Canadian businesses should be actively monitoring the uncertain cross-border trade landscape in light of U.S. President Donald Trump’s pledge to renegotiate NAFTA. Here we will keep you updated on key international trade developments and how they may impact your business. In this week’s international trade brief, we look at the Trump administration’s recently released trade policy agenda document, the administration’s indication that it will ignore international trade rules and rulings it disagrees with, and the next steps for “tweaking” the Canada-U.S. bilateral relationship in the NAFTA renegotiations.
President Trump’s trade policy agenda unveiled
On March 1, 2017, United States President Donald Trump released his Trade Policy Agenda (Trade Policy Agenda). It strongly reinforces President Trump’s election promises to advance economic nationalism and sovereignty over traditional respect for and deference to international trade rules, treaties and multilateral dispute settlement mechanisms. The new administration’s key priorities will be: (i) to defend U.S. national sovereignty when pitted against international rules; (ii) to vigorously enforce U.S. trade laws; (iii) to use all possible sources of leverage — not only international trade rules — to pressure other countries to open their markets to U.S. exports and to protect against theft of U.S. intellectual property rights; and (iv) to negotiate new and better bilateral trade deals with countries in key markets around the world.
In essence, President Trump’s view is that Americans were promised that globalization would lead to stronger economic growth in the U.S. — as well as greater opportunities for U.S. workers and businesses — but that this has not in fact been achieved. The Trade Policy Agenda cites statistics from 2000 to 2015 (for U.S. manufactured goods, trade deficits, median household income, and so forth), in support of the conclusion that the global trading system has not generated the expected results for the U.S. and its workers. The failure of the World Trade Organization (WTO) rules to serve U.S. interests is attributed to certain countries engaging in unfair trade practices — including theft of intellectual property, currency manipulation, dumping, and unfair competitive behaviour of state-owned enterprises.
The Trade Policy Agenda — by emphasizing that multilateral agreements and international dispute settlement mechanisms have put Americans at an unfair disadvantage in global markets — justifies the new Trump administration’s intention to focus on bilateral, rather than multilateral, negotiations. Furthermore, any existing trade agreements that do not further American goals will be renegotiated. Rather than rely on WTO rulings, the U.S., under its new Trade Policy Agenda, will actively and unilaterally investigate foreign actions that violate trade agreements or unreasonably restrict U.S. commerce. Accordingly, “advance interpretations” that would weaken the rights and benefits of trade agreements involving the U.S. will be resisted. Finally, according to the new administration, the American people are not directly subject to WTO decisions, and WTO rulings against the U.S. will not automatically lead to a change in U.S. law.
The full text of the Trade Policy Agenda can be accessed here.
WTO chief responds to President Trump administration’s position on ignoring WTO rules
As noted above, the Trump administration has made it clear that it does not intend to adopt the World Trade Organization (WTO) dispute panel and appellate body rulings when it loses cases under the WTO dispute settlement process, and that it will ignore WTO rules in favour of U.S. protectionist policies. This prompted the WTO Director-General, Roberto Carvalho de Azevêdo, to respond by acknowledging U.S. concerns and indicating that the WTO was open to a discussion with the U.S. However, given the diametrically opposed position of the Trump administration — which favours U.S. unilateralism over multilateralism, which provides the fundamental framework for the WTO system — it is unlikely that the differences will be easily resolved.
The Trump administration’s view represents a marked departure from the long-standing approach taken by the U.S., which previously focused on enhancing the role of the WTO and relying on its dispute settlement system to resolve state-to-state trade disputes. Since joining the WTO in 1995, the U.S. has brought more than 100 trade complaints to the WTO.
In light of the “America-first” approach that is at the centre of the Trump administration’s trade policy proposals, Canadian businesses exporting into the U.S. should proactively monitor the evolving and shifting trade policies being considered by the U.S. federal government, including:
- Increased tariffs and other tariff barriers — President Trump and his advisors have publicly announced the possibility of imposing a 10% tariff on all imports, a 45% tariff on imports from China, and a 35% tariff on imports from U.S. firms that relocate to Mexico. Some policy experts believe that the threat of such tariffs, which would be in conflict with the U.S.’s obligation under the WTO rules, may be a negotiating posture to compel some busineses and trading partners to adjust their behaviour pre-emptively.
- Border adjustment tax proposal — While the details of the proposed tax plans are not publicly available, the border adjustment proposal has already become one of the most hotly-debated topics in the Republican tax reform proposal. A number of business groups and commentators have already expressed serious concerns that the reform proposal may violate the U.S.’s international obligations and expose American exports to WTO-authorized retaliatory measures (i.e., trade sanctions).
“Tweaking” NAFTA — next steps
In recent weeks, the Trump administration has signalled that it will not adopt the same aggressive posture on U.S.-Canada relations as it has done in relation to Mexico. The Trump administration describes the situation with Canada as much less severe, and the administration will only be “tweaking” the North American Free Trade Agreement (NAFTA) provisions pertaining to Canada. This seems to be borne out by some recent developments. The Trump administration has approved the Keystone XL pipeline, in a reversal of the previous Obama Administration position, and furthermore has exempted Keystone XL from the “Buy America” provisions.
In response to the U.S. proposal for NAFTA renegotiations, the Canadian government has made it clear that Canada plans to take an active role in the trade negotiations by negotiating as much as possible on a trilateral basis. Prime Minister Justin Trudeau will bring a list of Canadian-U.S. trade and market issues to the table, including seeking provisions on pre-clearance of cargo, establishing government powers in labour standards and dispute settlement, and a streamlined procedure of dispute resolution procedures. Canada has also expressed a desire to import into NAFTA some of the improvements accomplished in the Trans-Pacific Partnership trade pact, which was heavily criticized by the Trump administration, and which presently appears to be unachievable in its current form due to the U.S. government’s withdrawal.
Many Canadian economists have expressed concern that uncertainty in U.S.-Canada trade talks could have a chilling effect on Canadian investment. In January 2017, for example, Canada’s trade surplus rose to $807 million, much of it with the U.S., marking the third straight month in which Canada has exported more than it has imported. As Canada’s trade surplus grows, the question as to what this means for NAFTA renegotiations is top of mind for those watching the impending trade talks. There is also the question of how quickly these negotiations will take place.
From the U.S. side, notwithstanding the concerns raised by Canada that uncertainty in the Canada-U.S. trade talks will “chill” foreign investment into both countries, the signals suggest a slower pace of negotiations. Changes are not expected to happen soon. Recently confirmed Commerce Secretary Wilbur Ross, who will be intimately involved in NAFTA negotiations, has said as much. Furthermore, the burden of carrying through on the trade talks and the negotiations falls largely to the Office of the U.S. Trade Representative (USTR), expected to be headed by Robert Lighthizer. His Congressional approval could be tied up for weeks while he awaits a special waiver from Congress for representing foreign governments in U.S. trade disputes while a private practitioner. Without the USTR in office, NAFTA renegotiations are likely to stall. Even if Mr. Lighthizer’s appointment is confirmed, the anticipated list of trade measures up for renegotiation is likely to be long and it is expected that renegotiations could occupy a substantial portion of the Trump administration’s term of office. In addition, while trade is a top issue, it will compete for attention within the administration and Congress with other priorities, including taxation reform and health-care reform.