Talking Trade blog
“Moderating” on trade in Washington? Don’t bet on it yet
Published 21 April 2017
As Donald Trump approaches the 100 day marker for his administration, many companies are breathing deep sighs of relief and starting to relax. A man who made many wild promises on the topic on the campaign trail, such as pledging to jack up tariffs to 45 percent or declare China a currency manipulator “on day one” has done nothing of the sort.
Thus far, many have proclaimed, his trade damage has been limited to withdrawing the United States from the Trans-Pacific Partnership (TPP) agreement. His wildest advisors are being marginalized and their influence will diminish further once officials are put into place in different agencies.
Ah—but perhaps this assessment is premature. Recent events suggest that Trump’s economic nationalist instincts that are strongly held and deeply rooted will continue to be felt throughout his term in office.
At the end of March, news media outlets began circulating a letter from acting USTR Stephen Vaughn to the US Congress. The draft eight page document was intended to inform members of Congress of the Administration’s intentions to start renegotiations for the North American Free Trade Agreement (NAFTA).
It is likely that the final letter will be amended again before it is formally submitted, but a review of the content in this document is helpful in understanding the viewpoint of the Trump Administration. It can shed light on how the new team is likely to approach other negotiations and regions like Asia as well.
Trump is now saying that a revised letter will be submitted to Congress by early May (presumably once Lighthizer’s long-delayed confirmation takes place). This will trigger the real start of NAFTA talks.
The original agreement was negotiated between the United States, Canada and Mexico and entered into force on January 1, 1989. It has not been stagnant during all this time, but has been periodically reviewed and adjusted. Nevertheless, after several decades a wholesale revamp may be in order especially if the TPP is now off the table.
The release of this document was treated in many quarters as a signal that the Trump administration was reverting to more moderate positions on trade. The first page reiterates the importance of NAFTA. It does not suggest that the US will simply withdraw from the deal.
This is the new benchmark for “normal” in Washington—a draft letter that does not erupt in flames on delivery is considered benign. A closer look at this draft, however, clearly shows the economic nationalism of this new administration now potentially housed in the USTR.
For example, the document contains wording like “fully reciprocal access” and “enhanced cooperation on enforcement.” It also includes calls to “seek to level the playing field on tax treatment.” Also of concern is the quest to seek rules of origin that “supports production and jobs in the United States.”
The rules of origin section of the NAFTA letter reinforces the obsession of the Trump team with something they call “circumvention” of rules of origin. It is becoming increasingly clear that the Trump administration is concerned that dumping is not just happening directly into the US market. Rather, it is happening indirectly, as dumped goods are then made into products which are then sold into the US market at unfairly cheap prices.
This idea is clarified further in the section on trade remedies which discusses “diversionary dumping and subsidization and market access barriers that lead to dumping and overcapacity.” This is an entirely new interpretation of trade remedies.
The arguments made in the NAFTA letter are not simply theoretical. Commerce Secretary Ross used this method to recalculate dumping margins earlier this month in a case against Korean oil country tubular goods (a steel pipe used in oil extraction). The margin was raised from 16 percent to 24.9 percent because of the “peculiar” situation of Korean producers who were alleged to be using unfairly dumped Chinese steel in the production of the pipe.
Ross told Politico on Tuesday, April 11, “We will not stand for the distortions in foreign markets being used against US businesses. The Trump administration will continue to employ all of the tools provided under the law to take swift action against harmful trade practices from foreign nations attempting to take advantage of our markets, workers, and businesses.”
If the NAFTA letter and the tubular steel examples are still seen insufficient evidence of the nationalist bent coming from Washington, Trump’s use of an old trade tool, Section 232, to investigate the national security implications of steel imports should be seen as a clear red flag. This investigation should not just be of interest to the steel industry.
Section 232 is a very broad tool that could allow the administration to impose tariffs on every single import from every single country into the United States whether or not they are practicing "fair" trade. Unlike traditional dumping and countervailing duty cases, the President need not show that any domestic industries have been harmed.
In other words, under Section 232, the US administration can simply assert damage and raise tariffs across the board on every imported product from a sector like steel.
Such a determination will be challenged, of course, by other countries but the national security angle could make it hard to overturn since the WTO allows national security exceptions.
I would warn the United States—were it to be listening to anyone—to be extremely careful with such actions. Reciprocity bites both ways. There are many governments around the world that will be quite keen to use the same national security argument to unilaterally raise tariffs on lots of different products and block trade in all sorts of different sectors.
There is a reason that such trade tools have not been used by the United States for decades. Section 232 was first drafted in 1962 for use during the Cold War. It joins a long line of dusty laws that allow an economic nationalist in the White House to do many deeply damaging things in trade.
Trump's Executive Order reviewing the "Buy American, Hire American" issued on April 17, 2017, fits within this overall mindset as well.
The sigh of relief over the relatively benign nature of the first 90 days in office from the Trump administration may be due to a lack of understanding of what is behind relatively anodyne sentences on the page. The economic nationalists haven’t gone away. They’ve maybe just gotten smarter at packaging.
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