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U.S. Trade Policy: Taking a New Direction, or Mired in Chaos?

With the new Administration less than two weeks old, U.S. trade policy is in a state of extreme uncertainty, if not chaos. So where do we go from here?

U.S. Trade Policy: Taking a New Direction, or Mired in Chaos?

It came as no surprise to anyone when President Trump withdrew from the Trans-Pacific Partnership just hours after taking office. But what will replace TPP, and whether the U.S. remains committed to multilateral trade treaties at all, is a key question.

Also in the new President's sights is the North American Free Trade Agreement (Nafta) with Canada and Mexico. Even without construction of a wall on the U.S.-Mexico border, we can expect to see major aspects of that treaty crumble in the months ahead. The President’s threat to place a 20-percent tax on imports from Mexico — or maybe not, depending on which Administration official you listened to after that initial confusing announcement — would be enough to end the 23-year-old agreement among the big three North American neighbors.

Article 2205 of Nafta gives any member of the agreement the authority to withdraw on six months’ notice. Similar action by a U.S. president hasn’t occurred since 1886. The nearest parallel in modern times was President Carter’s withdrawal from the mutual defense treaty with Taiwan, notes Loyola Law School professor Justin Hughes. Republican lawmakers failed in an effort to reverse the decision in the courts.

Don’t expect a similar showdown on Nafta between the President and the Republican-controlled Congress, although “if [House Speaker Paul] Ryan and [Senate Majority Leader Mitch] McConnell stared down Trump and said we aren’t withdrawing from Nafta, it would be a great court case,” says Hughes.

Still, he says, it’s unclear just how much power a President has to take unilateral action within the bounds of an existing trade treaty like Nafta. (That wasn’t a problem with TPP, which had yet to be approved by Congress.) “There’s a question of what domestic law says you can and cannot do.”

That said, the President holds broad tariff-adjustment rights granted by Congress, which retains the power to regulate commerce among states and with foreign nations. And while the negotiation of free trade agreements is conducted by the President under congressional authority, “fast-track” permission allows him to present a completed treaty to Congress for an up or down vote, without possibility of amendment. Both Nafta and TPP came about in that manner.

In any case, action to slap a tax or tariff on Mexican imports is likely to result in a proceeding against the U.S. at the World Trade Organization — and Mexico would probably win the case, says Hughes. And if the President fails to back away from his tariff threat, expect Mexico to respond in kind. The result would a trade war with one of our closest trading partners.

The rejection of TPP was a less controversial move, given that the candidates of both major political parties opposed it during the presidential election campaign. Hughes says TPP’s rules of origin would have actually lowered the bar for local content of automobiles sold in the U.S., opening the door to more Chinese and Japanese imports and further jeopardizing North American manufacturing jobs. “In terms of preserving the American automobile industry,” he says, TPP wasn’t a great deal.”

At the same time, he acknowledges, the demise of TPP robbed the U.S. of an opportunity to assert greater control over economic and political affairs in East Asia, since China was not a signatory.

The larger question behind the President’s recent actions on trade is whether the new Administration is attempting to reorient the nation’s focus from trade policy to industrial policy. The latter emphasizes domestic production, with the goal of preserving and restoring American jobs. In fact, several major manufacturers, including Carrier Corp., Ford Motor Co. and Taiwan’s Foxconn, have either scrapped plans to make product in Mexico or signaled a willingness to build new plants in the U.S. (Whether their actions had anything to do with the President’s policies is a point of contention.) So far, however, the President’s tough stance on that issue appears to consist of threats to impose import tariffs, tax breaks for domestic production, and other economic bribes offered on a case-by-case basis, rather than being the product of a coherent, broad-based industrial policy.

Many believe the death of TPP signals a sharp reversal in the decades-long trend toward globalization. Hughes doesn’t agree. “For now, this is just a zig in the zeitgeist,” he says. “I don’t think that Trump will be able to pull off a reversal, simply because Congress won’t permit it. Members have companies they have to answer to. They’re going to say no, and at the end of the day the power to regulate commerce with foreign nations belongs to Congress and not the President.”

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