Category: Trade Policy

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Alicia Nicholls

Last night (February 5, 2019), United States (US) President, Donald J. Trump, delivered his second State of the Union (SOTU) address before a joint session of the US Congress. The President highlighted his administration’s progress on his campaign promises, including on immigration, trade, tax policy, infrastructure and national security. This article takes a brief look at the trade takeaways from the SOTU.

The Context

President Trump came to office with the promise, inter alia, of effecting a seismic shift in US trade policy. America, Trump argued, was being taken advantage of by other countries, while “unfair” trade deals were leading to the outsourcing of American jobs to the detriment of American workers and the American economy.

An underlying theme of President Trump’s SOTU address last night was that of “promises made, promises kept”. The President reminded viewers of his campaign promise “to defend American jobs and demand fair trade for American workers”, while highlighting the achievements made thus far.

Much of President Trump’s trade policy actions have been done through executive actions utilising legislation like the Trade Act which empower the President to take certain trade-related action, such as raising tariffs. Indeed, in just two years, the Trump presidency has heralded a decidedly mercantilist turn in US trade policy, marked by increased unilateral action (even against traditional US allies, such as Canada and the EU), the US’ withdrawal from the Trans-Pacific Partnership Agreement, the renegotiation of the tripartite North American Free Trade Agreement (NAFTA), more aggressive action against China, coupled with threats of withdrawal from the WTO and blockage of appointments/re-appointments of WTO Appellate Body members.

Main Trade Takeaways from SOTU

However, in his address, President Trump focused exclusively on trade policy achievements regarding increased enforcement of US trade laws and the renegotiation of NAFTA. Below are the takeaways:

US-China Trading Relations

China has been the principal target of President Trump’s trade policy actions, leading to an escalation in trade tensions between Washington and Beijing which, according to the major multilateral institutions, are already negatively impacting global trade flows and dampening the outlook for the global economy.

In 2018, the Trump administration imposed tariffs on $250 billion worth of Chinese goods, to which Beijing retaliated with tariffs on $110 billion worth of US goods. Although those parties threatened to impose further tariffs, they made a truce on the sidelines of the G20 Summit in December 2018 not to impose any further tariffs for a 90-day period while trade talks resumed between them. Since the start of the truce, two sets of face-to-face trade talks have been held between the two economic behemoths.

While President Trump proudly boasted that America is “now making it clear to China that after years of targeting our industries, and stealing our intellectual property, the theft of American jobs and wealth has come to an end”, he further noted that he and Chinese President Xi were working on a new trade deal. The President, however, reiterated that any US-China trade deal “must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs”.

From NAFTA to USMCA

In his SOTU address, President Trump noted that “to build on our incredible economic success, one priority is paramount – reversing decades of calamitous trade policies”. To this effect, one of the President’s major trade policy campaign promises was the renegotiation of NAFTA, an agreement which he derided as a “historic blunder” in his SOTU address.

This renegotiation was accomplished last year with the signing of a replacement agreement called the US-Mexico-Canada (USMCA) Agreement. Some of the major changes include the requirement that 75 percent (up from 62.5 percent under NAFTA) of an automobile’s contents needs to be made in North America for it to qualify for duty-free treatment, greater access to the Canadian dairy market for US farmers, an extension of the terms of copyright protection, stronger labour provisions, a sunset clause and provision for review of the Agreement every six years.

The USMCA was signed in November 2018, but is awaiting ratification by the three parties. However, some Democrats have raised issues with the Agreement. President Trump encouraged Congress to ratify the USMCA, in order to “bring back our manufacturing jobs in even greater numbers, expand American agriculture, protect intellectual property, and ensure that more cars are proudly stamped with our four beautiful words: “Made in the USA.”

United States Reciprocal Trade Bill

President Trump also made a strong appeal to Congress to pass the United States Reciprocal Trade Bill (HR 764), “so that if another country places an unfair tariff on an American product, we can charge them the exact same tariff on the same product that they sell to us”.

The US Reciprocal Trade Bill, was introduced in the House on January 24, 2019, by Republican representative from Wisconsin’s 7^th District, Sean Duffy (R-WI), who is currently the ranking Member of the Financial Services Subcommittee on Housing & Insurance.

Inter alia, the Bill provides that if the President determines that the rate of duty or non-tariff barriers imposed by a foreign country on a particular US good is “significantly higher ” than the rate of duty or non-tariff barriers imposed by the US on that same good imported from that country, the President is empowered to take several actions, including imposing a rate of duty on imports of that good that is equal to that imposed by that country.

The Bill currently has 19 co-sponsors. According to Representative Duffy’s press release, the proposed legislation would give the President “more flexibility in responding to foreign tariffs on U.S. products” and “the tools necessary to pressure other nations to lower their tariffs and stop taking advantage of America”.

If passed, the Bill will, however, likely be challenged by affected countries through the WTO’s dispute settlement system. However, it should be noted that its successful passage by Congress is not guaranteed. Firstly, the Democrats are the majority in the House of Representatives since January 2019, some of whom have openly criticised Trump’s protectionist trade policies. Secondly, and more importantly, some members of Congress, including some Republicans, are already proposing bi-partisan legislation to limit the President’s authority to unilaterally impose trade restrictions for national security purposes.

In the House, for example, Representative Mike Gallagher (R-Wi-8) introduced H.R.940 to amend the Trade Expansion Act of 1962 to impose limitations on the authority of the President to adjust imports that are determined to threaten to impair national security, and for other purposes. Meanwhile, in the Senate, for example, Senator Mike Lee (R-UT)  introduced the Global Trade Accountability Act (S 177), which would amend the Trade Act of 1974 to require congressional approval of unilateral trade action. The House version (HR 723) was introduced by Representative Warren Davidson (R-OH-8).

However, the passage of any of these proposed bills limiting the President’s trade policy powers are not a sure bet either. Even if passed by both Congressional chambers, the bill would almost certainly be vetoed by the President, and would require a two-thirds majority in each house to override a presidential veto, which is not an easy feat.

The big takeaway

The big takeaway is that President Trump is convinced that his mercantilist trade policy is delivering for the American people, a fact he evidences by the increase in jobs and economic growth. Indeed, a fact sheet  was released by the White House on the same day highlighting the President’s trade policy achievements.

However, his trade policies have come at the cost of increased trade tensions, alienating traditional US allies and creating an impending crisis in the WTO’s Appellate Body whose membership is now down to three – the minimum number of members required to hear an appeal.

Several WTO members have already initiated complaints against certain of President Trump’s trade measures, and/or have raised issues during the US’ most recent Trade Policy Review (TPR).

However, barring some Congressional limit on Presidential trade policy powers, the current trade policy approach is likely to continue for the remainder of the Trump Presidency.

The full transcript of the President’s SOTU Address may be viewed here.

Alicia Nicholls, B.Sc., M.Sc., LL.B., is an international trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.