Leibowitz on Trade: A Big Week in Washington

USMCA Agreement

Editor’s note: The House voted to pass the USMCA earlier today. The Senate is unlikely to vote on the measure before completion of the Senate impeachment trial next year.

The United States-Mexico-Canada Agreement (USMCA) received the blessing of organized labor and the Democratic leadership in Congress last week, in a rare example of cooperation between Congress and the White House. The main sticking point on USMCA between the two branches of government was labor enforcement. In a series of meetings, Trade Representative Robert Lighthizer and a task force of Democrats in the House hashed out an arrangement and sold their ideas to Canada and Mexico, which signed off on an addendum to the USMCA last week.

The addendum also toughens the origin rules on steel. A new footnote to the Appendix on automotive rules of origin provides that for steel to be considered “originating” for automotive rules, “all manufacturing processes” must take place in one of the three USMCA countries. “Manufacturing” covers “initial melting” and all processes through the steel coating stage. This new rule for steel does not apply immediately; it becomes effective seven years after USMCA enters into force. A similar rule for aluminum will be considered by the USMCA parties 10 years after the agreement enters into force.

An agreement permitting the USMCA to go before Congress this year was a top priority of the administration. Speaker Nancy Pelosi also wanted a bipartisan agreement that would show progress on the nation’s business. The implementing legislation needs the approval of both houses of Congress before USMCA becomes binding on the United States.

Based on the signoff from organized labor (the AFL-CIO announced its approval of the revised USMCA deal last week), a bipartisan approval is likely for USMCA. Mexico is a reluctant partner on the rather intrusive enforcement requirements to assure Mexico’s compliance with the labor provisions, but they have approved the revised deal already.

Phase One China Agreement—A Truce in the Trade War?

Also last Friday, the U.S. announced a Phase One deal with China to ratchet down the heat in the U.S.-China trade war. While the text of the agreement has not been reached, President Trump tweeted that the deal would postpone indefinitely the “List 4B” tariffs on over $100 billion of imports from China, including cell phones. Those new 10 percent tariffs were scheduled to become effective Dec. 15. The List 4A tariffs on about $170 billion of imports will be cut in half, from 15 percent to 7.5 percent (according to a presidential tweet). The USTR notice states that the reduction of List 4A duties will be the subject of an upcoming notice. The tariffs imposed on goods covered by Lists 1, 2 and 3 will remain in effect.

China has also announced the postponement of additional retaliatory duties on U.S. exports to China. So, there is a pause in the trade war, much to the relief of many U.S. manufacturers and farm product exporters, who are looking forward to a sharp upturn in ag sales to China as a result of the Phase One deal.

WTO Appellate Body—RIP

On Dec. 10, the WTO Appellate Body no longer had three members whose terms had not expired. Accordingly, there can be no new Appellate Body panels constituted until WTO members agree to resume engaging the services of new members. Two members whose terms expired last week will continue working on cases that are already before the Appellate Body.

The United States, which precipitated the Appellate Body deadlock, has not indicated what needs to happen to reconstitute the Appellate Body. There are several proposals for reform of the dispute settlement system—up to now, the U.S. has not expressed approval of any of them. We are in new territory as of this week.

Brexit

The sweeping Conservative victory in the British election on Dec. 12 ended the deadlock on Brexit (the withdrawal of the UK from the European Union) and made the departure a certainty. As Britain withdraws, other issues will become clearer. The Trump administration has made clear statements that a trade agreement with the UK is high on the U.S. list of things to do. Those talks could begin shortly after the scheduled departure date of the UK, which is currently Jan. 31, 2020.

Thoughts

The new USMCA agreement and the Phase One China deal signal a departure from the trade policy that drove earlier administrations. USMCA makes small changes from the original NAFTA in most areas, but a few major changes should be noted. The automotive rules of origin aim to reduce the flow of jobs and investment to Canada and Mexico in the auto sector by increasing the North American content requirements. In steel, a new “melted and poured” rule for steel products scheduled to take effect in seven years will require new steel mills in North America. The Addendum features enforceable commitments by Mexico to raise wages, especially in the automotive sector, and to reform labor laws there. The enforcement provisions will require Mexico to have verifiable progress in labor relations and to permit U.S. monitoring of these reforms on the ground in Mexico. Some question whether auto makers in the U.S. will use the new USMCA rules. If they find that the new rules are too burdensome, they will have to pay duty on imported cars from Canada and Mexico, and on cars exported to those countries.

The Phase One China deal is widely seen as less progress than the U.S. wanted, but the administration claims that more progress will be made on the more difficult issues of forced technology transfer and intellectual property rights. In exchange for relaxing the tariffs, China appears to have made commitments to purchase more U.S. goods (especially farm goods) and to ease its burdens on foreign investors in China regarding technology transfer. If the Phase One agreement is to be judged a success, it will need to see more purchases of U.S. goods by China and fewer complaints from U.S. firms dealing with China. Clearly, it will not resolve all differences between the two countries, but with China as with many other issues, the perfect is the enemy of the good.

The world trading system is clearly in crisis, but it also has value. While the U.S. has lost a lot of cases in the WTO, it has won more, including a major victory challenging EU subsidies for Airbus, several victories over China on export restrictions in violation of its commitments when it joined the WTO in 2001, and other cases. The advantages of an orderly dispute settlement system clearly outweigh the disadvantages, but the WTO has become paralyzed because the members cannot agree on new or revised agreements to take account of technological changes in the last 25 years. The dispute settlement system is effectively the only operational part of the WTO. Countries need to commit to changes that are in the interest of the system as a whole. Domestic politics will get in the way of progress if the world does not have the will to make new agreements.

Perhaps the breakout of the United Kingdom from the EU will give the world a new opportunity to create 21st Century reforms. Or it might hasten the descent of new “beggar thy neighbor” trade policies that will increase poverty and stunt economic progress. The next year will be an important test for the world, in trade as well as other areas.

Lewis Leibowitz

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