (9)).  Next, we assumed that the EU levies a 25 percent import tariff on every sector selected for retaliation.  An interesting modeling scenario is one in which the EU imposes “optimal” tariffs, i.e., tariff levels that maximize the EU’s terms-of-trade gains, individually for every selected sector.  Lastly, the same sector-by-sector analysis performed here from the perspective of the EU can now also be executed for any other country on the “Dirty 15” list.

 

[1] The ACI gives the EU a wide range of possible countermeasures against countries engaging in economic coercion, the imposition of additional tariffs being only one of the options.

[2] See Latipov, O.; C. Lau; K. Mahlstein; S. Schropp (2022); “The economic effects of potential EU tariff sanctions on Russia – a sectoral approach”, Intereconomics, Vol. 57(5) pp., 294-305; and Latipov, O.; C. Lau; K. Mahlstein; S. Schropp (2023); “Quantifying the Impact of the Latest US Tariff Sanctions on Russia: A Sectoral Analysis”, Journal of World Trade Vol. 57(1): 55–124.

[3] In some sectors, the EU as importer has a degree of market power vis-à-vis the United States, forcing U.S. exporters to absorb a share of the EU’s tariff incidence by lowering export prices.  This improves the EU’s TOT (i.e., the relative price at which the two economies exchange goods and services), and it does so to the same degree that it worsens the U.S. TOT – constituting a pure net wealth transfer from the United States to the EU.

 

Disclaimer

The opinions expressed in this blog post are those of the author and do not represent the opinions of BRG or Sidley Austin LLP or its other employees and affiliates. The information provided is not intended to and does not render legal, accounting, tax, or other professional advice or services, and no client relationship is established with BRG or Sidley Austin LLP by making any information available in this publication, or from you transmitting an email or other message to us. None of the information contained herein should be used as a substitute for consultation with competent advisors.

The U.S. Argument that GATT Article XX Applies to Non-GATT Goods Agreements (Including the SCM Agreement)

In its first written submission in the U.S. - IRA Tax Credits WTO dispute (DS623), the U.S. makes a number of arguments people might find interesting. First, there's a new invocation of the GATT Article XXI security exception related to the exclusion under the Internal Revenue Code (IRC) Section 30D Clean Vehicle Tax Credit of participation by a "foreign entity of concern" (FEOC) in the supply chain. There's also a GATT Article XX(a) argument that "China’s non-market policies and practices resulting in China’s global dominance of the clean vehicle and renewable energy sectors violate the U.S. public morals against unfair competition, forced labor, theft, and coercion."

But I'm going to focus here on the following U.S. argument related to the application of GATT exceptions to non-GATT goods agreements, with the TRIMS and SCM Agreements being the non-GATT goods agreements at issue:

136. China raises claims under Articles I and III of the GATT 1994, Articles 2.1 and 2.2 of the TRIMs Agreement, and Articles 3.1(b) and 3.2 of the SCM Agreement. It is—or should be—self-evident that WTO Members continue to have the authority under the WTO to take essential security measures and measures under the general exceptions for public policy reasons, such as protecting public morals, protecting life or health, countering use of prison labor, or conserving natural resources – just as they did under the GATT. Because some litigants for obvious reasons have recently controverted this commonsense conclusion,212 for the avoidance of any doubt, the United States sets out the legal and textual basis for the applicability of the essential security and general exceptions to the TRIMs Agreement and SCM Agreement.

137. As discussed in detail in Section VI.A., the ability to invoke exceptions under Articles XX and XXI of the GATT 1994 for claims under the TRIMs and SCM Agreements is clear. The ordinary meaning of the terms of the TRIMs and SCM Agreements—including their numerous explicit textual links to the GATT 1994—establish that exceptions under Articles XX and XXI of the GATT 1994 are available as defenses to TRIMs and SCM Agreement claims.

The U.S. argument that Article XXI applies beyond the GATT did not surprise me, but I hadn't been sure they would also take this view of Article XX. I have been wondering for a while now about USTR's view of the application of Article XX to non-GATT goods agreements, in part with environmental subsidy issues in mind. At one point I said the following in the context of the U.S. arguments in a previous dispute:

... the broader issue of GATT exceptions for non-GATT goods agreements seems of great importance for the likely upcoming debates about how subsidies for environmental purposes are considered under WTO rules. Ideally, governments would sit down and hash out clear rules in this area. Perhaps more realistically, though, the existing rules will have to be applied, and disputes will arise over whether particular measures are consistent with those rules. I can imagine that Article XX will be invoked as a defense in this context, based on the argument that it applies beyond the GATT, and then we will see the issue debated directly.

Well, it looks like now we are going to see it debated!

The U.S. argument that Article XX can be invoked in relation to claims under the SCM Agreement starts on p. 47 of the submission. Here are some key excerpts:

A. THE ORDINARY MEANING OF THE TERMS OF THE TRIMS AND SCM AGREEMENTS ESTABLISH THAT DEFENSES UNDER ARTICLE XX AND XXI OF THE GATT 1994 APPLY TO CLAIMS UNDER THOSE AGREEMENTS

...

2. The SCM Agreement Contains Multiple Provisions of Text Linking the SCM Agreement with the GATT 1994 and the Articles XX and XXI Exceptions

147. The SCM Agreement also includes numerous references to the GATT 1994, thus also establishing that Articles XX and XXI of the GATT 1994 are available as defenses to claims under the SCM Agreement. Perhaps most notably, in Part XI of the SCM Agreement concerning final provisions, Article 32.1 states, “No specific action against a subsidy of another Member can be taken except in accordance with the provisions of GATT 1994, as interpreted by this Agreement”. The Article is accompanied by footnote 56, which states, “This paragraph is not intended to preclude action under other relevant provisions of GATT 1994, where appropriate.”

148. Article 32.1 is an explicit textual link with the GATT exceptions in the SCM Agreement. Specifically, Article 32.1 of the SCM Agreement provides that no action against a subsidy can be taken “except in accordance with the provisions of GATT 1994, as interpreted by this Agreement.” Action taken under Article XX or XXI of the GATT 1994 is “in accordance with the provisions of GATT 1994”, and therefore, is taken pursuant to Article 32.1 of the SCM Agreement. Although Article 32.1 also contains the phrase, “as interpreted by this Agreement,” footnote 56 confirms that the paragraph is not intended to preclude action under other relevant provisions of the GATT 1994 (emphasis added). Therefore, Article 32.1 and footnote 56, read in conjunction, confirm that where an article is not interpreted by the SCM Agreement, the authority to take action under GATT provisions remain unchanged.

...

151. In addition to Article 32.1, the SCM Agreement contains 24 other references to the GATT 1994. These 24 references include numerous statements that SCM Agreement terms should be understood “in the sense of”, “in accordance with”, “as provided for”, “within the meaning of”, or “for the purposes” of GATT 1994 Articles VI and XVI.

...

B. THE STRUCTURE OF THE WTO AGREEMENT AND THE CONTEXT IT PROVIDES ALSO ESTABLISHES THAT THE GENERAL EXCEPTIONS AND THE ESSENTIAL SECURITY EXCEPTION APPLY TO THE MULTILATERAL AGREEMENTS ON TRADE IN GOODS, INCLUDING THE TRIMS AND SCM AGREEMENTS

164. The structure of the WTO Agreement and the context it provides also establish that Articles XX and XXI(b) are defenses to claims under the SCM Agreement. The Marrakesh Agreement is an umbrella, establishing among other things that all of the agreements in its annexes are a single undertaking.216 The core multilateral substantive obligations are contained in Annex 1. In particular, Annex 1A consists of the Multilateral Agreements on Trade in Goods (including the TRIMs and SCM Agreements), Annex 1B consists of the General Agreement on Trade in Services (GATS), and Annex 1C consists of the Agreement on Trade Related Aspects of International Property Rights (TRIPS Agreement).

...

171. Within Annex 1A, the Multilateral Agreements on Trade in Goods, the first agreement listed is the GATT 1994. The GATT 1994 is a successor to the GATT 1947. The GATT 1947, and the slightly modified GATT 1994, contain the public morals and essential security exceptions in their respective equivalent of Articles XX and XXI. The remaining agreements in Annex 1A (including the TRIMs and SCM Agreements) are the product of negotiations in the Uruguay Round, undertaken with the purpose of elaborating upon the disciplines in the GATT 1994 and related matters involving trade in goods.

172. Two possibilities arise from this structure. The first, which the United States submits is the proper interpretation, is that the negotiators understood that the GATT 1947/1994 public morals and essential security exceptions apply to the new agreements on trade in goods contained in Annex 1A. The other possibility is that for some reason, the negotiators believed that those exceptions applied to the fundamental disciplines in the GATT 1994, but not to the elaborations upon those disciplines as set out in the other trade-in-goods agreements. This second interpretation is untenable. 

I have the sense that I'm one of the few people in the field who thinks Article XX should apply beyond the GATT, including to the SCM Agreement. As I put it a while back: "I have been making a lonely case that GATT Article XX should apply to non-GATT goods agreements, based on the logic that the non-GATT goods agreements are all derived from some part of the GATT, so it makes sense that the GATT exceptions should apply. But no one seems convinced." It sounds like USTR agrees with me, at least to some extent, although I do wonder if they would apply their reasoning to all non-GATT goods agreements, including even claims under the SPS and TBT Agreements (their argument in Section VI.B of their submission, partially quoted above, suggests they would, but I see some room for maneuver here if they wanted to take a different position).

The U.S. submission mentions the negotiators, and I'm curious about the negotiating history on this point. I've never come across any discussion of the issue in the Uruguay Round negotiating documents that I've seen. It would be nice if someone were able to dig something up, and in that regard it will be interesting to see what other governments have to say in their third party submissions.

Passing of Steve Charnovitz

I was saddened to hear of the passing this week of the great trade law scholar Steve Charnovitz, a professor at GW law school. The full list of his scholarly works can be found at his personal website. Steve was also one of the founding bloggers here at the IELP blog, and contributed 87 posts over the years. 

In all of his work, Steve was provocative and insightful. I can recall an event at the Cato Institute a few years ago where we all agreed afterwards that he had been the star of the show.

More personally, he was a strong supporter of all my professional efforts over the years, and I owe him a great deal for all the help he provided. I am confident that he did the same for many others as well.

He will be missed by everyone in the trade law and policy community.

Questions about Trump's Reciprocal Tariffs

President Trump and his trade team have been pointing to April 2 as the big day for his reciprocal tariffs. At this point, I have lots of questions, but few answers, about what to expect from all this. Here are some of my questions:

- Which statutes will they use as the basis for the tariffs? Clark Packard and Scott Lincicome of Cato describe the main possibilities here: IEEPA, Section 232, Section 301, Section 338, and Section 122.

- When exactly will the tariffs be imposed? IEEPA tariffs can come pretty quickly, while tariffs under certain other statutes could require a longer process (although some tariffs might be imposed under already completed processes). To what extent will the April 2 announcement be used as the basis for a negotiation rather than the immediate imposition of tariffs?

- What methodology will they use for the calculation of a reciprocal tariff rate to be applied to each trading partner? Coming up with a credible methodology is going to be a big challenge.

- Will the reciprocal tariffs include a sectoral component? It seems clear that tariffs are coming on autos and various other sectors, but is that part of the reciprocal tariff package, or will it be separate?

- Which countries will be hit the hardest? Treasury Secretary Scott Bessent recently referred to the "Dirty 15," meaning the countries that have the highest tariffs/barriers and large trade imbalances with the U.S.

- Which governments will retaliate and in what amounts? The reaction by other governments will depend on their domestic politics as well as their strategizing about how to get to the best outcome. Will any of the retaliation go beyond tariffs, and do creative things such as weakening intellectual property protections? And will products/services from Elon Musk and other Trump allies be targeted?

- Will any countries make concessions in the hopes of being subject to lower U.S. tariffs? If so, how meaningful will these concessions be in terms of actual value to U.S. companies? Will they be designed to look meaningful without actually doing much, or will there be real opportunities for U.S. exporters? 

- Will these concessions be carried out through formal trade deals? If so, what will these deals look like? Will there be an enforcement mechanism? 

- Will the reciprocal tariffs get tied in with non-trade issues such as security? For example, will foreign defense spending be brought into the mix? Of course, part of the foreign defense spending issue is trade related, as a lot of foreign defense spending involves buying from U.S. companies. Thus, foreign defense spending could either be brought in as a concession (through buying more U.S. products) or retaliation (through buying less). Also on defense spending, will the U.S. authorize the sale of military technology that it had not previously allowed, as part of broader deals with specific countries? And will certain countries shift away from reliance on U.S. military equipment, due to concerns about the direction of U.S. foreign and trade policy? 

- Will there be lawsuits in U.S. courts against the reciprocal tariffs? If the calculation methodology looks arbitrary, that could be an important part of any legal challenge.

- Will the targeted countries file WTO/FTA complaints? Of course, the U.S. can appeal any adverse WTO panel report into the void, but governments may see value in bringing a WTO case for various reasons. And some of the affected countries have FTAs with the U.S., so they have that as an alternative as well.

- Will affected countries step up their efforts to negotiate deeper trade deals with each other?

- How will the stock market react? And what will be the broader impact on the U.S. economy? And how will Trump react to the stock market reaction and to the impact on the economy? It feels like the Trump administration has been testing the waters with its tariffs, seeing how the market and the economy react to its initial moves. My best guess is there are limits to what the administration can tolerate in terms of a negative economic reaction, and if things get too bad they may pull back a bit, but we'll see.

WTO Dispute Settlement and Certainty

At the always excellent Georgetown Law International Trade Update last week, there was a "Fireside Chat" between Demetrios Marantis (former Deputy U.S. Trade Rep. and acting U.S. Trade Rep.) and Biden administration Ambassador to the WTO Maria Pagan. They covered a lot of ground, and on WTO dispute settlement, after an initial question and answer, there was this exchange about "certainty" in dispute settlement:

Demetrios Marantis: Maria, ... [d]oes that mean that WTO dispute settlement is essentially dead?

Maria Pagan:  Well, no, I mean, there are disputes that are going on. And one of the things that we have said is, you can have one tier dispute settlement that gives you, that should be able to give members what they need. I hear "you really want certainty." Well, you can have certainty with one tier. Why do you need an appellate body? What's so magical about this?

Certainty can mean a number of different things in this context. One thing it might mean is that you get a final ruling in your dispute as to whether the measure at issue is consistent with the obligations, and it's true that you can get that with a one tier panel system or with a two tier system involving an appellate body (or even a three tier system with something like a Supreme Court of World Trade). That ruling tells you which side wins and which side loses the case.

But another thing certainty could mean is that the clarifications of WTO provisions called for by DSU Article 3.2 provide a clear understanding of the meaning of WTO rules, so that governments understand the obligations/exceptions and how they apply to any measures or actions they might take going forward. Like most things, certainty is a matter of degree, and I think two tiers gives you a lot more of this type of certainty than one tier does.

To illustrate this, let's look at the core principle of non-discrimination. In very general terms with regard to determining the existence of discrimination, some people want to look at effect, some at intent, some at both, and some at other things that can be hard to characterize. Because of this diversity of views, when you have multiple first tier panels looking at this issue, you are inevitably going to end up with conflicting rulings. When that happens, there is a great deal of uncertainty. If one panel says "aim and effect" while another panel says "no aim and effect," what exactly is the obligation and how do you comply with it?

A second tier appeal mechanism can help address this problem, especially if it has institutional elements rather than being an ad hoc mechanism. A single interpretation from one appellate body, rather than multiple competing interpretations from individual panels, provides more certainty.

An appeals mechanism is not going to be perfect in this regard, of course, and the Appellate Body shifted back and forth a bit on its interpretations of non-discrimination over time. But it is better than a situation where you are trying to argue a case, and there are three prior panels saying three different things, and as a result everyone has trouble articulating what the obligation is.

Politicized AD/CVD vs. Neutral WTO Adjudication As a Way To Address Unfair/Non-Market/Protectionist Practices

In this post, I'm going to talk about an assumption that I think is held by many people (in the U.S. and elsewhere): AD/CVDs are a good way to respond to unfair/non-market/protectionist practices in other countries. I'm going to call that assumption into question and suggest that WTO complaints would be a better approach (and yes, to state the obvious, restoring a functioning WTO dispute settlement system is a condition for making this work!).

To start with, let me ask this basic question: What is the purpose of AD/CVDs? I think most supporters of trade remedies would say the primary goal is to "level the playing field" by imposing tariffs on imports. The duties are thought to neutralize the impact of the unfair foreign government/company behavior by taking away the advantage provided by that unfair behavior in the domestic market.

In addition to this primary goal, another possible goal of AD/CVDs is to change foreign government policies. This goal is most obviously present with CVDs, as they counter foreign government subsidies. And it is even possible that it exists in relation to dumping too, if you assume that foreign governments' unfair/non-market/protectionist practices are a cause of dumping, which has been suggested at times. Thus, by imposing a penalty on the unfairly traded goods, AD/CVD supporters may hope to induce policy changes in the foreign country, with the unfair/non-market/protectionist practices removed or modified.

To what extent are people thinking about this second goal when they use AD/CVDs? Is this an important consideration, an afterthought, or something rarely envisioned? I'm not sure, and it probably varies by person. But people should be thinking about it, because a situation in which the unfair/non-market/protectionist practices and the AD/CVDs both continue indefinitely does not seem ideal, so it makes sense to consider what is the best approach to eliminating the practices. 

Turning to the main point of this post, in my view, a problem with AD/CVDs is that they don't do much to stop these practices. AD/CVDs are unilateral determinations that are often seen as protectionist and biased, and therefore they do not, generally speaking, induce any change in policy relating to the underlying subsidies or other practices.

For those who may be skeptical that these measures are perceived in the targeted countries as biased, here is some evidence from a discussion at a recent House Ways and Means trade subcommittee hearing. This was a question from Rep. Adrian Smith (R-NE) for Ambassador Gregg Doud (who is now President and CEO of the National Milk Producers Federation) about some CVDs being imposed on U.S. milk powder by Colombia (starts at about 56:50 of the video):

I'm glad to say that I led a letter last year regarding Colombia's countervailing duty investigation into U.S. milk powder exports. Unfortunately, as you know, the Colombians moved ahead by imposing preliminary tariffs with an announcement on the final ruling expected soon. I'm concerned that Colombia's use of politically motivated countervailing duty investigations across commodities, including dairy and ethanol, will actually have copycat effects in other markets. Ambassador Doud, what actions do you think we should take to push back and certainly send a message that would prevent other markets from trying to make similar moves that again undermine the entire process?

Here is Doud's reply:

Mr. Chairman, we share your concerns and we haven't heard yet what's coming out of Colombia. Completely agree with you that this is 100% political, driving a domestic situation down there in Colombia. We just have to see what they're going to decide to do and whether common sense will prevail in this kind of conversation. But for goodness sakes, we have a free trade agreement with Colombia. This is a situation from an enforcement perspective, I think the US government has been very aggressive, but I think we need to continue to be very aggressive with our trading partners throughout the Western Hemisphere here to help folks understand that you don't solve domestic political issues on the backs of U.S. ag. exports, and that's exactly what's going on.

The point I think people should take from this is that the perception in the U.S. that Colombia's countervailing duty investigation is "political" is exactly the perception that people in other countries have about U.S. AD/CVDs. And as a result of this perception, you don't often see U.S. AD/CVDs changing foreign government policies and practices abroad. 

In contrast to the limitations of AD/CVDs, consider the possibility of a WTO complaint against these policies and practices. In this regard, the SCM Agreement adverse effects provisions have the potential to be more effective than CVDs in addressing subsidies, in several ways:

• Multiple Members can bring the complaint simultaneously, allowing them to pool their resources in formulating the case, and to address the harms of the subsidies to different Members in a coordinated effort.
• Adverse effects cases can look broadly at the impact of the subsidies on competition in third country markets.
• These cases allow for a broader set of remedies than just tariffs on imports.
• AD/CVD cases involve significant legal fees for affected companies (a recent Economist article notes: "Brad Muller of Charlotte Pipe and Foundry, a pipe maker, reckons that his firm and its peers have spent more than $6m over the past few years on antidumping cases and petitions over the evasion of duties.")
• WTO complaints involve neutral adjudication, resulting in a decision that will be perceived as more objective and unbiased.

With regard to dumping, if one of the theories about the causes of dumping is that unfair/non-market/protectionist practices lead to dumping, then those practices can be challenged in WTO dispute settlement. Thus, instead of focusing on anti-dumping complaints, the affected industries could identify the practices in question and convince their government to bring a WTO complaint.

Summing all this up, there is a common assumption in political circles that AD/CVDs are the tough and effective way of addressing unfair/non-market/protectionist practices. In my view, it's worth taking another look at this assumption, thinking about why that may not always be the case, and considering the alternative of WTO disputes to better address the underlying issues.

The USMCA Review (If the USMCA Survives!) Needs To Address the National Security Loophole

I don't know if the USMCA is going to survive all the U.S. tariffs on Canada and Mexico, along with the Canadian and Mexican retaliation. Will the agreement make it to the USMCA review next year? We'll see.

If we do make it though, I see a big problem in the form of the national security exception. Canada and Mexico were among the first targets in President Trump’s use of the International Economic Emergency Powers Act,  a law that gives broad discretion to the president to take actions to address national emergencies. And they are major targets of Section 232 national security investigations as well. Beyond the well-known steel and aluminum Section 232 tariffs, the Trump administration has initiated a Section 232 investigation of timber and lumber imports, which has been the source of a decades-long U.S.-Canada trade battle. It has also initiated one on copper. And Section 232 action on automobile imports is likely coming too (there was an investigation during the first Trump administration, and the current Trump administration could act on it), which would have a significant impact on both Canada and Mexico.

And while Canada and Mexico can file USMCA complaints against Section 232 measures (which the U.S. will defend under the security exception), and they may very well win those complaints (although the USMCA security exception is even broader that the WTO security exceptions), a panel ruling can give them a legal way to retaliate but won't save them from the tariffs.

As a result, Canada and Mexico have little recourse under the USMCA when the U.S. uses Section 232 against them. In each instance, they will be forced to the negotiating table and feel pressure to make new concessions. In these circumstances, USMCA is of much less value to them, and that's bad for the whole North American trading relationship.

Canada and Mexico were aware of the problem of a broad national security exception during the NAFTA renegotiation, and there were some USMCA side letters on this: MX-US Side Letter on 232 Dispute Settlement; MX-US Side Letter on 232 Process; MX-US Side Letter on 232; CA-US Side Letter on 232 Process; Side Letter Text on 232 CA-US Response. But clearly, given what we have seen recently with Section 232 actions, none of this appears to be sufficient. Are there alternatives that would be more effective? I will set out briefly a possibility I came up with. 

Canada and Mexico could ask for a presumption that in any Section 232 investigation, Canadian and Mexican imports would be exempt. The presumption would be rebuttable, so if specific evidence were presented in relation to Canadian and Mexican imports -- beyond the evidence provided for other affected governments -- restrictions on Canadian and Mexican imports could still be imposed. But the default finding would be that Canada and Mexico would be exempt from any Section 232 trade restrictions.

There is no doubt the Trump administration would strongly resist a demand such as this one. However, without something like this in place, Canada and Mexico will likely question the value of the USMCA. If all three parties want to maintain the USMCA -- and it is clear that many politicians and interest groups in the U.S. do, even if Trump and some of his trade officials have doubts about North American free trade -- a compromise along these lines may be necessary as part of the 2026 USMCA review. Without some action to address the problems created by the invocations of national security, the USMCA risks becoming a trade agreement in name only, with the breaches and threats of breaches overwhelming the commitments, and the private sector no longer relying on it as a stabilizing force that supports investment and trade.

(To be clear, everything that has been happening is far from the outcome I would like to see for North American trade relations. This is just one of those posts where I abandon my idealism and try to come up with a compromise that all the parties can live with.)

Will a "Zombie USMCA" Survive the Tariff Onslaught?

With all the tariffs imposed by the Trump administration on Canada and Mexico (under IEEPA already, under Section 232 soon, maybe under Section 301, and various other possibilities as well), and with the Canadian and Mexican tariff retaliation, how much is left of the USMCA? In economic terms, the creation of a virtually tariff-free trading area was the main benefit of NAFTA/USMCA. Without tariff-free North American trading, the agreement's impact is considerably reduced.

Having said that, until the parties formally terminate the agreement, it is still technically in effect, even if they are "observing it in the breach." And while tariffs may be spiraling, there are a number of ways the three countries may still make use of the agreement, including the following:

-- The Chapter 10 binational panel system

-- ISDS complaints (whose scope was limited through the USMCA, but certain claims are still possible)

-- Chapter 31 state-state disputes

-- The rapid response labor mechanism

With binational panels, I'm not sure how important these are given that domestic courts are an option for AD/CVD appeals, but some lawyers like them, so if they are available they will likely be used. They are part of U.S. law (and Canadian and Mexican law as well), so this process could keep functioning even if governments are disregarding the tariff commitments. If a government really wanted to disrupt the binational panel process, it could probably find a way, but it's unclear if anyone will think it's worth going that far.

For ISDS, this is where lawyers make some really good money, so there will likely be cases until the last possible day the remedy is available in the event of a formal termination of the agreement.

On Chapter 31 disputes, because the normal enforcement tool for a successful Chapter 31 complaint is tariffs, and as noted tariffs are already spiraling, I'm not sure how useful the three governments will consider Chapter 31 complaints to be. On the other hand, some complaints are brought to uphold a principle even if they are not likely to have an impact on policy, so we may still see a few of these cases.

Finally, the RRM is a tricky one. It has some strong supporters in the U.S. who want the U.S. government to use it against companies in Mexico. But this is a bilateral tool that relies on cooperation from Mexico. Will Mexico even engage with these issues in circumstances where it is subject to the Trump administration's tariffs? It may be reluctant to do so. If Mexico does not engage, the U.S. could then use that non-engagement to take additional action against companies in Mexico, including starting up a panel process if needed. If the end result of that process is more tariffs, then I'm not sure Mexican companies or the government will feel much pressure to comply, although there are other remedies that could be used as well that might be more convincing (we haven't gotten to that stage in an actual RRM proceeding yet). (For those who were wondering what the Trump administration would do with the ongoing RRM proceedings, also worth noting here is that last week there were updates to the proceeding timetables in the Pirelli and Camino Rojo panels, indicating that the cases will be pursued).

What do all of these issues have in common? They are lawyer-heavy aspects of the agreement! Trade wars may be bad for the economy, but lawyers tend to make out OK during these periods. 

As we limp towards the 2026 USMCA review, and stagger through all the tariffs, it will be interesting to see whether and how the rest of the USMCA holds up. It is possible that the parts of the agreement mentioned above could function as a "zombie USMCA" that keeps going even if the core of it has been killed.

Trump on Reciprocal Tariffs

In last night's address to Congress, Trump said the following about reciprocal tariffs:

Other countries have used tariffs against us for decades, and now it's our turn to start using them against those other countries. On average, the European Union, China, Brazil, India, Mexico and Canada ... and countless other nations charge us tremendously higher tariffs than we charge them. It's very unfair. India charges us auto tariffs higher than 100%. China's average tariff on our products is twice what we charge them. And South Korea's average tariff is four times higher. Think of that, four times higher. ... This is happening by friend and foe. This system is not fair to the United States, and never was. And so on April 2 ... reciprocal tariffs kick in, and whatever they tariff us, other countries, we will tariff them. That's reciprocal, back and forth. Whatever they tax us, we will tax them. If they do non-monetary tariffs to keep us out of their market, then we will do non-monetary barriers to keep them out of our market. It's a lot of that too. They don't even allow us in their market. We will take in trillions and trillions of dollars and create jobs like we have never seen before. I did it with China, and I did it with others, and the Biden administration couldn't do anything about it because it was so much money they couldn't do anything about it. We have been ripped off for decades by nearly every country on Earth, and we will not let that happen any longer.

I had some quick thoughts when Trump first announced his "reciprocal trade and tariffs" plan, and subsequently I put together something longer as a Baker Institute commentary. My main points in that piece are kind of obvious, but sometimes all you can do is state the obvious:

- Unilateral tariffs as a way to push for reciprocity would be an administrative nightmare and economically harmful to the US economy.

- Existing trade agreements establish a balance that previous US administrations wanted. US trade deficits do not mean that these US negotiators signed bad deals, because trade deficits are driven by macroeconomic factors.

- If the US wants to recalibrate the balance in its trade agreement, for example by focusing trade negotiations on lowering foreign tariffs rather than on issues such as intellectual property protection, that would be fine with me.

- Non-tariff barriers are complicated and a set of internationally agreed rules on when these are protectionist (and therefore illegitimate) is the best approach to dealing with them.

- Trade agreements are a good way to promote reciprocal trade liberalization, and were used for decades with great success. I hope U.S. trade policymakers will learn from these past successes (and current failures), and revive the old approach some day.

The piece concludes with the following:

Trump’s reciprocity memo appears to signal a unilateral move to raise U.S. tariffs in response to foreign tariffs and trade barriers. This approach is likely to cause serious problems for U.S. trade policy and for the trading system.

If the Trump administration were to attempt a unilaterally imposed “reciprocal” approach to trade and tariffs, it would come up against many administrative and methodological challenges. Calculating a U.S. tariff to be applied to each trading partner, taking into account both tariffs and other trade barriers in that country, will not be easy and the result is likely to look arbitrary. If the administration tries to match foreign tariffs and barriers on a product by product basis, it will be even more difficult.

In addition, the U.S. tariffs would lead to retaliation by trading partners, further damaging both the U.S. and global economies, and undermining U.S. influence in the process. It would functionally mean the U.S. is no longer participating in the world trading system it helped create, as it would be a flagrant violation of the rules of the WTO and all the FTAs it has signed. With most other countries continuing to uphold the system between each other, the U.S. risks losing influence by remaining on the sidelines. A more effective approach would be to engage and shape the rules from within.

When the dust settles on the current approach, the experience of the past may provide a way forward. After the Smoot-Hawley tariffs caused significant economic harm during the Great Depression, President Franklin D. Roosevelt implemented a U.S. trade policy centered on governments mutually agreeing to lower tariffs through trade agreements. This contributed to growth and prosperity in the U.S. and around the world in the ensuing decades. With recent alternative approaches to U.S. trade policy causing so many economic and political challenges, historical success stories may, at some point, receive a second look and a revival.