Trade’s minor player, Congress

The weekly trade report with L.C.

Concern is growing nationwide that trade’s minor player, Congress, shouldn’t have let itself be downgraded to its present subordinate position. Article I, Section 8 of the Constitution specifies that “Congress shall have Power…To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” Admittedly, Congress’s lassitude extends beyond trade. For far too long it has ceded to the executive branch its responsibilities to make the nation’s laws and oversee their administration. As a consequence, often it’s business, not Congress, that is forced to raise the alarm over unchecked executive and agency power. At other times, a few lonely senators raise the issue of congressional abdication – only to be ignored by their colleagues.

Commerce’s proposed ICTS rule

Which brings us to the Commerce Department’s proposed rule to secure what it inelegantly calls the Information and Communications Technology and Services Supply Chain (“ICTS”) against foreign adversaries. Business is concerned that Commerce’s proposed ICTS rule confers on the executive branch dictatorial powers over private sector transactions. The Commerce proposal has sparked widespread criticism from a number of organizations and businesses during the public comment period recently ended. Some observers believe the administration deliberately downplayed the rule in order to sneak it “under the radar” – but weren’t successful.

The proposed rule would give the government wide authority to intervene in, block, and unwind commercial ICTS transactions by justifying this on national security grounds. The rule has sparked dismay from many in the private sector for being so broad and open-ended that it would enable Commerce to interfere with almost any private transaction involving a foreign company or national. The rule does not allow companies to submit transactions in advance for approval or an advisory opinion as the Committee on Foreign Investment in the United States (CFIUS) does but enables the Commerce Secretary to block or even unwind already completed ICTS transactions. It does, however, like CFIUS, allow the parties to offer ways to mitigate the alleged security threat and to try to rebut the threat determination.

Commerce says that “the determination of a ‘foreign adversary’ for purposes of implementing the [executive order] is a matter of executive branch discretion” – which analysts pointed out means that not only foreign governments but also individual companies could be targeted as “adversaries.”

The rule has a section on “emergency action” that explains that Commerce does not have to follow the proposed rule’s procedures “when public harm is likely to occur if the procedures are allowed or national security interests require it,” in which case the Secretary can “dispense with any or all of the procedures set forth” in the rule.

“Nearly any business transaction” could be blocked

One analyst warned that the rule has “astonishingly elastic terms that effectively enable Wilbur Ross to unilaterally block nearly any business transaction…. This kind of power puts the liberty to do business in a global marketplace at the president’s discretion.” It gives him “unbounded authority to declare non-US individuals and firms a ‘foreign adversary’ and prevent any transaction between them and US individuals and firms.”

The Business Software Alliance suggested that the rule be redrawn with more clarity and specificity and included safeguards against abuse. The US Chamber of Commerce submitted a 12-page comment that concluded: “While our members share the Administration’s priority to secure ICTS transactions, this rule-making proposes to provide the Secretary with significant authority to interfere in, block and unwind essentially any ICTS transaction, with little to no accountability, transparency, or coordination with other government programs. This could result in significant harm to the US economy… without a corresponding national security benefit. We therefore strongly urge the Department to issue a [rule] that responds to [our] concerns.”

So far, it’s unclear if there will be push-back from Congress. Many legislators are more concerned that the president might go soft on China and pull back from curbing the influence of suspect Chinese companies, especially in the ICTS arena. Hence, many legislators may support the Commerce Department’s new authority, assuming it will be directed at China and not be abused by this or subsequent administrations.

USMCA: bad process, bad bill

The USMCA is moving forward again on Capitol Hill, after it passed the House easily on December 19th and was sent to the Senate on January 3rd. The administration again seems to have contrived to marginalize Congress. Because the White House submitted a final version of the USMCA implementing bill, fast-track timing and procedures are in effect. That means that although relevant committees have to review the bill and report it to the Senate floor, they can’t suggest any changes or amendments – at least not any that could change the text of the bill. Normally under fast-track a preliminary draft bill is submitted first. It is considered by relevant committees, which can make suggestions for changes during “mock markups” that the White House may incorporate into a final bill that is then formally submitted. Then the fast-track “clock” begins ticking.

At the Senate Finance Committee hearing on the USMCA, Senator Grassley noted the difficulty of reaching a final USMCA deal, pointing out in particular how hard it was to get the president to agree to eliminate the Section 232 steel and aluminum tariffs on Mexico and Canada – which were a particular concern to him because those countries retaliated against US agricultural exports. “I don’t know how many White House meetings I attended where that was an issue,” he told the hearing. “I kind of got tired of hearing the words, ‘I like tariffs.’”

Several senators on the Finance Committee complained that the White House didn’t keep the Senate informed during negotiations – either for the original USMCA or the changes later worked out with House Democrats. Most Republicans oppose the changes that were made. “[L]egislation governing well more than $1 trillion in annual trade went from vapor to almost-law in about a week,” The Dispatch reports in an article titled “How Donald Trump Broke U.S. Trade Policy.”

Senator Toomey: “this committee is getting rolled”

Senator Toomey reiterated points he made in a Wall Street Journal op-ed and speech in December. In addition to criticizing the content of the agreement, he argued that the implementing bill shouldn’t receive fast-track treatment because it hasn’t adhered to the requirements for fast-track laid out in the Trade Promotion Authority law. On process, Toomey said, “Here we are today, totally jammed by the House and this process, not even able to offer an amendment [because the mock markup part of the process was skipped]. We’ve slapped on all of these provisions designed to restrict trade and investment, we’ll get no economic growth out of this. And we, the Senate and the Senate Finance Committee, are allowing ourselves to be marginalized.”

Every past trade deal, Senator Toomey said, had a mock markup for the “express purpose of allowing us to consider whether there’s a consensus about some changes. All of that is being dispensed with…. On process, in significant ways… this committee [Senate Finance] is getting rolled…. We’re being made increasingly irrelevant in… trade negotiations which is a constitutional responsibility assigned to us….This agreement… is not in compliance with TPA.”

Sen. John Cornyn (R-TX), Chairman of the Finance Trade Subcommittee, said that he too was “very disturbed” that the Senate had so little input to the deal. He nevertheless voted for the implementing bill. Senator Toomey voted against, but to no avail.

France’s digital service tax could provoke US-EU trade war

Congress will also be out of the loop with respect to trade negotiations with the EU. The US-France spat over the French digital services tax – the 3% tax on income earned in France by the giant US digital services companies – is moving quickly. It could soon result in significant new US tariffs on French exports, and French and EU retaliation. Or, it could result in a successful quick effort to conclude a global pact on digital services taxes through the negotiations already ongoing at the OECD.

The US tariffs, which are proposed as 100% additional duties on $2.4 billion of French exports, would be justified by the White House under Section 301, which enables a response to foreign discriminatory trade practices. If this happens, US wine importers, distributors, retailers and upscale restaurants will be especially hard hit. US wineries also oppose tariffs on European wines because, while they would lose formidable competitors, they would also lose the distributors that both they and the Europeans depend on.

The tech giants not surprisingly support the US retaliatory tariffs. Despite the pain that would fall on some US businesses, there is a lot of sympathy in the US private sector and in Congress for doing something to punish France for the digital services tax and to warn the growing number of other countries that are planning or contemplating to impose a similar tax. The feeling is that France shaped its tax so it would just hit the US giants, leaving most French and European companies untouched. However, doing so through Section 301 without WTO involvement leaves the US vulnerable to charges that it is the one breaking trade rules.

In the background remains the possibility of the president slapping tariffs on European auto exports. Given the current weak performance of European and especially German manufacturing and exports, the threat of losing market share in the US vehicles market gets the Europeans’ attention.

US economy, manufactures, and WTO

Meanwhile, the US economy is growing moderately as consumer buying remains strong, the labor market robust, housing responding well to the interest-rate cuts and low unemployment, and the service sector thriving. Yet manufacturing is in a recession amid mounting corporate debt and declining business investment. While manufacturing’s ills haven’t spread to the consumer and services sector, they have hit logistics, reflected in lower trucking and railway activity. Meanwhile, the US trade deficit narrowed in November, due to falling imports and an improved petroleum trade balance.

The recession in US manufacturing is attributable to the uncertainty created by the president’s unpredictable trade policies, which make long-term investment in manufactures risky, both here and abroad. Additional uncertainty has been created by the US administration’s disruption of the World Trade Organization and the US move to bilateral agreements, which increases costs for small and medium US companies. By way of examples,

• The US-Japan Trade Agreement, which came into force on January 1 along with the US-Japan Digital Trade Agreement, appears to break WTO rules by including bilateral tariff cuts that aren’t subsumed within a comprehensive free trade agreement;
• The US-China “phase one” trade agreement that is now set to be signed in Washington on January 15 similarly appears to include a Chinese commitment to breach WTO nondiscrimination rules. To what extent will only become clear when the text is released after the signing, but Beijing is apparently balking at the managed trade coloration of the deal and says it won’t carve out specific parts of its commodities market for US suppliers;
• In the revised USMCA, the vehicle-quota side letters are another apparent blow to the WTO since it forbids “voluntary” export restraints; and
• The tariffs the US is preparing to impose on French exports in retaliation for France’s digital services tax on the US technology giants also break WTO rules for not having first received WTO approval.

The WTO is weakened when such provisions take effect even if no member steps forward to challenge them. But what is the most astonishing is that Congress has uttered nary a peep as the administration overthrows the entire post-WWII trading order based on GATT and its successor, the WTO. This has been justified on the dubious grounds that this trading order is responsible for present US ills rather than the domestic policy blunders that took place on Congress’ watch…or slumber.

L.C. reports on trade matters for business as well as Founders Broadsheet.