Trade and Security

Trade War Battles: Latest Conflicts

By Kathleen Claussen
Wednesday, December 12, 2018, 11:49 AM

The last weeks of 2018 have precipitated significant developments in the so-called trade wars between the United States and its trading partners. Yet the recent agreements made and signed did little to advance efforts toward greater cooperation on the “three-digit sagas”—the tit-for-tat tariff battles occurring under statutory delegations known by their three-digit references, such as Section 232 of the Trade Expansion Act of 1962. The announcements coming out of the G20 summit in Argentina make now a good time to take stock of the state of play in the trade wars.

A New NAFTA

First was the signing of a new North American free trade agreement on Nov. 30. Unlike the existing regional agreement, the replacement changes name depending on who is asking: it is the United States-Mexico-Canada Agreement (USMCA) to the United States, but the Canada-United States-Mexico Agreement (CUSMA) to Canada, and, in translation, the Treaty Among Mexico, the United States, and Canada (T-MEC) to Mexico. The agreement was signed in the shadow of the ongoing “national security” tariffs that the United States continues to impose on steel and aluminum imports from Canada and Mexico under Section 232.

Though industry sought resolution of the tariffs concurrent with the signing of the USMCA, that proved not to be in the cards. In July 2018, U.S. Trade Representative Robert Lighthizer told Congress that he hoped the steel and aluminum tariffs would be resolved as part of the NAFTA renegotiations, although Section 232 is not within his purview; rather, it falls to the Commerce Department to administer the Section 232 process. By November, Lighthizer commented that because the USMCA was “very complicated,” the governments could not turn their attention to the tariffs while negotiating the agreement. Meanwhile, Canadian Prime Minister Justin Trudeau made clear that the tariffs would not be an impediment to Canada’s signing. And indeed, the tariffs have continued despite the signing of the USMCA in Buenos Aires.

When the draft text of the USMCA was made public at the end of September 2018, the parties also published two draft side letters that spoke not to the existing steel and aluminum tariffs, but to the possibility of future tariffs under Section 232 and how those would be managed among the three countries. The side letters have been revised since their initial publication, and, now in their final form, they mostly achieve the same goals as set out in the drafts—but there are some key differences. In total, the United States has now two Section 232-related letters with Canada and three Section 232-related letters with Mexico.

Agreement through exchange of letters such as these is typical in the practice of the Office of the U.S. Trade Representative (USTR). Many trade agreements feature side letters that cover, for example, updates to market access for particular products or services. Such letters are often expressly linked to the entry into force of the trade agreement or come after the agreement is already in force. Unusually, these USMCA side letters are not so tied. Indeed, it seems odd to call them “side” letters at all, as they appear to stand alone without the entry into force of the USMCA. They are already in effect now.

In what I will call the first letter exchange, and what USTR refers to as the letter on “[Section] 232 process,” the United States agrees “not to adopt or maintain a measure imposing tariffs or import restrictions on goods or services” of Canada or Mexico under Section 232 for “at least 60 days after imposition of a measure,” allowing the parties to negotiate an “appropriate” market-based outcome. There is a letter exchange with Canada and a separate letter exchange with Mexico to this effect. This letter has been lightly updated since the earlier draft—replacing the reference to the USMCA with a reference to the Protocol to which the USMCA is an annex, replacing the word “action” with “measure” for consistency and correcting at least one typographical error. There are some small differences in grammar, syntax and order of references between the version of the letter exchanged with Canada and the version exchanged with Mexico that are surprising if the copies originated from the same draft or if they were intended to match, but the effect is the same.

The final version of this first letter, like its draft, appears to authorize Canada and Mexico to “take a measure of equivalent commercial effect” if the United States takes a measure under Section 232 “that is inconsistent with” the North American Free Trade Agreement (NAFTA) 1994, the Protocol incorporating the USMCA, and the World Trade Organization (WTO) Agreement “notwithstanding” those agreements. This is notable because the United States has maintained that its Section 232 measures are consistent with all those agreements because any such measures fall within a national security exception found in each agreement. Under the U.S. interpretation, it is difficult to envision an instance in which its Section 232 measures would be “inconsistent.” Thus, to the extent this phrase is intended to shield Canada and Mexico from liability should they wish to retaliate, it is not obvious that it achieves that goal. (Both countries have already retaliated anyway in response to the steel and aluminum tariffs, and the United States has sued them at the WTO on this basis.) Does the word “notwithstanding” create an exception to the national security exception in those agreements? That would be surprising.

This letter also confirms that both Mexico and Canada retain their rights to “challenge a Section 232 measure” at the WTO, but what then to make of such a challenge if the United States again invokes the national security exception? The national security exception varies slightly in wording depending on which agreement is invoked. The NAFTA 1994 exception is closer to the WTO Agreement language, while the USMCA exception—see Art. 32.2 subparagraph 1 of 1 (and query whether there was more than one subparagraph in an earlier draft of Art. 32.2 that would explain the numbering)—is broader, consistent with more recent drafting such as what was proposed for the Trans-Pacific Partnership Agreement.

Finally, this letter does not appear to be enforceable should the United States refuse to honor its commitment to a 60-day negotiating period. The second letter, however, is a bit different in this respect.

In a second letter exchange, which I will call the auto-related letter exchange, the United States agrees that a certain amount of passenger vehicles, light trucks and auto parts from Canada and Mexico will be excluded from future Section 232 actions. Again, there is an exchange with Canada and an exchange with Mexico. The letter has been updated with a detailed elaboration as to how Canada and Mexico each will track, monitor, and report allocations of the relevant products. The amounts excluded remain as they were in the earlier draft version, although the precise start date for accounting for the number of products imported remains unclear. (The language has changed from “a calendar year” to an “annual basis,” perhaps to reflect the starting date at which tariffs on autos and auto parts may be imposed in early 2019.)

Some strange passages remain in this second letter, as do some distinctions between the letters exchanged with Mexico and Canada. The letter exchanged with Mexico says the United States shall not adopt or maintain a measure imposing tariffs on those goods of Mexico for at least 60 days after imposition. On the one hand, this seems repetitive of the first, process-related letter discussed above, although without reference to any potential negotiation that would occur during those 60 days as in the first letter. The version of the letter exchanged with Canada is silent with respect to any such waiting period.

The letter exchanged with Canada also includes a legally interesting dispute settlement paragraph that limits Canada’s recourse to either NAFTA 1994 or USMCA dispute settlement procedures on a closed set of issues surrounding these special Section 232 arrangements. The letter states that Canada may have recourse to dispute settlement “only with respect to whether the United States has excluded light trucks, the number of passenger vehicles, and the value of auto parts as set out in the above-mentioned agreement, from a measure taken pursuant to section (sic) 232.” This language seems confusing. To the extent it limits Canada’s rights, how far does that stretch? Does the phrase “from a measure taken pursuant to section 232” effectively indicate that Canada’s dispute settlement rights are restricted only when a dispute arises with respect to an auto-related Section 232 measure? The placement of the phrase make it unclear as to what it modifies. Read most broadly (and nonsensically) the sentence could even suggest that Canada’s overall dispute settlement rights with the United States under international law are restricted to just this one topic. Moreover, why does the paragraph refer to its prior contents as an “above-mentioned agreement” rather than just “above”? Is not the entire letter the agreement? The paragraph then goes on to say that the dispute settlement chapters of NAFTA 1994 or USMCA, whichever is in effect, are “incorporated and made part of that agreement” (emphasis added), referring again to text just a few paragraphs above as if that text were a separate agreement.

Some of this confusion may be explained, or perhaps exacerbated, by a third letter newly published with the final text of the USMCA which is effectively a side letter to the Mexican auto-related side letter. It is in this third letter that Mexico and the United States agree to dispute settlement in precisely the same terms as were agreed in the letter with Canada. In other words, this third letter simply breaks out the dispute settlement paragraph that was part of the auto-related letter exchanged with Canada to make it stand alone in a separate letter with Mexico, even though this language originally appeared in the auto-related letter intended for Mexico.

The flood of agreements is not over. Lighthizer has said that the president has directed him to negotiate two more agreements to address the steel and aluminum tariffs already in place. As briefings begin on Capitol Hill regarding the USMCA in the lead-up to the congressional votes on the agreement, members of Congress ought to consider probing the contours of these many separate agreements—even if, at the moment, it remains unclear what power Congress would have over them.

A Simmering Dialogue With China

Second among trade war milestones at the G20 was an announcement that the Trump administration would delay its planned increase in tariffs on products from China imposed under Section 301 of the Trade Act of 1974—meaning the higher tariffs would go into effect 90 days after the meeting between the leaders of the two countries in Buenos Aires, i.e., around Mar. 1, 2019 rather than Jan. 1, 2019 as originally announced. Some have called this a ceasefire, but that may be an overstatement. A different metaphor may be better-suited: Up until the announcement was made, the Trump administration was continuing to turn up the heat on economic and technology issues with China, among other issues. And now the pot appears to be simmering.

Much remains unknown to the public. The USTR’s updated Section 301 report issued on Nov. 20 indicates that there is still a long way to go. That is, the United States is not getting the assurances and proof of progress that it wants. There is also little consistency as to just what China and the United States agreed and a number of discrepancies between the Chinese and U.S. statements. Moreover, the topics under discussion at the summit, such as the theft of U.S. intellectual property by China, do not lend themselves to easy public announcements. But in the face of many complaints from industry that the tariffs on Chinese products are hurting their bottom line, the delayed decision does not come as a surprise. The U.S. statement is clearly open-ended enough to leave plenty of room to maneuver in the coming months. And there are other issues lurking in the background, such as sanctions, indictments and arrests, and the WTO and China’s status there—to name a few.

Multilateral Rumblings

Also a product of the G20 was a leaders’ declaration concerning WTO reform. The leaders “note current trade issues,” affirm that the multilateral trading system is “falling short of its objectives” and commit to improving the WTO’s functioning. This commitment comes on the heels of ongoing discussions on the topic, along with the EU’s tabling of a proposal for WTO reform. As I have discussed elsewhere, these intractable issues will not be easy to resolve, but they are also not independent of the other battles described above. Each development intersects with the others. Language in the USMCA is clearly intended to contain China; the USTR appears to be considering an additional Section 301 investigation into Chinese labor practices that some claim may be a move to secure Democrats’ support for the USMCA; and all the tariffs have given the United States still greater leverage to put pressure on changing the multilateral trading system.

As 2018 draws to a close, the White House appears to be doubling down on each of these trade moves—the possibility of withdrawing from the NAFTA 1994, the 90-day deadline for China to respond to U.S. demands on technology transfer and intellectual property, and the advancement of dispute settlement proceedings at the WTO to defend the Trump administration’s tariff-focused approach—suggesting the trade wars will continue well into the new year.