Executive Summary

During his Presidential campaign, Donald Trump challenged longstanding U.S. trade policy with promises to terminate or renegotiate the North American Free Trade Agreement (NAFTA), impose 45 percent tariffs on imports from China, and impose 35 percent tariffs on imports from U.S. companies that move plants and jobs to Mexico. Moreover, as part of the first 100 days of his new administration, in addition to promising to renegotiate or withdraw from NAFTA, President-elect Trump has also said he will consider withdrawing from the Trans-Pacific Partnership (TPP), designate China a “currency manipulator,” and use “every tool under American and international law” to challenge unfair trading practices that impact American workers.

Under U.S. trade law, Congress has granted broad authority to the president to withdraw from trade agreements, impose additional duties on unfair trade practices, and designate currency manipulators. These steps do not require Congressional action or approval, as U.S. trade law vests broad authority in the president, without the checks and balances or legal constraints that exist under other trade procedures. Thus, President Trump would face only limited legal constraints in implementing these campaign promises.

In our view, these risks are sufficiently real that companies should assess their potential exposure and consider their response options should these possible risks mature. We have experience working with companies to identify specific risks and to develop response strategies.

Background

The basic legal authority for U.S. free trade agreements is the Trade Act of 1974 (1974 Act), which authorized the president to negotiate trade agreements dealing with tariff and non-tariff barriers. Importantly, Section 151 of the 1974 Act authorized the president to submit such agreements to Congress for approval under the so-called fast-track/Trade Promotion Authority (TPA) procedures. Subsequent extensions of TPA in the Omnibus Trade Act of 1988, Trade Promotion Authority Act of 2002, and Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA Act of 2015) have extended the fast-track/TPA procedures in Section 151 to permit new agreements.

All of the extensions have incorporated key provisions of the 1974 Act, including section 125, which gives the President what is commonly referred to as “termination and withdrawal authority.” Under Section 125(a), every trade agreement entered into by the U.S. must contain a provision allowing the U.S. to withdraw after giving appropriate notice (normally 6 months). Section 125(b) gives the president additional authority to revoke any earlier Presidential proclamations implementing U.S. tariff reductions under the agreement. Paragraph (c) gives the president authority to proclaim higher U.S. tariffs up to a maximum of 50 percent above the rate in column 2 of the U.S. tariff schedule on January 1, 1975, or 20 percent above the rate in effect for that country on January 1, 1975. Finally, Section 125(e) provides that existing U.S. tariff levels normally should remain in effect for one year after termination of an agreement. Paragraph (e) reflects concern on the part of the Congress about the potentially disruptive economic effects of sudden and precipitous tariff increases, and gives traders and markets time to adjust. However, in special circumstances, the president can impose higher U.S. tariffs in less than one year after notifying the Congress and holding a public hearing, and if there is a need for truly expeditious action, the president can move without a hearing as long as a public hearing is held promptly after such action.

The termination and withdrawal provisions of the 1974 Act apply to NAFTA, the World Trade Organization (WTO) and other U.S. trade agreements. NAFTA was negotiated under a grant of fast-track/TPA authority in the Omnibus Trade and Tariff Act of 1988 (1988 Act). Section 1105 of the 1988 Act made the termination and withdrawal provisions of Section 125 fully applicable to NAFTA.

As a result, the president has authority to unilaterally terminate NAFTA if he or she so desires. This would require 6 months’ notice under NAFTA Article 2205, which allows a party to withdraw six months after providing written notice of withdrawal to the other parties. Thus, if the president (1) gives 6 months’ notice under NAFTA Article 2205 to Mexico and/or Canada, (2) terminates the free trade agreement, and (3) issues a proclamation under Sections 125(b) and 125(c) revoking U.S. NAFTA tariff concessions and imposing higher tariffs on imports from Mexico and/or Canada, U.S. tariffs would then increase up to 20 percent above their rates in effect on January 1, 1975 after a transition period of 6 months to a year. The same authority applies to U.S. Membership in the WTO and other U.S. free trade agreements.

The president also has broad authority under U.S. trade law to unilaterally impose punitive U.S. tariffs. Section 125 of the Trade Act of 1974 give the president authority to raise U.S. duties after terminating NAFTA or other trade agreements. However, because these increases are capped at 20-50 percent higher than the rates previously in effect on January 1, 1974, Section 125 would lead to only modest increases for many products.

Accordingly, a president who is determined to impose punitive tariffs on Mexico or China is likely to turn to other sources of legal authority, including:

  • Section 301/Unfair Trade Practices - Section 301 of the Trade Act of 1974 gives the United States Trade Representative (USTR), at the direction of the president, broad authority to respond to unfair trade practices, such as violations of trade agreements, or to “an act, policy, or practice of a foreign country that is unreasonable or discriminatory and burdens or restricts U.S. commerce.” If a president directs the USTR to impose higher tariffs on a trade partner, e.g. 45 percent tariffs on imports from China or 35 percent tariffs on some products from Mexico, USTR has authority to do so. While USTR has interpreted Section 301(a) to require it to take potential trade agreement violations to the WTO, and has been very reluctant to use Section 301(b) to challenge “unreasonable” practices that are not covered by WTO rules, there is nothing to stop it from doing so and acting more aggressively if it chooses to do so.
  • Section 122/Balance-of-Payments - Section 122 of the Trade Act of 1974 authorizes the president to deal with “large and serious United States balance-of-payments deficits” by imposing temporary import surcharges not to exceed 15 percent ad valorem on imported goods, temporary quotas, or some combination of both. This 15 percent surcharge would be on top of any existing U.S. duties. One disadvantage is that the duties can only remain in effect 150 days, unless this period is extended by an Act of Congress.
  • Section 232(b)/National Security - Section 232(b) of the Trade Expansion Act of 1962 authorizes the Secretary of Commerce to investigate whether imports pose a threat to U.S. national security. Based on the Secretary’s report, the president is authorized to negotiate agreements to limit or restrict imports, or to “take such other actions as the president deems necessary to adjust the imports of such article so that such imports will not threaten to impair the national security.”
  • IEEPA/International Economic Emergencies - Finally, the International Emergency Economic Powers Act (IEEPA) gives the president broad authority to deal with any “unusual and extraordinary threat, which has its source in whole or in substantial part outside the United States, to the national security, foreign policy, or economy of the United States.” Although the president must consult with the Congress, submit a report, and provide periodic follow-up reports, IEEPA does not require Congressional approval. These measures can last indefinitely. The United States has maintained its system of export controls for several decades under IEEPA, because of Congress’ inability to agree on new export control authorization legislation.

Implications/Conclusion

While President Trump will have legal authority to implement his campaign promises on trade, such a step is unlikely to be cost-free. If the U.S. imposes punitive duties on China and Mexico, it is quite possible that one or both will retaliate with equivalent tariffs on U.S. goods. Chinese and Mexican trade negotiators are as sophisticated as they come and know the trade game as well as anyone. Within 48 hours after president Obama announced he was imposing new duties on imports of Chinese tires under Section 421 of U.S. trade law, Beijing initiated antidumping investigations of U.S. cars and poultry in retaliation. While the U.S. tire duties were lifted long ago, U.S. poultry is still largely shut out of the Chinese market. In 2009, after Congress restricted the entry of Mexican trucks in violation of U.S. NAFTA commitments, Mexico imposed US$2 billion of additional duties on U.S. exports, carefully targeting U.S. products of interest to key Members of Congress and leading proponents of the trucking ban. Congress quietly repealed the trucking ban two years later.

In sum, the president has broad authority under U.S. trade law to terminate existing U.S. free trade agreements and impose higher tariffs on certain U.S. trading partners. While this step could trigger a costly trade war, it is fully permitted by U.S. law and does not require Congressional approval.