International Economic Law and Policy Blog

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.