Final Thoughts

Leibowitz: Another Trade Dispute, Another Loss for the US

Written by Lewis Leibowitz

Last week I wrote about the US loss in the Section 232 steel and aluminum trade dispute at the World Trade Organization (WTO). This week, the US suffered another loss—the dispute settlement proceeding under the United States-Mexico-Canada Agreement (USMCA) on the Agreement’s rules of origin for automobiles.  

IN PROGRESS... Leibowitz:

The United States has thus recently lost two major cases that arose because of the actions of former President Trump. The Biden administration chose to defend the actions of the former president in the international trade area.

The two cases have a lot in common. Both related to the interpretation of agreements that the United States negotiated and freely signed. In both cases, the tribunal was duly appointed in accord with procedures that the US also agreed to. There have been no accusations—at least at this point—of bias on the part of the panel members. Everything went according the established procedures. 

But there are also significant differences. The US complained chiefly about an international panel that second-guessed the US argument that its “essential security interests” were involved. The US asserted it never agreed to be second-guessed on its national security. US Trade Representative Katherine Tai herself commented that the WTO was “on very, very thin ice” with this ruling. Only 12 days later, the WTO ruled that the US violated trade rules by requiring goods originating in Hong Kong to be marked “Made in China.” Again, the justification was national security. 

The WTO and the USMCA could be damaged by these outcomes. 

When the General Agreement on Tariffs and Trade (GATT) was first drafted in the aftermath of World War II, the negotiators knew that unilateral action, or at least action by a group of countries, was possible, and could not be averted by an economic agreement. They also knew that the hard work of negotiation could not possibly be successful if a single country could tear up these complex agreements by an incantation of the words “national security.” They added the second requirement to balance those important but competing interests. The WTO cannot finish the Steel and Aluminum case because the last stage (the Appellate Body) is not operational.

The USMCA is different. The USMCA does not have an Appellate Body (the US blew up the Appellate Body while the USMCA was being negotiated). The USMCA decision announced last week is now final (except for the retaliation portion). Nor is “national security” involved in the USMCA auto case; while important economic and political considerations surround the dispute, they are not immediately involved with national survival. 

Trade agreements don’t prohibit countries from acting alone, but they impose consequences for taking action against the terms of the agreements. Freedom of action isn’t surrendered—freedom to act without any consequences is limited. These consequences are carefully measured to be consequential without preventing a country from taking meaningful action to protect its vital interests. But countries may face economic retaliation if they violate the agreements.

This means that, if the US does not want to accept an adverse decision, it can continue to violate the agreement, accepting retaliation against US exports. Or, it can negotiate a resolution that gives everyone something. While that means negotiating with over 160 other members in the WTO, in the USMCA context, it only means negotiating a resolution with two other trading partners. 

The US has thrown a big monkey wrench into the dispute settlement machinery of the WTO by disabling the Appellate Body. There is no way to secure authorization to retaliate against exports of a country that has lost a case and fails to comply with the decision. All countries in the WTO profess to be committed to dispute settlement reform, but reform is hard in these deeply divided days. The US can therefore continue to act as it wishes, and is unlikely to face trade retaliation.

No monkey wrench has been thrown at the dispute settlement mechanism of the USMCA. It works fine, as the auto rules of origin and dairy disputes illustrate. Canada and Mexico can retaliate against the US if it fails to adhere to the rules of origin as determined by the dispute settlement panel, but that will take awhile to work out, and negotiations are possible that can avert retaliation.

However, Canada and Mexico also have politically volatile policies that could lead to other disputes. In Canada’s case, their dairy policy was found wanting in 2021 by granting quotas in a way that hurts US dairy product exports to Canada. In responding to that decision in 2022, Canada, according to the US, made the problem worse, not better. The US is about to bring another dairy case against Canada.

As for Mexico, that country has announced energy-related policies that seem to favor Mexican energy producers, especially the state-owned entity PEMEX, over foreign sources of energy, particularly in the natural gas area. The United States has asked for consultations, a request that Canada has joined. At this point, the consultations have not led to a resolution of the dispute, and the US can institute a formal complaint at any time.

There was a US-Mexico-Canada summit meeting in Mexico City last week. The major topic there was the US-Mexico border and immigration. There was no public release about trade disputes and the auto decision was not formally announced until after the summit. 

Some analysts speculate that, with each country facing adverse decisions (first Canada, and now the US, with Mexico waiting in the wings), the three countries could call a truce by letting each country get away with policies that violate the USMCA, but are politically useful: autos in the US, energy in Mexico, dairy in Canada. 

But that would make the USMCA pretty much meaningless for facilitating commerce in the three countries. Companies could not rely on the agreement or its dispute settlement structure to protect their interests if the three governments ignore the rules they’ve negotiated by coming up with disputes to negotiate away politically sensitive problems. 

And, the US in both cases has essentially ignored domestic interests that are hurt by the current policies on steel and aluminum, and auto producers—who generally welcomed the USMCA ruling—in favor of organized labor and domestic steel producers. 

In the end, if trade disputes are routinely settled by trading one violation for another, there will effectively be no trade agreements at all.

Lewis Leibowitz 

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