Last month, we provided a first look at the Trump administration’s Trade Policy Agenda. One month later, we are starting to see more specific information about the priorities the administration intends to pursue, where it differs from its predecessor, and where there will most likely be continuity in approach.

Trade Ministers Agree in Chile to Continue Discussing a Potential TPP

At the same time, governments around the world are taking the measure of the administration’s early trade moves, and positioning themselves to adapt. The first indication of how foreign governments were responding came at the meeting of Asian and Latin American Trade Ministers in Vina del Mar, Chile, on March 14-15. The meeting brought together members of Pacific-facing governments from three trade groups – the eleven remaining members of the Trans-Pacific Partnership (TPP); the Latin American governments participating in the Pacific Alliance; and several of the governments, including China, negotiating the Regional Comprehensive Economic Partnership (RCEP).

The principal development from Vina del Mar was the commitment by the TPP-11 governments (that is, absent the U.S.) to continue discussing the potential future of the agreement after the United States’ withdrawal. Ministers from the TPP-11 will meet again in Hanoi, Vietnam, in May during the meeting of Asia-Pacific Economic Cooperation (APEC) Ministers Responsible for Trade, and possibly in Canada prior to that time as well. Opinions among those governments vary about the future of the agreement, and whether to implement it among themselves, renegotiate it, or abandon it. Japan, the largest economy left in TPP, has stated that it wished to consider all options, and will consider TPP in the context of the possibility of pursuing a bilateral agreement with the United States, and regional integration through RCEP. Other developing country members are only interested in TPP if the United States is party to the agreement.

In Latin America, governments are emphasizing their commitment to liberalizing trade among themselves, and opening up the Pacific Alliance trade agreement to new members, with criteria for membership to be developed.

USTR Nominee Robert Lighthizer Suggests Substantial Continuity with Past Policy during Confirmation Hearing

Back in Washington, the confirmation hearing for United States Trade Representative (USTR) nominee Robert Lighthizer on March 14 was a further opportunity to examine the “new approach” the Trump administration is promising to bring to US trade policy. Lighthizer’s comments to the Senate Finance Committee indicated the administration’s trade policy would have substantial continuity with past policy while emphasizing stricter enforcement and more focused negotiation on sectors that boost American production. Of interest:

  • On digital trade, Lighthizer said the work in TPP was important and should be incorporated into future U.S.  agreements, and emphasized Canada, Japan, and Mexico as early priorities.
  • On NAFTA, Lighthizer said NAFTA needed to be re-negotiated to benefit U.S. manufacturing. Lighthizer reassured Senate members that he would be careful in re-negotiating NAFTA “not to do anything that adversely affects winners from NAFTA”. At the same time, he did not specify whether the agreement would remain a three-country bloc, or be concluded as two separate but parallel agreements.
  • On trade deficits, Lighthizer said deficits were “indications of conditions in a country or the particular set of rules,” suggesting a trade deficit with the United States is a sign of trade barriers employed by the trading partner. To study this condition, President Trump signed Executive Order 13786 on March 31, 2017, directing the preparation of an Omnibus Report on Significant Trade Deficits.
  • Trade Enforcement was a feature of Lighthizer’s testimony. Much of the discussion regarding the Trump administration’s new approach to trade enforcement took place in the context of China’s overcapacity in the steel sector. Lighthizer suggested China was pursuing industrial policies in violation of global trade rules, stating that China’s unfair policies were not just limited to steel but encompassed many other sectors, and that WTO rules were not effective in dealing with China.

Lighthizer’s confirmation by the Senate remains on hold pending agreement in the upper house on a waiver for his past representation of foreign interests.

Administration Preparing to Notify Congress its Intent to Pursue Revising NAFTA

By March 30, it was starting to become clearer how the Trump administration would be sequencing its trade priorities, and approaching its first foray into trade negotiations – revising NAFTA.

An initial draft of its notification letter to Congress, under the signature of Acting USTR Stephen Vaughn, set out the priorities the administration would intend to pursue in revising NAFTA. Although media reporting of the letter emphasized the continuity between the Trump administration’s priorities and the TPP Agreement which it abandoned, there are a number of important shifts in emphasis providing insight into how the administration intends to restructure NAFTA.

The most important area of difference is in trade remedies. The draft suggests the administration would seek to include a safeguard provision in the renegotiated NAFTA, though it does not describe how the new provision would differ from the current safeguards in Chapter 8 of NAFTA. With respect to antidumping and countervailing (AD/CVD) duties, the administration is seeking to preserve flexibility to address “diversionary dumping” which involves using low-priced imported inputs from outside the NAFTA zone in manufacturing while meeting NAFTA rules of origin. In addition, the administration has signaled it wishes to eliminate Chapter 19 of NAFTA, which requires antidumping and countervailing duties be confirmed by a binational panel, rather than just the judicial authorities of the importing country. All of these changes create scope to limit the effect of NAFTA’s market-opening commitments, creating the potential for Canada and Mexico to withdraw some benefits under the agreement to match their evaluation of the revised balance of rights and obligations the Trump administration may seek. Such responses could take the form of tariff increases; imposition of tariff-rate quotas and quantitative restrictions; or in the rules areas, removal of provisions of interest to the U.S. from the coverage of the agreement.

Another prominent area of difference is in rules of origin, where the draft letter foreshadows an administration approach that would “seek rules of origin that ensure that the Agreement supports production and jobs in the United States.” This is a signal that the U.S. intends to tighten rules of origin under NAFTA. One of the objectives of rules of origin in a regional agreement is to enable “cumulation” of the value of production inside the free trade area, but it does not distinguish between  production taking place in the U.S., Canada, or Mexico. Tightening rules of origin will reduce the amount of non-NAFTA content in complex manufactured goods, but will not necessarily cause production to be located in the United States as compared to Canada or Mexico (although it would be possible to “weight” the rules of origin in such a way as to require a certain percentage of regional value content to originate in the United States, but this would be controversial and would smack of industrial policy, not a U.S. strength in the past).

Limiting the application of cumulation rules could result in a relocation of production to the United States, thus reducing the benefit of the overall agreement to Canada and Mexico. Clearly rules of origin will be one of the most contentious parts of the renegotiation.

For more information, contact: Paul Davies, Melissa Morris