International Economic Law and Policy Blog

Whither the Worker-Centered Trade Policy?

The Biden administration changed U.S. trade policy significantly when it adopted a “worker-centered” trade policy that justified entering into “frameworks” and not trade agreements. That policy didn’t win many accolades from the trade crowd. Many critics felt that it forewent critical opportunities by refusing to discuss market access in new trade contexts. Without getting into that debate, this post discusses whether the Biden administration’s worker-centered trade policy – and notably, use of that policy under the United States-Mexico-Canada Agreement (USMCA) Facility-Specific Rapid-Response Labor Mechanism (RRM) – will outlive the administration.

I think it will, but it will look different. And some, including labor rights advocates like myself, might prefer the Trump administration’s approach.

Before delving into the Trump trade agenda, a recap of the Biden administration’s worker-centered trade policy is in order. I won’t go deeply into it because I’ve discussed it at length both here and here. Relevant for our purposes is how that administration used the USMCA’s RRM – negotiated by the Trump administration – to assure U.S. trade unions, concerned members of Congress, and influential non-governmental organizations (NGOs) that it took worker rights seriously. It did so by aggressively enforcing the labor rights stipulated in the USMCA’s RRM in Mexican auto sector facilities; well, at least in politically advantageous auto sector facilities.

At Cornell University, I partnered with Alex Covarrubias-V, an expert in the Mexican auto sector at El Colegio de Sonora, and Cirila Quintero Ramirez, a labor union and feminist scholar at Unidad Matamoros, to ask workers in the Mexican auto sector directly about their experiences under the USMCA and its RRM. Our report is forthcoming at Cornell, but it can be found here in the meantime. We asked 130 Mexican workers about what they knew of their labor rights, unions, election procedures, and the RRM’s petitions and hotline processes.

In a nutshell, our study (albeit exploratory in nature) failed to find evidence that working conditions had improved in the Mexican auto sector despite the hundreds of thousands of dollars of U.S. assistance in Mexico and dozens of RRM cases USTR launched. That general finding stood starkly against the enormous benefits that some workers had received through direct assistance from the U.S. government under the USMCA RRM and its extensive remediation plans. Notably, all facilities that faced RRM investigations and remediation plans had workers who were assisted by U.S. unions and NGOs. While that transnational solidarity is a welcomed development, the disparity in empowerment and working conditions between those workers who were at facilities investigated under the RRM and those at facilities that had not raises significant questions about the object and reach of Biden’s worker-centered trade policy.

At this point, you might be asking why we’re talking about empowering workers in Mexico in the wake of a second Trump term. Many assume that the Trump administration merely agreed to include the USMCA RRM to appease a progressive Congress. Tomorrow’s Congress will look quite different following recent elections. With a Republican Congress, and with U.S. union support of current USMCA RRM enforcement, why should the incoming administration worry about broadening enforcement to encompass additional workers in the Mexican auto sector (or other trade and service sectors, for that matter) who are not affiliated with U.S. unions and NGOs?

Having spent four years working for Lighthizer’s Office of the United States Trade Representative, I’ll provide you two reasons that the new Trump administration will, or at least should, be thinking about expanding USMCA’s enforcement under the RRM to encompass more Mexican workers in trade sectors.

First, the RRM was more than a political compromise. It fits squarely within Trump’s objectives to ensure Mexican facilities pay workers the same wages and offer the same types of (costly) workplace benefits as U.S.-based facilities. Think about it this way: So long as facilities in Mexico avoid unions, pay low wages, and mistreat their workers, they produce goods and services for less, creating a competitive advantage in Mexico and incentivizing offshoring.

Those effects in Mexico directly hurt workers in the United States.

When companies in the United States move to Mexico to save on production costs, U.S. workers lose their jobs. When companies in the United States threaten to move to Mexico if workers do not accept their demands, workers lose their salaries, benefits, and bargaining power in desperate efforts to keep their jobs. In other words, the costs of inadequate Mexican labor protections are born by the same U.S. workers that the first Trump administration cared deeply about.

Second, our report offers some evidence that the current scope of enforcement is inadequate to change those unfair competitive practices in Mexico. As I recently explained at a U.S. ITC hearing, by only protecting those workers in Mexico who are privileged to have an inroad to U.S. stakeholders, the Biden administration missed critical opportunities to disseminate information about grievance and election procedures more directly to workers in the trade sectors in Mexico. If the Trump administration wants fair competition, it needs to ensure, as it did when it negotiated the USMCA’s RRM, that workers throughout the trade sectors that compete with workers in the United States have protected opportunities to build their power and fight for better working conditions.

How should things improve under the incoming administration? The Trump administration must ensure that no companies we compete with profit from breaking the rules, including very basic rules governing workers’ rights to join and form the unions that will fight for higher wages and better workplace benefits. It should redirect federal funding to ensure that workers in trade partner countries know their rights and how to enforce them. It should also publicize all petitions filed by workers – not just those supported by U.S. stakeholders. If the administration decides, as is its right, not to pursue a petition, it should be prepared to explain why; otherwise, workers strapped for resources in Mexico and elsewhere may become disincentivized, and we need their participation on the ground to identify rule breakers. Transparency is critical to keeping any administration consistent, and when it comes to production costs and disincentivizing rule-breaking, consistency is key.

As a parting consideration, the trade community is spending a lot of time right now debating the utility of tariffs as a measure to protect U.S. businesses and workers. The USMCA RRM offers an alternative by addressing the root causes of unfair competition, the elimination of which could reduce the trade deficit. By focusing on the causes of unfair competition rather than its results, the Trump administration could attack the trade deficit without increasing the costs of goods on U.S. consumers – again, the same workers that the Trump administration pledges to fight for.

I look forward to hearing your thoughts. Feel free to write in the comments, which are always cause for joy and great amusement, or directly at [email protected].

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.

Some Responses to Lighthizer's Recommendations for the WTO

Former U.S. Trade Rep. Robert Lighthizer has a new book on trade policy. I haven't read the whole book, and I'll leave a full review to others. However, I did come across an excerpt of his seven specific recommendations for the WTO, and I had some reactions to each.

Lighthizer recommendation #1:

First, we need a reset on the global tariff system. This practice of countries having wildly different tariffs for the same products is unfair, inefficient, and historically anachronistic. We need a new baseline for all tariffs. There should be some small number of exceptions permitted to accommodate grave political and economic situations in some countries. The average tariffs of industrialized countries would be a good starting point for discussions on this baseline.

I assume he is upset that the U.S. has lower tariffs than many other WTO Members (although not the lowest). But it's worth noting here that tariffs aren't the only policy negotiated at the WTO. When thinking about the overall balance of obligations, you have to take into account non-tariff policies, such as IP protection. So, if the U.S. decides at some point that it wants other countries to lower their tariffs from existing levels (or the U.S. wants to raise its own tariffs), it will almost certainly have have to give up some of what it fought for and got on IP or some other issue.

Lighthizer recommendation #2:

Second, we need to stop the FTA end run around MFN treatment. Clearly, defined custom unions of contiguous states, such as USMCA or the European Union, should be permitted, but otherwise countries should have to treat all trading partners equally.

The USMCA is not a customs union, but putting that aside, GATT Article XXIV/GATS Article V do not currently have this kind of limitation on FTAs. I'm not sure what his goal is here. It is probably not to shift from trade-diverting to trade-creating FTAs, as some economists might suggest, so maybe he's just trying to reduce the number of FTAs? In a WSJ op-ed from 2020, he made this point in a way that suggests it is directed at the EU: "As multilateral trade negotiations have foundered, the most-favored-nation norm has eroded as well with the proliferation of bilateral free-trade agreements that discriminate in favor of preferred trading partners. By entering into trade deals with smaller economies—72 at last count—the European Union has effectively resurrected the system of colonial preferences that prevailed in the pre-GATT era. The EU uses its trade deals in many cases not to advance trade liberalization, but to force other countries to adopt thinly veiled protectionist measures like “geographic indications,” which prohibit the use of common labeling terms for wine and food items produced outside the EU."

Lighthizer recommendation #3:

Third, special and differential treatment has to be cut back so that only the poorest countries in the world get special treatment. The rest are either in the trading system or they are not.

Lots of people are interested in this issue right now. Jim Bacchus and Inu Manak had some suggestions here.

Lighthizer recommendation #4:

Fourth, the WTO needs new rules to stop Chinese economic aggression. Clearly, compensatory tariffs should be allowed in prescribed circumstances. Further, if necessary, countries should have the ability to act unilaterally to counter predatory, mercantilist policies.

On this issue, it's probably worth exploring the rules China agreed to in its accession protocol and working party report. There are some broad obligations in there that have been mostly overlooked. Having said that, it could be helpful to have certain policy areas covered a bit better by WTO rules, e.g., bring CPTPP SOE rules into the WTO. As for "the ability to act unilaterally to counter predatory, mercantilist policies," if this means AD/CVD, that has been heavily utilized for a long time now, without much impact on Chinese policies.

Lighthizer recommendation #5:

Fifth, the concept of a sunset should be incorporated into the WTO agreements. Economies change, and so should the obligations of members. No business would sign an eternal contract with its suppliers, nor should any country.

I'm against all sunset provisions, with the exception of policies I don't like, in which case I am for them. That's a joke! But seriously, it seems like people generally want sunset provisions for things they don't like, and I haven't come across many arguments for sunset provisions on principle.

Lighthizer recommendation #6:

Sixth, the WTO must adopt a mechanism that assures long-term balanced trade. Commitments must be flexible when a country such as the United States runs up trillions of dollars of deficits for decades.

If Lighthizer is concerned about the U.S. trade deficit, he'll need to address its core causes, which are mainly macroeconomic in nature. If he wants, for example, a WTO mechanism to increase U.S. savings and end the dollar's use as the dominant reserve currency, he can push for that.

Lighthizer recommendation 7:

Finally, the dispute settlement system should be scrapped. A new one, modeled after commercial arbitration, should be put in its place. There should be a one-stage panel process with a vote of the WTO member states being able to overturn the decisions. Further, the decisions should be the basis of party negotiations and not be binding.

Lighthizer also mentioned commercial arbitration in the WSJ op-ed, where he said: "The current two-tier system should be replaced with a single-stage process akin to commercial arbitration, in which ad hoc tribunals are impaneled and resolve particular disputes in an expeditious manner. The rulings of these one-off panels should apply only to the parties in the dispute, and not become part of an ever-evolving body of free-trade jurisprudence." I don't know much about commercial arbitration, and perhaps the methods used there work well for those disputes. But from what I do know about them, they don't seem well-suited for WTO law. At the WTO (and in bilateral and regional trade agreements), we need reasoning that clarifies what the vague terms of the rules mean, so parties know what their obligations are. If the meaning of national treatment, for example, is up for grabs in every dispute, it will be very difficult for governments to act in compliance with the principle.

What Does Bob Lighthizer Think of the Trump Administration's Trade Policy?

On his TV show, former Trump administration official Larry Kudlow was talking to Trump's U.S. Trade Representative Bob Lighthizer about various trade issues, including whether Lighthizer thought the Trump administration's China trade policy was successful. Not surprisingly, Lighthizer thought this policy was quite good, even coming close to being historically great and Churchillian. Here was the exchange:

Kudlow: Was the US-China Phase One trade deal a success or a failure? ...

Lighthizer: ... So I'll take a half a step back. Was the President's China policy a success? I think it was a success. Probably the greatest success of his presidency, or at least arguably. I think it was the most impactful and successful policy of a modern American president.

And here's why I say that. You have to start with the proposition that China is an existential threat to the United States. They do not like us. They want to be the leader of the world. They do everything they can to hurt America. So you start with that. Then you go back and you think, where were we six years ago? People didn't understand that. Trump understood, but people did not understand that. And he basically changed the way the United States thinks about that, and in truth, the world, because everyone now understands that issue. ...

Kudlow: ... Trump rang the warning bell, big time. And that's really what you're referring to.

Lighhtizer: He convinced the world that we have a conflict. Think of it as a little bit like, and I don't want to draw too far on this analogy, but a little bit like the 30s with Winston Churchill, it's a little bit like that. ... he's now, the world's in a different spot. We understand we have a problem.

Now, to get to your specific question, was the Phase One deal a success? First of all, it was successful in helping to convince the world of the most important thing you need to know, that we have an existential threat, if you're on the West, if you're an American. So in that sense, it was a success.

Let's go back and look at the individual parts of it, because there's a lot of confusion about this. People say, was the agreement about buying stuff? No, that was a very small part of it. So the most important single part of that agreement was we kept the tariffs in place. The tariffs were very important, they reduced the trade deficit, which they did. They took away the advantage that was unfair, that China had as a result of its unfair practices and subsidies. So the most important single part of that was the tariffs are still in place, and they're still doing the right things. And if President Biden gets rid of them, in my judgment, that will be a betrayal of the American people. ...

...

Let me spend one more second on the trade deal. All right, so the trade deficits, I mean, the trade tariffs stay, and that's the most important part. The second part, there was systemic changes. This is Phase One I'm still talking about, and they did most of those. The third part, and we can talk about that, they introduced and changed the laws that they said they would, agriculture, a variety of other things. Now it wasn't perfect, but it was pretty good. On the purchases side, they were less successful, the agreement was less successful. Now, there were interventions, there was COVID. There were a lot of reasons, but that's not an excuse. But most importantly, the thing's enforceable, and if they're not following the agreement, we should raise tariffs to retaliate.

Kudlow: Forced transfer of technology?

Lighthizer: So the forced transfer of technologies, they have stopped it as a matter of policy. Whether it stops in practice is something that a USTR or an administration should take a case to the Chinese if they find the case. And if they do, retaliate against it.

Putting trade aside for a moment, what I'll always remember about Trump's China policy was that he appears to have endorsed, or at least not objected to, China's treatment of the Uighurs and the Hong Kong crackdown. It would be interesting to see the counterfactual with a U.S. president who cared about these issues and pressed Xi Jinping on them, but we'll never know what would have happened. 

On trade, I had the following reactions to Lighthizer's points.

First of all, it sounds like Lighthizer thinks China mostly complied with the substantive obligations in the Phase One agreement, which is an intriguing position for a China hawk to take, as most people with that perspective say that China doesn't comply with its agreements. (With regard to the cause of China's compliance, I'm not sure that the Chinese actions here went beyond what it was already planning to do on most of these issues, but I'm happy to hear from any China experts out there on this point.)

Second, Lighthizer emphasizes that the Phase One agreement is enforceable, but this opinion is not widely shared (and it's definitely not my view). Without some kind of independent arbitration mechanism that can provide a neutral ruling on complaints, all the U.S. can do is threaten tariffs when it is upset about something, which is what it can already do -- and which it did -- under Section 301.

Third, Lighthizer says the most the important thing the agreement did was to keep the tariffs in place. But without the agreement, the tariffs would still have been in place, so I'm not sure the agreement adds anything here.

Obviously, it's natural for people to want to promote a positive version of their legacy, so we can't really expect anything else from a Kudlow-Lighthizer exchange on this issue. What will be interesting is to see the legacy that develops when we've had more time to reflect, and when some of the key players are no longer active in the field and more people feel comfortable expressing a view.

The Trump/Lighthizer Legacy on Trade

With the Trump administration now finished, we are in the period where people will be spinning Trump's time in office into the narrative they want to create. On trade policy, Trump's U.S. Trade Representative Robert Lighthizer spent some of his final weeks in office trying to create a favorable narrative with the talks and interviews he gave. At an event last month with the Confederation of Indian Industry, he said the following (starts at 1:25:34):

"I think the China awakening will last. I'm very hopeful that changing the direction of trade policy, or the objective towards workers, will also last.

I think the President got elected on this issue. And he ran on it. And it was interesting, the other side, Biden didn't really run against our views at all. It was very interesting. And so, it's an enduring part of the Trump legacy."

He offered a similar perspective to the BBC: 

• "what we tried to do was reorient the purpose of international trade more towards working people in the United States"; "I think that the Democrats as well as the Republicans realise that we needed to shift the paradigm on trade more in the direction of working people in the United States"; "The real question is, 'What's the objective?', and the objective can't just be efficiency, the objective has to also be working men and women"; "We want strong communities in the United States. And if that means that T-shirts cost another nickel, then T-shirts will cost another nickel"
• "And that we needed to recognise that China is a real problem for our system, and that we had a very, very unbalanced relationship and we can't go back to where it was."
• "I wouldn't really say that we started a lot of trade wars. I don't think that's accurate. ... where would you really say we started a trade war?"

And perhaps with the most detail, at the Milken Institute he responded to questions such as: "as you think back to the Trump administration's four years, what are the lessons learned?", and "What are things that people can take away, to compare these four years, say, to prior presidential administrations?":

• "I would say, to me the two most important things are, one, we have reoriented the purpose of trade policy, more towards working men and women, and farmers, and what's good for them, and less away from the notion of global corporations, long supply lines, outsourcing, and efficiency."
• "The number two thing is [Trump] showed that there is a major issue with China. … this president realized that [the trade system] needed to be reset .. in terms of realizing that we have to deal with China as the biggest growing economy in the world, and a very different system. Not a capitalist system."
• "In the 90s there was this notion, which turned out to be a foolish notion, but there was this notion that well if you just draw China in and deal with China, China will become like America, right. … Just a common view in the Clinton administration, that if they trade they'll become democratic."
• "I have always been an economic nationalist in the sense that I always wanted a strong US economy, I wanted a strong manufacturing economy, I wanted good services jobs."
• "And then we put in place as part of that [at the WTO], we put in place this dispute settlement process. What you've noticed since then in going forward is no more negotiations. So we have a negotiating body that has now become like a court. And it was never intended to be that way. … So what has tended to happen is people are not negotiating. And they're just litigating."

Lighthizer's spin on the legacy of Trump's trade policy raises a number of questions:

• Did Biden run against Trump's trade policy?
• Did the Trump administration start any trade wars?
• How did U.S. trade policy change with regard to China under the Trump administration?
• Is U.S. trade policy now more oriented towards workers?
• Did Trump get elected on the issue of trade?
• What is the relationship between WTO dispute settlement, on the one hand, and WTO negotiations, on the other?
• What is "economic nationalism"?

Let's go through these one by one. The first two are the easiest.

Did Biden Run Against Trump's Trade Policy?

Yes, Biden ran against Trump's trade policy. One example is this speech. Some choice quotes from the speech are: "Trump's tariffs and trade wars are hitting a lot of American manufacturing -- especially the American automobile industry -- choking it to within an inch of its life"; "Trump doesn't get the basics. He thinks his tariffs are being paid by China. Any beginning econ student at Iowa or Iowa State could tell you that the American people are paying his tariffs"; "Trump is attacking the very partners we need with us to deal with China. We need to rally more than half the world's economy to hold China to account for their cheating. And get a chorus of voices speaking out on China's repression."

While I don't think trade policy plays that big a role for most U.S. voters, to the extent that Biden talked about trade policy, he clearly indicated that he would not be following Trump's approach. That's not to say he'll be a free trader, but he will diverge considerably from what Trump did.

Did the Trump Administration Start Any Trade Wars?

Yes, the Trump administration started trade wars! We could quibble over whether specific actions constituted a trade war, and who started particular trade wars, but no one has any doubt that the Section 232 tariffs and quotas on steel and aluminum were trade wars started by the Trump administration. The steel and aluminum tariffs were of questionable legality, favored special interests over the economic welfare of the country as a whole, and led to retaliation from trading partners. 

How Did Trump Change U.S. Trade Policy Towards China (and Was That Change Effective)?

With regard to China, I think the legacy of the Trump administration is a lack of focus and many missed opportunities. Keep in mind that China was high on the U.S. trade agenda even before Trump, as the Obama administration used the TPP (and the TTIP), at least in part, to counter China's rise and keep it in check. You can question whether that was the right approach, but certainly the Obama administration was pressing hard to work closely with allies and to "write the rules instead of letting China write them," as Obama and his trade policy team often said. The Trump administration talked a lot about China, but at the end of it all got just about as much as the Obama administration did with TPP/TTIP. There's a "phase one" deal in effect, but outside of a few sectors/issues here and there, it doesn't seem to have changed much in terms of China's trade practices; and there are now lots of additional tariffs in place, on both sides. Basically, if the goal was to induce China to liberalize, we went backwards. Now, maybe this was all part of a longer-term strategy, and the ultimate goal really was to use the tariffs to change China's practices. However, when you have a President who calls himself a "tariff man," it's also possible that the tariffs themselves were the main goal, and inducing change in China was a secondary consideration.

As for the notion that trade with China would make it more democratic, this Bill Clinton speech I linked to a while back is helpful in understanding the thinking at that time. Lighthizer puts this straw man out there: "there was this notion that well if you just draw China in and deal with China, China will become like America." However, Clinton's speech clearly says something very different.

Did the Trump Administration Reorient Trade Policy Towards Workers?

On the issue of workers, the Trump administration's trade policy was clearly intended to help certain U.S. companies in particular industries, such as steel and aluminum. To a great extent, then, this trade policy was about enriching particular corporations. Now, there are workers at those corporations, so I can see how you would spin things to say that the policies were designed to help the workers rather than the CEOs and shareholders. But there are many more workers in other industries who were hurt by the steel and aluminum tariffs, so on balance the case for these policies helping workers is pretty weak. And his argument about efficiency is too simplistic. Yes, you can maintain an inefficient system for a while by imposing costs on the masses for the short-term benefit of a few well-connected corporations. That kind of approach works only until it collapses though. At a certain point, it just becomes too expensive to prop up the inefficient companies.

On labor rights, the USMCA famously has some innovative new provisions that could promote worker's rights in Mexico, but those were pushed by Congressional Democrats. Perhaps the appropriate narrative on this point is that the Trump administration acquiesced to the demands of Democrats on issues related to workers. When you put it that way, it seems less compelling in terms of the Trump administration's legacy.

Did Trade Policy Help Trump in Elections?

As to the role of trade policy in elections, Trump did talk a lot about trade during both his presidential campaigns. In the 2016 election, Trump got beaten pretty handily by Hillary Clinton in the popular vote, but was able to win the electoral college. Then, after four years of implementing his trade policy, and giving voters a chance to see what that trade policy looked like in practice, Trump got trounced by Joe Biden in both the popular vote and electoral college. So, putting aside the merits of the policies, they don't look quite so helpful politically.

As I said above, I don't think trade policy plays that big a role in U.S. politics. Most people's views on trade policy are not that strongly held. But if you want to judge protectionist trade policy on the standard of how it fares in elections, it doesn't look all that successful.

What is the relationship of dispute settlement and negotiations at the WTO?

As I explained here, the Trump administration's view seems to be that governments have been unwilling to negotiate at the WTO because they could more easily litigate and get what they wanted that way, without having to offer concessions. That shifted the WTO from a negotiating forum to a litigation forum, with the U.S. paying the price as it lost cases brought against it. 

I think this view completely mischaracterizes the reasons for the failure of WTO negotiations in recent years. As I see it, the main reason for this failure is the unwillingness of certain governments to make concessions. People often point to countries such as India and Brazil, and that's fair. But I would also point at the U.S., the EU, Japan, and other developed countries. The developed countries may look at the current set of rules and say, we have made the biggest commitments (e.g. on bound tariff levels), and now it's time for the developing countries to do more. It's up to them to make concessions. But the developing countries look at issues such as IP protection (e.g. long copyright and patent terms) and think, we gave way too much already, and now it's time to rebalance things towards us. And I think the developing countries have a point here. As I see it, the result of all this is, until all major trading countries are willing to give something, the negotiations are going to mostly remain stalled. Importantly, the negotiations being stuck has nothing to do with the ability to litigate. Yes, at the margins, governments can bring cases against the U.S. and win some minor victories. And the U.S. can do the same against other governments (although the Trump administration didn't make much use of this ability). But issues related to litigation tend to be narrow and are not the cause of any broad negotiating failures.

What Is Economic Nationalism Anyway?

Finally, there was this: "I have always been an economic nationalist in the sense that I always wanted a strong US economy, I wanted a strong manufacturing economy, I wanted good services jobs." OK, but if the standard is "wanting a strong US economy," we are all economic nationalists. The real issue here is whether ratcheting up protectionist policies to levels not seen in decades is good for the U.S. economy. We all saw the harms to specific U.S. companies and their workers, especially manufacturers who make use of imported inputs. Trump's policies reaffirmed that economic nationalism in the sense of high levels of protectionism and unilateralism is bad for the domestic economy as a whole.

So What Is the Trump/Lighthizer Legacy on Trade?

What is the Trump/Lighthizer legacy on trade? Maybe it is this: For the foreseeable future, the Trump administration's trade policy will provide everyone a long list of examples of things not to do. Tariffs being wildly overused as negotiating threats; tariffs outside the normal legal processes; tariffs that lead to trade wars; tariffs that undermine international trade agreements; and unilateralism on trade policy in general. All of it had the expected negative results. None of it had the benefits that were promised.

The reality of the trading system that existed pre-Trump is that it did not come close to full free trade. Rather, a major part of the system was a carefully negotiated balance of modest constraints on tariffs and other protectionism. Trade was liberalized a bit, but there was plenty of protectionism still allowed. Interest groups certainly put their policy preferences in the mix at times, but probably less so than they would in a system without the international constraints. The Trump administration tried to move away from that, with an ideological approach based on higher tariffs and unilateralism, and designing trade policy largely for the benefit of a few favored industries.

So what now? The path ahead is a bit unclear, but in my view just about everything the Trump administration pushed over the last four years should be avoided. When people study trends in U.S. trade policy, they should go from Clinton to Bush to Obama to Biden, with the four year period under Trump characterized as just a weird anomaly. Normally, trade policy tries to take into account all of the various domestic interest groups and to promote good relationships with foreign nations. We took a break from that approach during the Trump administration, but hopefully we can get back to it now.

Giorgio Sacerdoti Letter to the WSJ in Response to Lighthizer's Op-Ed

Giorgio Sacerdoti sent along the following letter he wrote in response to the Lighthizer WSJ op-ed from last month:

Letter to the Editor, Wall Street Journal

Milan, 29 August 2020

Dear Mr Lemmer,

It was refreshing for all those who believe in the advantages of a multilateral rule-based trading system to read in USTR Robert Lighthizer’s Op-Ed published by the WSJ on 20 August a defense of multilateralism and equal treatment for all trading nations in accordance with the most-favored-nation standard enshrined in the WTO. Especially since in recent years the US has preferred to resort to bilateral deals, at times obtained under the threat by the US to resort to unilateral restrictive measures against imports of dubious WTO-consistency.

The lack of any meaningful new multilateral agreements at the WTO in the last 20 years cannot however be attributed to the case law of the Appellate Body that, according to Mr. Lighthizer, would incentivize countries to resort to litigation rather than negotiate. Adjudication of cases involving contentious rules cannot be a substitute to negotiating new provisions or amendments to existing rules, including when a country considers that the Appellate Body’s interpretation does not correspond to what it believes had been agreed in original negotiations (such as the US in respect of its unique “zeroing” practice in anti-dumping investigations).

Contrary to Mr. Lighthizer’s opinion, the Appellate Body has more than once revised in favor of the US first-level panels’ decisions, such as in the “Gambling” case, where the panel had found a host of US domestic regulations contrary to the GATS while the Appellate Body, on appeal by the US against Antigua, limited the conflict to a minor instance. Same in the well-known “Shrimps-Turtle” case.

Similarly, Mr.Lighthizer’s proposal to  “rethink totally” the WTO’s dispute settlement system, replacing "the current two-tier system with a single stage akin to commercial arbitration”, with recourse to a kind of ad hoc appeal panel ”to allow the WTO membership to set aside erroneous panel opinions in exceptional cases” would leave traders and member countries worst off. The current consistency of interpretation, inherent to a continuous case-law from a professional unanimously selected standing appellate body, would get lost. Differential treatment of the same issue in different cases by different panels (say once between China and the EU and next time by a different panel between the US and India) would become possible. Exactly to avoid these shortcomings, that would belie the equal treatment principle advocated by Mr. Lighthizer, the panel system of the GATT was completed with an appellate review stage as an integral feature of the WTO in the Uruguay Round negotiations finalized in 1994.

Countries are of course free to resort to conciliation and alternative compensation to settle their trade disputes instead of pursuing litigation. This is already provided under the current rules and could be incentivized. The US itself has resorted successfully to these solutions: in the Hormones case to negotiate market openings for its beef export to the EU. Similarly to resolve a dispute with Indonesia, when the US offered  additional access for its products into the US market, instead of readmitting clove-flavored cigarettes in the US in compliance with the unfavorable outcome of the dispute.

Sincerely yours

Prof. Giorgio Sacerdoti

Emeritus professor of International Trade Law, Bocconi University, Milan, Italy

Former member of the WTO Appellate Body (2001-2009), chairman (2006-2007)

Food Regulation, Science, Protectionism, and Regulatory Autonomy/Sovereignty

I feel like the role of science in trade agreements doesn't get enough attention, and I'm always excited to see someone trying to raise the profile of this issue. Here is a question from Congressman Earl Blumenauer at last week's House Ways and Means trade policy hearing with Ambassador Lighthizer (starts at 1:09:53):

Blumenauer: ... Let me say, I have a particular interest in dealing with food and agricultural policy, to make it more visionary and equitable. Currently, the United States spends too much money subsidizing large corporations and doesn't adequately help the majority of small and mid-sized farmers, and it subsidizes manufactured food at the expense of fresh, healthy food. We have entered into a phase two of our agreements with the United Kingdom. I hope that our negotiators can focus on tearing down protections and barriers to trade, like quotas and price control measures, and spend less political capital on areas where our two countries may simply have reasonable policy differences. I think too often we hide behind requiring science-based justification for other nations' sanitary or phytosanitary measures without allowing flexibility on values and public input. Many large agricultural interests focus on scientific studies on pathogen rinses for poultry. Maybe we should be asking about our production process that requires us to wash chickens in chlorine in the first place. Can't reasonable people have concerns about slaughterhouses in the United States. My goodness. Anyone who has looked at the news recently understands American policy on slaughterhouses needs a much closer review. With pesticides, our regulations do not set a high enough standard for determining their effects on our environment and how those environmental effects impact our health. Should we really export our weak standards to another country who has legitimate public policy concerns and may provide better protections? For genetically modified meat or meat altered by growth hormones, is it possible that a democracy where consumers have input might choose to restrict these practices for reasons other than interfering with American commerce? As with all negotiations, there are some priorities you will push harder than others, but I would hope that you could focus your attention and that of your team on protectionist hurdles to our farmers rather than areas of legitimate policy differences. American families need national and international agricultural policies that address our common welfare and allow for targeted regulations that promote health, address climate change, and put people ahead of corporate interests. I would hope that you and your staff would be willing to help us explore these differences to determine where there are some legitimate policy differences rather than simply protectionist impacts. Would it be possible for us to work with your team to explore this?

It's not surprising that some American politicians on the left would favor an approach to food regulation that is more consistent with what the Europeans do. I agree with some (but not all) of what he is saying here. I agree with the sentiment that we should focus on "protectionist hurdles to our farmers rather than areas of legitimate policy differences." And I worry about obligations that food safety regulations be based on science, because I'm not sure that obligations of this sort can be applied in a way that gives regulators sufficient flexibility. A non-discrimination obligation is narrow and targeted, catching only a handful of measures. By contrast, a requirement that regulations be based on science puts a lot of regulations at risk. I think people overestimate the extent to which food regulations are actually based on science, and also overestimate the ability of international law to enforce such a standard. 

Here was Lighthizer's response:

Lighthizer: ... On this issue of agriculture, I'll just repeat what I have said before. Number one, agriculture policy is set by the United States Congress, not by the U.S. Trade Representative. So the issues that you raised I know are difficult issues, and they're being fought out in Congress and Congress will come to some conclusion and I'll be guided by what Congress says. For right now, the reality is that what we want and what we insist from our trading partners is equal access, fair access based on science. The difference between big and small farmers and corporate farmers, I don't know much about that. I would say the United States has the best agriculture in the world. It has the safest, highest standards. And I think we shouldn't confuse science with consumer preference. If consumers have a preference of one thing or another, they should certainly exercise their preference, but it's not the role of the United States Trade Representative to change agriculture policy. I'm dictated that by the Agriculture Department, but mostly by the United States Congress. So what I'm going to do is try to insist on science-based restrictions and to the extent they have restrictions that are not science-based, we will object.

A similar conversation happened at the Senate Finance Committee hearing later the same day. Here is an exchange between Senator Thune and Lighthizer (starts at 00:55:15):

Thune: Thank you, Mr. Chairman. Ambassador, thank you for all you're doing to promote U.S. trade around the world and I know that in testimony earlier today you said that the United States wouldn't agree to a trade deal with the United Kingdom unless the UK lowered barriers and provided fair access for U.S. agriculture products including U.S. meat imports. We've talked time and time again about how much our ag. producers are hurting and how we should be doing more to help them. One way we can do more is by making sure that our trade agreements require our allies and trading partners to rely on sound science. Do you agree that many food standards are actually disguised protectionism, and a follow-up question is, what is the best way to stop that practice?

Lighthizer: So, Senator, I completely agree with you. I made this statement this morning that the European Union has raised this practice of using standards really as protectionism to a high art and I believe they have. They now in terms of some residue -- maximum residue levels, they actually have -- if there's any detection at all, the product is unacceptable. To me, that is just plain protectionism. And making every regulation science-based is the equivalent of getting rid of protectionism. It's the equivalent of getting rid of any other non-tariff trade barrier. I would say Europe is going in the wrong direction, not in the right direction. They're being controlled by protectionist interests and -- well, let me just leave it at that. Protectionist interests. In my judgment, we have to insist on science-based standards for our farmers. And I would say this standards thing is not just an ag. issue. They're using standards in industry too. It's not just -- it's a higher art in ag., but they use it in industry too. We have to insist on it. And to the extent people deny us access, we shouldn't give them a trade agreement. And if we don't have a trade agreement, then in my judgement we ought to be taking trade actions against them. And I'm looking right now at whether or not some of these actions, I want to consult with you and your staff, whether or not right now we shouldn't be looking at a 301 on some of these things. It's getting so far out of control, where they say literally if there's any detectable residue, the product is unacceptable. That's just, there's nothing to do with science.

Based on these responses, Lighthizer seems very comfortable using the absence of a scientific basis as a proxy for rooting out disguised protectionism. If it's not based on science, in his view, we can assume it is protectionist.

I have doubts about this. I think the absence of scientific justification for a regulation can exist for many reasons. To take an extreme example, think about all the people who don't want to get vaccines these days. Ignoring science may overlap with protectionism on occasion, but it's really a separate and much broader issue. The practical reality is that sometimes people's feelings about an issue take precedence over the science, and those popular sentiments are reflected in the work of legislators and regulators. (Democracies are imperfect, but often people's views do make their way through to government officials.)

In addition, sometimes the science is not completely clear, and there is a debate about what the science tells us to do. And in some cases, there are policy issues other than science (e.g. animal welfare) that underlie the regulatory decision in question.

In my view, then, science can play a role in food (and other) regulation, and should be taken into account, but a "based on" science requirement, as we have seen it applied, may go too far, and is not necessarily an appropriate proxy for identifying protectionist regulation.

I also want to raise the issue of regulatory autonomy/sovereignty here, because that seems to be a big point for many people who call themselves economic nationalists. I would say that a narrow and targeted obligation that tries to root out protectionism doesn't (or shouldn't at least) interfere much with regulatory autonomy and sovereignty. In contrast, requiring that all food safety regulations be based on science would be pretty intrusive in this regard, including for U.S. policy-making.

Finally, there's the issue of which branch of the U.S. government should be in charge here. Lighthizer suggests that he is deferring to Congress on all this. But I suspect that many people at USTR have given these issues a lot of thought, and I think that USTR should lead the way a bit more here. Members of Congress will be focused on their particular constituencies, whereas USTR can see the big picture. Currently, U.S. trade policy strikes a certain balance between opening foreign markets and preserving regulatory autonomy. Is it the right balance? Have we been able to use the rules to open foreign markets? Are we risking challenges to non-discriminatory domestic regulations? I'd like to hear more from USTR on these issues.

If Biden wins the presidential election, I'd be curious to see what kind of response Blumenauer would get from Biden's trade policy team on this same question. I have talked to some people on the left -- perhaps those same people have been talking to Blumenauer -- who really want to revisit issues like this one, and who might be more eager to work on this. From the perspective of U.S. domestic politics, it might be risky to take such an approach, because some influential agricultural groups will be annoyed. However, I think there is a case to be made that while trade rules have done a good job dealing with protectionist food regulations, using trade negotiations and enforcement to address food regulations that are unscientific but not clearly protectionist hasn't worked all that well, and that perhaps the industry should try a different approach to pushing for regulatory changes in foreign markets.

Congress Asks Lighthizer About the Sunset Clause

I have been suggesting that Congress should clarify its role in the decision required under the USMCA's sunset clause on whether to extend the agreement, and Congressman Steven Horsford came through for me at yesterday's House Ways and Means Committee hearing (starts at 3:37:50). Here's what he asked:

Rep. Horsford: “… And finally, I’m concerned about the sunset clause and the fact that it has some automatic renewal provisions that could go around Congressional authority and approval.”

I understood this to mean that Congressman Horsford was interested in the role Congress would play in the USMCA extension decision. But Lighthizer's answer seems to take the question in a different direction:

Amb. Lighthizer: “… And then on the issue of sunset, I guess I didn’t quite understand the point. We have a sunset provision in here. Most trade agreements, for reasons that don’t make any sense to me, are eternal and this one is temporal, although it’s complicated how it works. So, if there is any usurpation of Congressional prerogatives in trade agreements, it would be, I would suggest, in all the others and less in this one.”

Horsford tried to clarify by adding this:

Rep. Horsford: “So if I could Mr. Chairman, just to clarify, you will come back for approval with any sunset clause. It doesn’t take the Congressional oversight accountability or approval process."

Lighthizer's further response seems to insist they are on the same page:

Amb. Lighthizer: “There’ll be no coming back – that’s how trade agreements work. It’s kind of a crazy thing, but they kind of become, that they’re just eternal. We just pass these things and then they go on forever and ever and ever. What this one does is it has a process, which as you know, that every six years you’ll have a review and see if whether or not this is something you want to extend, and if it isn’t then it will expire in a certain period of time after. But this is, I would suggest, that this is like an extremely important idea, exactly consistent with where you’re coming from. And it’s an innovative way to do exactly what you want to do. And I want to sit and talk to you about it because I think this is right in your sweet spot."

But I'm really not sure they are talking about the same thing. Lighthizer is focused on the sunset clause's requirement of an affirmative decision to extend the agreement, which he sees as a positive; Horsford is thinking about the role of Congress in this decision.

I'll close by repeating what I've said before: "[W]hich U.S. government branch gets to decide on whether the agreement should be extended as part of this review? What is the role of Congress here? Congress has ceded a lot of power to the President on trade over the years, and if it allows this provision to stay in, it better make sure that it has a full say on whether to confirm that the United States wishes to extend the new NAFTA deal as part of the review." I hope Congressman Horsford and others keep pressing Lighthizer on this behind the scenes, and use the USMCA implementing legislation to give Congress a say in the decision on whether to extend (one approach would be that the decision will be in favor of extension unless both Congress and the President agree not to extend).

Brady-Lighthizer ISDS Exchange

Congressman Kevin Brady and U.S. Trade Rep. Robert Lighthizer had a good exchange today on ISDS at a House Ways and Means hearing. Here is a messy transcript (hopefully it is mostly accurate):

Brady: You know I'm confident you and your team are going to negotiate a pro-growth NAFTA that makes America stronger economically. To do that, and to maximize the economic growth from our now one of the most competitive tax codes in the world, to maximize on that we need more customers, and many of those customers live outside the United States. Many of them are in Mexico, in Canada. And when we compete and win on a level playing field, we grow American jobs here. But, to do that, we all sometimes have to invest in those countries to compete and win against China, Europe, and the rest of the world. But if that investment in those countries is to benefit America, our investors have to receive fair treatment from other governments. And many countries don't provide basic, substantive or procedural protections for American businesses. That means American investors have to rely on the investor state dispute settlement process to ensure that they are treated fairly, and they aren't discriminated against in these other countries, that the rule of law, the property, and investment is protected as it is in America. Without ISDS Americans’ property is left unprotected against discrimination, foreign seizure, or regulatory abuses and other forms of unfair action. This issue is basically a question ‘When other countries treat American investment unfairly, who has their back?’ The answer should be ‘America has their back.’ I'm deeply concerned about reports that Mexico and Canada are negotiating bilateral ISDS provisions without us, because USTR said it doesn't want to participate in that. Mr Schweiker from Arizona has led a letter that many of us have signed now, signed by 103 Republicans, affirming that inclusion of a strong ISDS is essential in the NAFTA agreement. Mr Ambassador, we've had many discussions about that; this is a key part of passing a strong NAFTA agreement that we're convinced you will negotiate well for us. So, how do you square USTR’s current proposal against the Congressional objectives that are in law, and that 103 of us have as of today said are crucial for passage of this agreement?

Lighthizer: Well, thank you Mr Chairman. Yes, I'm aware that there are some controversies surrounding ISDS.

Brady: You picked up on that?

Lighthizer: Yeah, I have picked up on that. I would say this about it: First of all, that whatever happens on ISDS, the kinds of issues that members are concerned about in terms of U.S. investment overseas will be able to be handled within the context of what we call Chapter 20 or the state-to-state dispute settlement. So it isn't like we will be in a position where there will be no recourse. So, that is the first thing I would say.

The second thing I would say that we have proposed an opt-in/opt-out proposal. We are skeptical about ISDS for a variety of reasons which I would like to go into if I have a second to do it. Number one, on the U.S. side there are questions of sovereignty. Why should a foreign national be able to come in and not only have the rights of Americans in the American court system but have more rights than Americans have in the American court system? It strikes me as something that at least we ought to be skeptical of and analyze. So a U.S. person goes into a court system, goes through the system and they're stuck with what they get. If a foreign national can do that and then at the end of the day say ‘I want three guys in London to say we're going to overrule the entire US system.’ So on the inward bound, it strikes me as a question of sovereignty and I view it myself as a conservative and a “sovereigntist”. So this is troubling in that respect.

On the outgoing side, there are many people who believe that in some circumstances, and I can discuss the varieties, that in some circumstances it's more of an outsourcing issue. So what is it? It's a situation where somebody says ‘I want to move a plant from Texas and I want to put it in Mexico; and when I go down there, I don't want to take the political risk that AMLO is going to win in Mexico and change my bargain. So I want the U.S. government essentially to buy political risk insurance for me.’ Our view tends to be that if you want to move a plant from the United States to Mexico, and the economics suggest that, then you should go with the economics, it is too bad, and your responsibility as a Congress is to make the U.S. more competitive so that isn't the problem. But if you're going there because we are underwriting the investment, we are putting our finger on the scale, we're encouraging you to move your plant down there, that's not the job in my opinion at least of the United States government.

I would say also this is an area that's not without controversy. This is, the National Association of States attorney general thinks this is a mistake. The Cato Institute, an issue which I don't always agree with, a liberty issue, they think ISDS is something that we shouldn't have. The National Association of State Legislatures which is controlled by Republicans is on record as against ISDS. So there are a whole variety of issues; I can go on and on and on. People will respond ‘Well we haven't lost cases in the United States in our position,’ and while in fact that is the case, we have come close to losing some. But more importantly we've had situations where real regulation which should be in place which is bipartisan, in everybody's interest, has not been put in place because of fears of ISDS. So I think it is something we have to think about very carefully.

Our view was that rather than have this mandatory ISDS provision, which we think is a problem in terms of our sovereignty in the United States, encourages outsourcing and losing jobs in the United States, and by the way lowering standards in a variety of places, that we should be very careful before we put something like that into place. So you say ‘What are the risks, what are the alternatives for these companies?’ The first alternative I’d say is state-to-state dispute settlement, the second alternative is if you go to any one of these companies and ask them ‘Why do you need this; why don't you put in place an arbitration provision in your contract?’ They'll all say ‘Well we could do that,’ and indeed they did do it - did it before we had ISDS. In a country like Mexico they subscribe to all the conventions and they have to enforce those. If they put that contract in arbitration provision in their contract, these things are then resolved in a similar manner, but without the United States ceding sovereignty in order to encourage people to outsource jobs. It's just not a good trade in my opinion. I realize however that it's a controversial provision and that my view is in the minority in some very intelligent caucuses.

Brady: Mr Ambassador, thank you for that defense – a couple quick thoughts before I turn to Mr Neal. There is no threat to sovereignty. Foreign investors have no more rights than American investors because in our country you have the greatest standards and protections for property rights, investment rights in the world – bar none. Secondly, your client is Congress. Speaking out for our agriculture community that wants you to have America's back when they have to invest in other countries, to win customers, energy, manufacturing, technology, services – every key industry in America has to compete against China and the rest of the world, and other countries, is saying ‘We need to have their back’ when they make their investments, and so you're right there is a disagreement there; we're going to continue to work together with you Mr Ambassador to get to a good place and make sure we're keeping this in a trade agreement and we have the backs of our American investors.

 

Lighthizer's Opening Plenary Statement at the WTO Ministerial Conference

The full text is here. I'll quote some key portions and offer comments.

Lighthizer starts with this:

First, the WTO is obviously an important institution.  It does an enormous amount of good, and provides a helpful negotiating forum for Contracting Parties. 

That sounds like a pretty basic point, but it's very good to hear him say this. (Although why does he say "Contracting Parties"? Why not "WTO Members"? I can see how someone might speculate that this is part of his longing for the GATT.)

But, in our opinion, serious challenges exist.

I agree with this as well, although I may have different challenges in mind than he does. The biggest one I see is the proliferation of bilateral and regional trade agreements, which constitute preferential trading arrangements and undermine multilateral trade liberalization that is truly free.

He then turns to negotiation vs. litigation:

Second, many are concerned that the WTO is losing its essential focus on negotiation and becoming a litigation-centered organization.  Too often members seem to believe they can gain concessions through lawsuits that they could never get at the negotiating table.  We have to ask ourselves whether this is good for the institution and whether the current litigation structure makes sense.

The biggest problem with WTO negotiations, in my view, is that most governments are reluctant to liberalize in areas that are sensitive for them. I'll come back to this later.

In terms of litigation, there are lots of rules, and sometimes governments don't follow them. Thus, I wouldn't call the WTO "litigation-centered." It's just that governments violate the rules sometimes, and that leads to complaints.

As for gaining concessions through lawsuits, I'd want to see exactly what cases he has in mind, but certainly you could argue that the U.S. has done this sort of thing as well.

Does the "current litigation structure" make sense? In my view, it's the best international litigation system there is, but some tweaks may be in order.

Next up is development:

Third, we need to clarify our understanding of development within the WTO.  We cannot sustain a situation in which new rules can only apply to the few, and that others will be given a pass in the name of self-proclaimed development status.  There is something wrong, in our view, when five of the six richest countries in the world presently claim developing country status.  Indeed, we should all be troubled that so many Members appear to believe that they would be better off with exemptions to the rules.  If in the opinion of a vast majority of Members playing by current WTO rules makes it harder to achieve economic growth, then clearly serious reflection is needed.

5 of the 6 richest countries in the world claim developing country status? That can't be right! Oh, wait, maybe it is. But it's not quite what you think, because those 5 are small, oil rich states plus Singapore. (One point I'd like clarified, though, is in what context exactly these particular countries have claimed developing country status. It's hard to find that kind of information.)

But I do think there needs to be a reconsideration of the classification of certain countries as developing, and also of the extent of the obligations that some of these countries have taken on. In my view, taking on more obligations in core areas such as tariff reductions would be beneficial for economic growth and development.

Finally, the last two points relate to negotiations on the substance of WTO rules:

Fourth, it is impossible to negotiate new rules when many of the current ones are not being followed.  This is why the United States is leading a discussion on the need to correct the sad performance of many Members in notifications and transparency.  Some Members are intentionally circumventing these obligations, and addressing these lapses will remain a top U.S. priority.

Fifth, the United States believes that much can and should be done at the WTO to help make markets more efficient.  We are interested in revitalizing the standing bodies to ensure they are focused on new challenges, such as chronic overcapacity and the influence of state-owned enterprises.  Further, we are working closely with many Members in committee and elsewhere to address real-world problems such as SPS barriers.

This takes me back to my earlier point. Governments want to negotiate about things that others are doing wrong, but not about what they are doing wrong. With that attitude, nothing much is ever going to get done at the WTO. It's great that the U.S. is pushing on notifications and transparency, SOEs, and SPS barriers. But if it is not willing to negotiate on farm subsidies and trade remedies, and if it insists on pushing anti-free market policies on intellectual property, I don't see WTO negotiations going very far.

Is International Economic Law International?

Following up on my earlier posts, I want to talk briefly about U.S. Trade Representative Robert Lighthizer's response to a question about WTO dispute settlement:

... We’ve had other provisions where the WTO has taken – really, I think, took the position that they were going to strike down something they thought shouldn’t happen rather than looking at these – the GATT agreement as a contract.

So what we’ve tended to see is that Americans look at the WTO or any of these trade agreements and we say, OK, this is a contract and these are my rights. Others – Europeans, but others also – tend to think they’re sort of evolving kinds of governance. And there’s a very different idea between these two things. And I think sorting that out is what have to do.

If your appellate body or your dispute-settlement process really thinks that we’re trying to evolve into what’s good for trade, that’s one thing. If what you’re going to do is look at the exact words and say here’s what was bargained when Ambassador Hills sat down and negotiated, she had a very precise idea of what it was that the United States was giving and what it was we were getting. And anything that doesn’t enforce that in that way is troubling.

And I think that the DSU has evolved in a way that it creates new obligations and it has reduced a lot of our benefits. ...

I was struck by the way he contrasted the American view of trade agreements as a "contract" with the European/other view of them as "evolving kinds of governance." This makes me think of Anthea Roberts' new book on international law ("Is International Law International?"), where she argues -- convincingly, in my view -- that there are very different conceptions of and approaches to international law around the world ("international lawyers in different states, regions, and geopolitical groupings are often subject to distinct incoming influences and outgoing spheres of influence in ways that reflect and reinforce differences in how they understand and approach international law"). Is it really the case that Americans view trade agreements as contracts and others view them as governance? And what are the implications of this distinction?

At the outset, let me note that, of course, treaties and trade agreements are contracts between nations, so it shouldn't really be controversial to refer to them that way. Nevertheless, there are (at least) two fundamental -- and related -- questions here: (1) how are trade agreements to be interpreted by third party adjudicators? and (2) what is the purpose of this dispute process, with implications for the appropriate institutional arrangements?

With regard to the interpretive process, I think what Lighthizer is suggesting is that Americans want a narrow interpretation, perhaps focusing on what is clearly set out in the text, and which does not fill gaps and address issues that are not explicitly covered by the terms of the agreement. By contrast, he suggests that Europeans and others hope for these adjudicators to do more gap filling and development of the law (and thus governing), taking the broad principles of the agreement and applying them to support the agreement's objectives more broadly, regardless of the specific obligations in the text.

First of all, I'm not sure that this characterization of American and European views is completely accurate. I can think of WTO cases brought by the U.S. (e.g., EC - Aircraft) where the U.S. asked the panel/AB for a broad interpretation of WTO rules on export subsidies, in order to find a violation. I'm not sure that fits with his idea of a narrow interpretation.  In order to buy in to this distinction, I'd want to hear more from specific actors, and see some data on this. Who in U.S. trade policy believes in a narrow contract theory of interpretation, and who in other countries believes in a broader governance theory? Based on the cases they bring, what specific interpretive methodology does each set of actors actually support? I can definitely think of a few cases where the EU perhaps wanted to establish some general principles, but on the whole isn't everyone just trying to win the case at hand? Once you've decided to bring the case (or were forced to defend), you just make all the arguments that you can think of that might help you win.

Second, what exactly is the distinction between the two approaches? There are a number of factors interpreters could take into account, including text, context, object and purpose of the agreement, drafters' intent, drafting history, original meaning, public policy goals, etc.. What specific balance does Lighthizer see as reflecting the contract approach? And what does he see the Europeans asking for, or the Appellate Body doing, instead?

Turning to the purpose of the dispute process, and the required institutions, the U.S. has seemed, and seems even more so under the Trump administration, skeptical of strong, permanent international judicial institutions. For example, it prefers investment arbitration to an investment court; and it is worried about the way the Appellate Body has approached its role. What the U.S. seems to want is a narrow procedure that resolves disputes, with as little resulting "governance" as possible. It may see the development of strong international courts as undermining its own power.

The EU, by contrast, is pushing its multilateral investment court idea, and has not raised the same concerns about the Appellate Body. How do other countries feel about these issues? I'm not sure.

There is a fine line here, and the distinction is probably one of subtle degree, rather than widely diverging views of the ideal system. Even in the "contract" world, the courts will be "making some  law." And the "governance" world isn't really governing all that much -- the Appellate Body make strike down zeroing, but anti-dumping is here to stay (unfortunately!). Again, I wonder how much these distinctions related to the nature of the system matter in practice, as actors engaged in the system mostly seem concerned about winning the cases they are involved in.

To some extent, the "contract" versus "governance" distinction reminds me of the "precautionary principle" versus "cost-benefit analysis" distinction some people talk about in relation to EU and U.S. regulation.  I tend to think that this latter distinction is overblown, with the U.S. being more cautious in some areas and the EU more cautious in others (although, overall, the EU probably regulates more). A contract versus governance distinction may oversimplify the views of different countries in a similar way.

But even so, the language matters here. If U.S. government officials talk about international economic agreements a certain way, and others talk about them a different way, that may be enough to make Anthea's point. What would be interesting now is to hear from EU and other government officials on how they see the distinction between contract and governance in this area, and how they would like WTO dispute settlement panels and the Appellate Body to approach interpretation. The U.S. seems to want to raise these issues in the DSB. I think it would be a useful exercise for the WTO Members to put their views out there. We need a system that everyone is (mostly) happy with, and a clear expression of what each side is looking for from the system may help with that.

USTR's NAFTA Chapter 20 Proposals

Recall that at a recent CSIS event, U.S. Trade Representative Robert Lighthizer said this:

... Back when Senator Brock and I were there and there was a system, it was before 1995, before the WTO, under the GATT, and there was a system where you would bring panels and then you would have a negotiation. And, you know, trade grew and we resolved issues eventually. And, you know, it’s a system that, you know, was successful for a long period of time.

Now, under this [WTO] binding dispute-settlement process, we have to figure out a way to have – from our point of view, to have it work.

It's true that GATT dispute settlement had a weaker enforcement mechanism that we have now with the WTO.  Most people would prefer the stronger system, because the system is of much less value without effective enforcement, but there are certainly arguments that there are benefits to some aspects of the GATT system.

How serious was Lighthizer in his positive sentiments about the GATT? Apparently somewhat serious, because according to Politico, USTR is thinking about changes to NAFTA Chapter 20, the core state-state dispute procedure in NAFTA, that are along the same lines:

USTR CONSIDERS NON-BINDING DISPUTE SETTLEMENT MECHANISM IN NAFTA: The United States is considering dropping a binding mechanism in NAFTA for resolving government-to-government trade disputes in favor of a softer advisory system, sources following the talks told Morning Trade. 

I want to hear more about this, because it is a bit vague and confusing. "Softer" how? "Advisory" in what sense? But nevertheless, here's a quick response.

First of all, I think we need to move away from the language about "binding" and "non-binding" dispute settlement in international trade agreements. In my view, this is not a very helpful way to think about things. Instead, we should look at the issue as one of varying degrees of enforceability. WTO rules are more easily enforced than GATT rules were, although quantifying that is very difficult. Perhaps the WTO is "binding" in some sense, but that hasn't helped Canadian and U.S. cattle ranchers sell their hormone-treated beef in the EU. Ultimately, then, what matters is enforceability, and there are usually some complex and detailed rules that have to be sorted through in order to determine the level that exists in a given agreement.

So what about this proposal for new NAFTA dispute procedures? Well, the old rules were not all that enforceable, as evidenced by the U.S. blocking panel selection in the Sugar case, back in the early 2000s. No NAFTA Chapter 20 panel has been established since then. I'm working on a paper proposing a fix to that, but in the meantime, we are told that USTR might want to soften up the rules even more. If that's true, here's one concern the U.S. business community will have with this idea. Imagine that Canada imposes some restrictions on dairy imports (not hard to imagine!). In the NAFTA renegotiation, some rules might be established to rein in those restrictions. But afterwards, Canada might keep those restrictions in place, and the U.S. might file a Chapter 20 complaint to get them removed. If the Chapter 20 panel "advises" Canada to stop restricting dairy imports, Canada could respond by saying, in effect, thanks for the advice, but we've decided to bow to pressure from our domestic industry and keep the restrictions in place. That's not a very good outcome from a U.S. perspective. Business groups, Congress, and other U.S. agencies should all be wary of any kind of softening of this kind. And they are, as Politico notes: "The proposal, which would be a major shift away from a decades-old push by the U.S. to build an international system of enforceable trade rules, is already raising concern across the executive branch and on Capitol Hill."

Along the same lines, Canada and Mexico are unlikely to accept this. Why have an agreement if it can't be enforced effectively? 

I don't know where this is all going. I am genuinely curious what the Lighthizer trade team has in mind here. Maybe we'll hear more soon.

Lighthizer on WTO Dispute Settlement

This is an excerpt from the Q & A at the Lighthizer CSIS event mentioned in the last post, relating to WTO dispute settlement. I'm just going to quote it for now, but I should have more to say later. 

MR. MILLER: ...

To continue with the WTO, the United States has raised some objections to a dispute settlement understanding and the way the bodies are formed in that process. Could you tell us a little bit more about what the U.S. is trying to accomplish in terms of changing or reforming the dispute settlement body?

AMB. LIGHTHIZER: Well, I guess I would answer that in two parts. One, there are a number of issues which – on which there’s pretty broad agreement that the WTO, in dispute-settlement understanding, is deficient. I mean, there are transparency issues. There are issues with the staff. There are a whole variety of issues that we have a problem with. And I think there’s general agreement that there are problems.

But I think, even beyond that, the United States sees numerous examples where the dispute-settlement process over the years has really diminished what we bargained for or imposed obligations that we do not believe we agreed to. There have been a lot of cases in the dumping and countervailing-duty, the trade-remedies laws, where, in my opinion, the decisions are really indefensible, and even a lot of people who have much more free-trade orientation who read these question(s). And we’ve had tax laws that have been struck down. We’ve had other provisions where the WTO has taken – really, I think, took the position that they were going to strike down something they thought shouldn’t happen rather than looking at these – the GATT agreement as a contract.

So what we’ve tended to see is that Americans look at the WTO or any of these trade agreements and we say, OK, this is a contract and these are my rights. Others – Europeans, but others also – tend to think they’re sort of evolving kinds of governance. And there’s a very different idea between these two things. And I think sorting that out is what have to do.

If your appellate body or your dispute-settlement process really thinks that we’re trying to evolve into what’s good for trade, that’s one thing. If what you’re going to do is look at the exact words and say here’s what was bargained when Ambassador Hills sat down and negotiated, she had a very precise idea of what it was that the United States was giving and what it was we were getting. And anything that doesn’t enforce that in that way is troubling.

And I think that the DSU has evolved in a way that it creates new obligations and it has reduced a lot of our benefits. So coming to grips with that, both in the procedural realm but also just practically, is really what we have to worry about in the DSU. And it’s a fundamental part of the WTO. I mean, it’s a very – it raises a lot of, you know, very major issues for the WTO.

MR. MILLER: Yeah, that makes sense.

Well, on a practical level, in the last 20 years or so of dispute-settlement cases there’s two patterns that have come out. First, the big traders have a lot of cases on both sides, which is not surprising at all, and that there is – that the complainants tend to win much more than a coin toss, which says to me that there is a selection of cases that are worth the prestige of the country bringing them.

And so since the U.S. both is involved in a lot of cases and often is a respondent, how do you think that sort of the practical – the decisions on cases will affect the reform process?

AMB. LIGHTHIZER: Well, I mean, to the extent that we’re – that we’re objecting to the process, it’s because we don’t agree with the way the – in many cases the appellate body has approached this. We think the appellate body has not limited itself to precise – to precisely what’s in the agreement. So, I mean, that is the nature of our complaint.

And that’s not to say that we don’t win cases. Of course we win cases. Back when Senator Brock and I were there and there was a system, it was before 1995, before the WTO, under the GATT, and there was a system where you would bring panels and then you would have a negotiation. And, you know, trade grew and we resolved issues eventually. And, you know, it’s a system that, you know, was successful for a long period of time.

Now, under this binding dispute-settlement process, we have to figure out a way to have – from our point of view, to have it work.

Lighthizer on Trade

U.S. Trade Representative Robert Lighthizer spoke at CSIS yesterday. The full transcript is here. I'm going to respond to some of his specific points.

Early on, he refers to a growing skepticism about trade:

For decades, support for what we call free trade has been eroding among the electorate. There has been a growing feeling that the system that has developed in recent years is not quite fair to American workers and manufacturing, and that we need to change. 

As it happens, I came across an article about this very topic today:

A protectionist push by the Trump administration hasn’t diminished support for free trade, a Morning Consult poll for the Bloomberg Global Business Forum shows.

Fifty-two percent of the 2,094 adults polled in the United States say they support expansion of free trade across borders. Within that group, 18 percent said they “strongly support” free trade, and 34 percent said they “somewhat support” it. Seventeen percent said they “somewhat oppose” free trade across borders, and 8 percent “strongly oppose” it.

I know there are some passionate opponents of trade, but most of the the polling I've seen suggests that a majority of Americans support it (the question in the poll above was "Do you generally support or oppose ... Expansion of free trade across borders"). You might not get applause at a campaign rally by praising NAFTA, but on the other hand harsh statements about trade agreements are not necessarily going to win you a majority of the vote.

He then talks about his preference for markets:

I believe, like many of you, that removing market distortions, encouraging fair competition, and letting markets determine economic outcomes leads to greater efficiency and a larger production of wealth both here and abroad. I’m sure that most here also agree that many markets are not free or fair. Governments try to determine outcomes through subsidies, closing markets, regulatory restrictions, and multiple similar strategies. The real policy difference, I submit, is not over whether we want efficient markets, but how do we get them.

What is the best thing to do in the face of market distortions to arrive at free and fair competition? I believe – and I think the president believes – that we must be proactive, the years of talking about these problems has not worked, and that we must use all instruments we have to make it expensive to engage in non-economic behavior, and to convince our trading partners to treat our workers, farmers, and ranchers fairly. We must demand reciprocity in home and in international markets. ...

All governments, including the United States, intervene heavily in markets, in a wide range of ways. Are some governments intervening more than others? Yes, although it is hard to come up with a precise ranking, and I suspect the United States is not in the lead when it comes to avoiding government distortions of the market. I support the idea of trying to convince other countries to reduce their market distortions, but we will probably have to remove some of our own in order to accomplish that. 

Now on to trade deficits:

... the president believes – and I agree – that trade deficits matter. One can argue that too much emphasis can be put on specific bilateral deficits, but I think it is reasonable to ask, when faced with decades of large deficits globally and with most countries in the world, whether the rules of trade are causing part of the problem.

Now, I agree that tax rates, regulations, and other macroeconomic factors have a large part in forming these numbers, and the president is tackling these issues. But I submit the rules of trade also matter, and that they can determine outcomes.

In a simple example, how can one argue that it makes little difference when we have a 2 ½ percent tariff on automobiles and other developed countries have a 10 percent tariff, that it is inconsequential when these same countries border-adjust their taxes and we do not, or that it is unimportant when some countries continuously undervalue their currencies? Is it fair for us to pay higher tariff to export the same product than they pay to sell it here?

I don't get the sense that current U.S. government policy is tackling the macroeconomic factors that are at the heart of trade deficits. Without action there, the trade deficits will remain (not that it matters).

As for how the "rules of trade" can affect this, I made the point above that all governments intervene in markets, including through trade barriers. The World Tariff Profiles publication is helpful here. The United States has relatively low tariffs, although not the lowest and comparable to other developed countries (the U.S. simple average MFN applied rate is at 3.5%, Australia is at 2.5%, Canada is at 4.2%, the EU is at 5.1%, Japan is at 4.0%, and New Zealand is at 2.0%). Non-tariff protectionist measures are more difficult to measure and compare. But regardless, if we can use trade negotiations to bring down protectionist trade barriers at home and abroad, that is a good thing.

Then there is the issue of China:

I believe that there is one challenge on the current scene that is substantially more difficult than those faced in the past, and that is China. The sheer scale of their coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented.

Unfortunately, the World Trade Organization is not equipped to deal with this problem. The WTO and its predecessor, the General Agreement on Tariffs and Trade, were not designed to successfully manage mercantilism on this scale. We must find other ways to defend our companies, workers, farmers, and indeed our economic system. We must find new ways to ensure that a market-based economy prevails.

I'm not convinced we have really tried that hard to use WTO rules to target Chinese protectionism. We should file more cases, and pursue Article 21.5 complaints where we are unhappy with the compliance measures. I'm not sure why this hasn't happened.

Finally, there is a suggestion to reevaluate trade agreements after a certain period of time:

we are looking at all of our trade agreements to determine if they are working to our benefit. The basic notion in a free-trade agreement is that one grants preferential treatment to a trading partner in return for an approximately equal amount of preferential treatment in their market. The object is to increase efficiency and to create wealth. It is reasonable to ask after a period of time whether what we received and what we paid were roughly equivalent. One measure of that is change in trade deficits. Where there the numbers and other factors indicate a disequilibrium, one should renegotiate.

Not that any country is going to agree to this, but presumably such a rule would have to apply in both directions. Does the U.S. government really want to open up trade agreements and grant additional concessions if, for many possible reasons, the bilateral trade balance moves in the direction of a surplus after signing a trade agreement?

Lighthizer's Responses to Senate Questions

Here are a few answers from USTR nominee Robert Lighthizer to written questions from Senators (via Inside US Trade):

The European Union is the top export markets for the United States. At the same time, U.S. businesses and farmers face significant barriers to the EU market. The Obama Administration had launched TTIP negotiations with the EU to those barriers our exporters - where I believe we could be even more successful. Do you support continuing those negotiations? What alternative would you suggest to address trade barriers in the EU?

Answer: I agree with you about the importance of the EU as an export market for the United States. I understand that the T-TIP negotiations sought to reduce or eliminate barriers to U.S. exports in the EU, and that, while the United States made progress toward that goal, a number of difficult issues could not be resolved. I would look forward, if I am confirmed, to consulting with you and with other members of the Committee on whether, when, and how to proceed with a trade agreement with Europe. It is our impression, though, that upcoming elections in France, Germany, and other EU member states will, in any case, make it difficult for the EU to resume comprehensive trade negotiations until at least the end of this year. In the meantime, we would be open to exploring ways to address barriers to U.S. exports and to expand trade with the EU and its member states. As I said during my confirmation hearing, we also want to look for opportunities to strengthen cooperation with the European Commission and with EU member state governments on global trade issues of common concern, including the noneconomic expansion of production capacity around the world in critical sectors such as steel, aluminum and solar panels.

...

When Secretary Mnuchin was before this Committee for his confirmation hearing, he indicated that the outcomes in TPP would be a starting point for a NAFTA renegotiation. Do you share that view? Are the benefits in TPP a floor for what the Administration should seek to achieve in the new negotiations it contemplates with Canada and Mexico? What specific improvements over TPP do you think the Administration seek in any NAFTA renegotiation discussions?

Answer: I believe that in negotiating a new trade agreement we should learn from, and build on, earlier negotiated trade agreements. In the case of NAFTA and TPP, there is much in TPP that goes well beyond NAFTA. So, in a renegotiation of NAFTA, we should consider incorporating those provisions as well as improving areas where we may be able to go beyond TPP. In determining what those areas are and what to prioritize, I look forward to working with you, other Members of Congress, and stakeholders.

...

Canadian subsidies to softwood lumber have been a top concern for me for years and are the subject of new trade cases before Commerce and the International Trade Commission. Canada has in the past used special procedures included in Chapter 19 of NAFTA to force U.S. trade agencies to weaken trade remedies decisions on softwood lumber. The Trump Administration seems to want to renegotiate NAFTA, but have also suggested that they merely intend to “tweak” the agreement as to Canada. What are your views on NAFTA Chapter 19? If confirmed, and if the Administration initiates negotiations with Canada with respect to NAFTA, will you commit to working to address longstanding concerns with Chapter 19?

Answer: The review of disputes pursuant to trade remedy laws contained in Chapter 19 of NAFTA is an area that has raised concerns among Members of Congress and U.S. industry. Should I be confirmed, I certainly would want to work with you and U.S. industry regarding your concerns on Chapter 19.

...

The President has stated it is a priority to negotiate bilateral free trade agreements. One of America’s greatest allies is the United Kingdom, and the UK is also one of North Carolina’s top trading partners. There are many benefits to be had for North Carolina farmers, businesses, and workers by further increasing trade with the UK. As soon as possible, will you make negotiating a free trade agreement with the UK a priority?

Answer: I appreciate your highlighting that North Carolina, like many other states, enjoys a substantial trade relationship with the UK. As you know, until the UK leaves the EU it cannot sign a comprehensive trade agreement and may be limited in the extent to which it can formally conduct trade negotiations. When UK Prime Minister May visited in January, however, she and President Trump expressed an interest in pursuing discussions on how to deepen bilateral trade. If confirmed, I look forward to working with Congress and other stakeholders on our future trade relation with the UK after it withdraws from the EU.

As far as I can tell, just about everything related to the direction of Trump's trade policy is still an open question.

Global Trade Watch on the Lighthizer Nomination

From the Global Trade Watch blog:

The nomination of Robert Lighthizer to be U.S. Trade Representative signals President-elect Donald Trump’s interest in altering the trade policy approach that has prevailed through Republican and Democratic administrations for the past two decades. Lighthizer has consistently noted that historically Republicans favored trade policies designed to obtain specific national economic goals and criticized the Republican Party’s rigid support over recent decades of “free trade” ideology. His views put him at odds with most of Trump’s other high-level appointees who represent the very perspective on trade that Lighthizer has long critiqued.

“Lighthizer is very knowledgeable about both technical trade policy and the ways of Washington, but what sets him apart among high-level Republican trade experts is that for decades his views seemed to be shaped by the pragmatic outcomes of trade agreements and policies rather than fealty to any particular ideology or theory,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. ...

Here are a few thoughts I had on this:

1. When two people hold different views on a particular policy, how is it decided which one is being "ideological" and which one is being "pragmatic"? Do they draw straws?

2. How is it that the "free trade ideologues" who have been running trade policy for "the past two decades" have created a system with massive amounts of protectionism embedded in it? Are they pragmatic ideologues? Ideological pragmatists?

3. Most self-proclaimed progressives I talk to are pretty skeptical of protectionism. They think it is bad international relations and bad economics. Their approach to trade policy would be to have relatively free trade, but with an expanded social safety net to help people they see as being harmed by trade. How come Global Trade Watch does not seem to take this view? From what I can tell, they are very tolerant, even supportive, of protectionism. Why is that? Is this some pragmatic/ideological blend of progressivism and economic nationalism?

Obviously, I'm trying to needle the Global Trade Watch folks a bit here (I tweeted their blog post with the comment that they had "gotten on the Trump train").  But I really am confused about what they want to see from U.S. trade policy. It often comes across to me as economic nationalism. If that's not what they intend, they may want to clarify.