Trump threatens Canada, NAFTA, WTO, and Congress

Trade correspondent L.C. reports: President Trump this past week issued threats against Canada, NAFTA, the WTO, and Congress. The rest of the world has been responding pro-actively by forming free-trade pacts without the US.

In an intense week for the NAFTA renegotiation that followed last week’s announcement of a US-Mexico bilateral agreement, talks with Canada resumed but did not conclude. The President then proceeded to notify Congress of the deal with Mexico on August 31st. If Congress treats this as a formal notification, then the deal can be signed in 90 days by outgoing President Enrique Peña Nieto just before he leaves office. The US President announced the deal with Mexico on August 27th while he had Peña Nieto on speakerphone. The unusual aspect was the Mexican president’s continuing assertion that he expects Canada to be part of the deal while the US president ignored these comments, touting the two-way pact.

Whether the President has authority to enter a bilateral agreement with Mexico remains a question. The Trade Priorities & Accountability Act which granted the President Trade Promotion Authority to negotiate agreements that can be given fast-track treatment in Congress requires that before negotiations for any trade deal can begin, Congress must be notified well in advance and the goals for the negotiation have to be published by the Administration. That was done for NAFTA; it wasn’t done for a bilateral with Mexico.

On September 1st the President tweeted his disregard for the constitutional role of Congress in trade policy and his continuing inclination to simply scrap NAFTA: “Congress should not interfere w/ these negotiations or I will simply terminate NAFTA entirely & we will be far better off.”

President Trump commented on NAFTA in an August 30th Bloomberg interview that he designated “off the record” but which some source – not Bloomberg – released early the following day to the Toronto Star. In strong language, the President insisted that the US would offer no compromises to Ottawa. The US will insist, he said, that any agreement with Canada will be “totally on our terms, totally.” Then he suggested he will use the threat of Section 232 automotive tariffs to force Canada to concede. “[E]very time we have a problem with a point, I just put up a picture of a Chevrolet Impala,” he told Bloomberg. The GM Impala is made in Ontario.

Does Trump realize that threatening to block US auto imports of Canadian cars is not a threat to Canadian auto companies – there aren’t any – but to the US Big Three automakers, a large part of whose business is making cars in Canada? It’s also a threat to both US and Canadian auto workers, a point AFL-CIO head Richard Trumka drove home in network Labor Day interviews in which he said a US-Mexico trade deal without Canada is unacceptable to the workers in his dual-nation trade union confederation.

Economist Tyler Cowen observed that the benefits the US wrested from Mexico weren’t worth the ill-will generated in Canada.

The situation will be much less complicated if a US-Canada deal is quickly reached that will become part of a three-way NAFTA 2.0.

If the President tries to withdraw from NAFTA but is blocked by Congress, and the US-Mexico Trade Agreement isn’t enacted by Congress, then the old NAFTA 1.0 would simply remain in effect for the three countries. That would be a defeat for the President and it is unclear how he might respond, though imposing Section 232 automotive tariffs on Mexico and Canada would be likely.

Canada doesn’t have issues with what Mexico agreed to on automotive trade. But the two issues that appear to be the most troublesome in the talks with Canada are the Canadian dairy market and the Chapter 19 dispute settlement mechanism through which countries can appeal antidumping and countervailing duties (AD/CVD) imposed by another NAFTA country. A possible compromise would be for the US to give a bit on chapter 19 and Canada do the same on dairy.

More tariffs on China coming soon?

President Trump is reportedly preparing to impose tariffs – as high as 25% – on the third tranche of imports from China, worth $200 billion, as soon as the public comment period ends on September 6th. These reports are not surprising given that US-China talks last week failed to resolve anything and were largely seen as a failure.

The new tariffs would hit not only more intermediate goods — adding to those already hit by the first two tranches — but also a wide array of consumer products. In anticipation, Ford announced cancellation of plans to import its Focus crossover made in China. It is expected that US car buyers, especially lower income buyers, will see dwindling choices as tariffs move ahead.

Is Trump trying to kill the WTO?

President Trump this week repeated his threat to withdraw the US from the WTO. “If they don’t shape up,” he said in an August 30th interview, “I would withdraw from the WTO,” declaring that the agreement to create it “was the single worst trade deal ever made.”

Withdrawing would throw US and world trade into turmoil, would be complex legally, and would likely provoke Congressional action to block the move.

It is relevant to ask what the President’s end-goal is here. The US continues to be an active user of the WTO’s dispute settlement process, recently filing a string of new complaints against countries that retaliated against his Section 232 tariffs. The Trump Administration has filed WTO complaints on other matters as well and is actively defending itself in a number of cases. Administration criticisms center about specific Appelate Body (AB) practices rather than questioning more fundamental aspects of the WTO.

Nonetheless, President Trump continues to disparage and lie about the WTO, claiming that:

• It is rigged against the US,
• The AB judges come from anti-US countries, and
• The US loses its disputes at the WTO.

The truth of the matter is that

• The US was the strongest force in its creation, assuring that it met US needs;
• The US is the only country with a guaranteed seat for one of its nationals on the AB; and
• The US wins a majority of the cases that it files with the AB.

Canadian groundwood paper cleared of unfair trade charge; duties removed

In a stunning reversal for the protectionists in the US Commerce Department, the US International Trade Commission in a unanimous (5-0) vote on August 29th “determined that a US industry is not materially injured or threatened with material injury by reason of imports of uncoated groundwood paper from Canada.” The Commerce Department had claimed that the product was being unfairly subsidized and dumped in the US market. The ITC vote ends a controversial, high-profile case that harmed US newspaper publishers and angered Canada. The jacking up of newsprint costs due to the preliminary antidumping and countervailing duties put a severe financial strain on local newspapers around the country and provoked an outcry in Congress, where 174 members publicly supported the US importers of the product.

Defensive, non-US trade agreements flourishing

Trade ministers negotiating the Regional Comprehensive Economic Partnership (RCEP) met August 30th-31st in Singapore on the sidelines of the Association of South East Asian Nations (ASEAN) Economic Ministers Meeting. The RCEP would be the largest trade agreement ever negotiated. Although they didn’t hide the fact that obstacles remain, the ministers reported progress and still hope to have a deal this year, or early next year. Ministers also stressed to the press that the involved countries want to send the message that Asia is not turning protectionist and values free trade.

Another outcome of the ministers’ meeting is the commitment to strengthen the individual free trade agreements (FTAs) that already exist among RCEP countries, which they see as preparatory for a successful RCEP. All the non-ASEAN countries have FTAs with ASEAN, and most have FTAs with each other, though the lack of a China-India FTA has hampered the talks.

The Indonesia-Australia Comprehensive Economic Partnership is nearing conclusion and is expected to be finalized later this year.

Canadian Trade Minister Jim Carr traveled to Southeast Asia this week, visiting Singapore and Thailand for “exploratory talks” on a possible Canada-ASEAN FTA. Ottawa is also actively looking at the possibility of a Canada-China FTA. It is also considering agreements with South American trade blocs following its FTA with the EU. This is part of Canada’s push to diversify trade away from the US.

Japanese Finance Minister Taro Aso was in Beijing this week for the 7^th session of the China-Japan Finance Dialogue. Although Japan is working on joint action with the US and EU to constrain China’s abusive practices, Tokyo understands that this trilateral initiative may fail. If so, it doesn’t want to end up with a hostile relationship with China. The Aso visit was also to prepare for Prime Minister Shinzo Abe’s expected October visit to China to meet with President Xi Jinping.

Click here to go to the previous Founders Broadsheet (“Agreement with Mexico but unity vs China pending”)