The noise level in Washington remains painfully high with frequent presidential Twitter storms attacking friends and foes. But on trade – where much action was expected – it has been rather calm. Yes, Canadian softwood lumber producers have been hit by preliminary tariffs – as has Bombardier recently. But these cases have been handled within the regular trade dispute framework, and free trade does not mean that disputes do not flare up. This is also why dispute resolution mechanisms play such an important role in both Brexit and Nafta negotiations.
But maybe this is the calm before the storm. President Trump does not have many core convictions, but trade – and that the US has been screwed by its trading partners – is one of them. The focus on bilateral trade deficits remains and US Trade Representative Lighthizer is likely to push for a more aggressive trade agenda now that he has settled in after a long confirmation process. Commerce Secretary Ross and Economic Advisor Cohn are more moderate and favor less-disruptive measures, but in the end the President may choose to make trade a battleground – especially if his domestic agenda stalls in Congress. Hence, if Republicans are not able to pass a tax reform the result could have global implications.
Significant presidential powers
It is underappreciated how much administrative power the President holds on trade issues. While the right to levy tariffs in general rests with Congress, the President has the power to undertake discretionary measures against companies, sectors or countries.
Since April, the Commerce Department has worked on framing steel and aluminum imports as a national security issue (using 232 in Trade Expansion Act of 1962), but has not published a report as inter-departmental fights broke out and focus moved to how partners would retaliate. Counting from April, the Commerce Department has 270 days to make a recommendation to the President. Section 232 is a potent tool and allows the Commerce Department to self-initiate trade investigations without complaints from interested parties. I expect more case-by-case investigations going forward.
In August, Lighthizer initiated an investigation of China under Section 301 of the Trade Act of 1974 to determine whether practices in the areas of technology transfer, intellectual property, and innovation were unreasonable or discriminatory. Trade relations with China have been tied to North Korea since President Trump and President Xi met in April, but as the trade deficit shows no signs of easing, targeted measures should be expected. South Korea has also been in the crosshair, but large sales of military equipment may placate the President.
Nafta is the elephant in the room
The biggest risk of disruptive trade measures comes from the ongoing Nafta negotiations. President Trump considered pulling out of Nafta – “worst trade deal in history” – in the spring, but chose to renegotiate instead. There is nothing new about US opposition to Nafta. In the 1992 presidential election, independent candidate Ross Perot opposed the deal, talking about the “giant sucking sound” of jobs moving to Mexico. His point was about the wage difference, which is also a contentious topic in the current negotiations.
The fourth of seven rounds of negotiations take place in DC 11-15 October, and while the statement after the third round noted progress, there are still significant differences of opinion. All issues are on the table, but US auto imports from Mexico has the President’s special attention. However, Mexico has become an important destination for US capital and exports (especially energy and agriculture), so the relationship is much more complicated than that.
The risk of failure should not be ignored. Not just because of President Trump’s statements during the election campaign, but also because of domestic politics in the US and Mexico. Mexico has presidential elections later in 2018 and making substantial concession on trade to the US is not an option in the current political environment. Trump is looking for wins to please his political base of free-trade opponents. As mentioned, tax reform – and maybe the border wall – could be factors in President Trump’s decision making.
Hence, there is a risk that the negotiators reach an agreement, but it stumbles on the political optics. I would pay special attention to not just the statement after the next negotiations, but also to how the three partners spin the situation.