The first full month with the White House’s trade team in place saw a ramp up of activity initiated in the early days of the administration. To a great extent, the administration is still in the driver’s seat; its decision to renegotiate NAFTA, its self-initiated actions on the national security reviews of steel and aluminum imports, and the review of trade deficits are all areas where the president is pursuing a shift in direction of policy.

What is becoming apparent is the administration is facing the challenge of balancing its priorities with the legacy of continuing negotiations and expiring agreements it inherited, as well as the policy responses of trading partners to its moves. How it balances these sometimes competing prerogatives will become clearer in the coming months.

NAFTA and China

In wide ranging testimony before the House Ways and Means and Senate Finance Committees on June 21-22, U.S. Trade Representative Robert Lighthizer characterized the administration’s trade policies as discrete actions; however, when taken together, the measures demonstrate a results-driven use of trade policy.

Regarding NAFTA renegotiation, Lighthizer faced questions about strategy and specific priorities for the negotiations. His key messages were:

  • There is “no artificial deadline” for NAFTA renegotiation; the priority is getting a high-standard agreement.
  • NAFTA is recognized as deficient on intellectual property, but the three countries’ systems are not incompatible, and “our hope is that we end up with a model agreement in this area.” Securing extensions of newer IP protections, including pharmaceuticals, to NAFTA will be a priority in the coming negotiations.
  • Currency manipulation is not considered a problem with Canada or Mexico, but the renegotiation is an opportunity to put together a “model” agreement with an eye to future negotiations with other countries.
  • NAFTA labor provisions should be strengthened, and any new principles should build on the NAFTA labor annex and not take a step back by narrowing the scope of existing principles.
  • Lighthizer would do “all I can” to address remaining agricultural barriers to American exports to Mexico and improving dairy access to Canada.
  • On the future of investor-state dispute settlement, he said “I can’t say we will get rid of ISDS, but we will see what we can do to perhaps rebalance where we are in this situation.”

Unsurprisingly, the committees were very interested in White House strategy on China. Of note, Lighthizer addressed:

  • WTO Market Economy Status: Lighthizer considers China’s seeking market economy status at the WTO the “most serious litigation matter we have at the WTO right now… China is certainly not a market economy under our laws.” Lighthizer is not sure what will happen with the WTO ruling, but if the WTO rules that China can attain market economy status, this would be “cataclysmic”.
  • Outcomes from the 100 day plan: USTR is working on remaining issues surrounding science-based approval of American agriculture biotech products in China. Lighthizer is confident these issues can be resolved. For example, U.S. beef access to China “has been restored.”
  • Technology: USTR will continue to focus on the issue of opening China to U.S. cloud services. He said, “China has had an unfair advantage in several different sectors of the economy.”
  • Mercantilism: Lighthizer used aggressive language regarding China, saying, “I do believe our trade model is better than China’s. We have to take on China when they do something that is inconsistent with how we think the economy should develop and work…We have to prevail against China for the good of the world.”
  • Autos: Lighthizer called the issue of Ford moving its factory activity to China “very troubling”. He said there is no administration position as of yet, but that if this happened for reasons that are “noneconomic”, he thinks the administration should take action.

A Further Round of Engagements – Europe, India, Korea, Japan

The “built-in” agenda of negotiations and agreements the administration inherited attracted more attention in June. Summit diplomacy with India and South Korea and further engagement with Japan and the EU are beginning to clarify next steps with major trading partners.

  • Europe: In early June, Commerce Secretary Ross hinted the administration could still proceed with TTIP negotiations with Europe, while at the same time pursue smaller, sectoral agreements where deals could be struck outside the omnibus agreement framework. In his House testimony, USTR Lighthizer said the White House appreciated the current political reality in Europe. The recently concluded election in France and coming election in Germany suggest the Trump administration will not be able to move quickly on any far-reaching agreement with the EU. President Trump’s participation in the G20 Summit in Hamburg in July is seen as another opportunity to clarify the Administration’s intent regarding TTIP.
  • India: Prime Minister Modi’s first meeting with President Trump yielded an agreement to conduct a “comprehensive review of trade relations with the goal of expediting regulatory processes; ensuring that technology and innovation are appropriately fostered, valued, and protected; and increasing market access in areas such as agriculture, information technology, and manufactured goods and services.” One key objective for Modi’s visit was to maintain a positive tenor of relations with the United States, and the agreement on a trade review neutralized the potential impact of India’s inclusion among the countries highlighted in the trade deficit review report.
  • South Korea: President Trump’s stated dissatisfaction with the terms of the U.S.-Korea Free Trade Agreement (KORUS) loomed over the visit by newly-elected President Moon Jae-in. The official outcome of the two leaders’ engagement on trade was a neutral reference in the Joint Statement issued at the end of their meeting to “work together, as part of the process of the Commercial Dialogue, to promote investment, support entrepreneurs, and facilitate cooperation between the United States and the [Republic of Korea] to boost economic growth and job creation in both countries.” The statement made no reference to KORUS or any commitment to change its terms, but did reference working together on addressing steel overcapacity and “non-tariff barriers to trade”.
  • Japan: The Minister for Economy, Trade and Industry (METI), Hideki Seko, made a low profile visit to Washington to continue the economic dialogue established during Vice President Pence’s visit to Tokyo in April. Following USTR Lighthizer’s meeting with Seko on the margins of the Asia Pacific Economic Cooperation (APEC) Trade Ministers’ meeting in May, it is increasingly clear the economic dialogue is shifting more towards a way to deal with ongoing issues and promote joint action where feasible, rather than moving in the short term towards negotiation of a bilateral free trade agreement. For its part, Japan is playing down the prospect of negotiations, while at the same time working with the remaining ten other members of TPP to revise and complete that agreement.

232 Investigations, Deficit Reports a Signal of Things to Come

By the end of June both the Department of Commerce report on significant trade deficits and the Section 232 reports on steel and aluminum had been submitted to the White House. Of the two, the 232 reports are seen as having a more immediate potential impact because its findings (not yet public) could recommend specific remedies on steel and aluminum imports and (per USTR Lighthizer’s testimony) could cause affected trading partners to threaten retaliation.

Over the longer term, the trade deficit report could have broader impact depending on its specific recommendations. If it attributes deficits, or some component of structural deficits, to trade restrictive policies, the administration may use the finding as a pretext to launch negotiations or unilateral actions with trading partners to address imbalances.