Leverage Is Everything: Understanding the Trump Administration's Linkage between Trade Agreements and Unilateral Import Restrictions.

• Author: Cunningham, Richard O.

This paper offers an understanding of the Trump administration's (Administration) often-perplexing approach to international trade policy and, in particular, the Administration's repeated threats to withdraw from or renegotiate bilateral, regional and multilateral trade agreements. The central premise offered here is that all Administration trade actions including both its approach to trade agreements and its threats or use of unilateral import restrictions must be seen in terms of two fundamental goals. The first is to eliminate U.S. trade deficits with foreign countries (individually or collectively). The second is to restore the U.S. manufacturing sector by limiting imports and by bringing back to the U.S. manufacturing that had been moved to other countries. Renegotiation of trade agreements and imposition of import restrictions are closely integrated tactics used to accomplish these goals. Thus, neither should be seen as an end in itself, but rather as leverage toward achieving whatever specific goal the Administration seeks at the time. In one situation, import restrictions (or threat thereof) may serve as leverage in a trade agreement negotiation. In another situation, a trade negotiation may be conducted in a manner that provides leverage to obtain a limitation of imports. In analyzing this approach to trade, this paper addresses the following: A brief summary of the Trump Administration's trade policy and objectives; specific examples of the Administration's leverage-based strategy in action; and more detailed discussions of the Administration's leverage strategies in the three most important areas of U.S. trade today: US-China trade, the effort either to change or withdraw from the World Trade Organization, and the attempt to reshape the structure of North America by renegotiating or withdrawing from the North American Free Trade Agreement.

1. The Trade Objectives and Strategies of the Trump Administration II. The Use of "National Security" Import Restrictions as Leverage A. Canada and Mexico B. The European Union C. South Korea D. Turkey III. Section 301 Tariffs and the US-China Trade Conflict IV. U.S. Desire To Renegotiate the WTO Agreement V. NAFTA VI. Some Concluding Thoughts I. The Trade Objectives and Strategies of the Trump Administration

   Donald J. Trump was elected President of the United States, largely because of an angry feeling on the part of a substantial segment of the American electorate that the globalization of the U.S. economy has enriched sophisticated, cosmopolitan East and West Coast Americans while leaving them behind. (1) The Trump campaign relentlessly complained that "bad trade agreements" (2) have permitted rising volumes of imports and have facilitated the movement of U.S. manufacturing operations offshore--thus depriving U.S. workers of good jobs in the manufacturing sector. (3)

   It is important to note that this argument did not target, nor did it appeal to, a majority of Americans. Remember that Hillary Clinton received nearly three million more votes than Donald Trump. (4) But it struck a chord of resentment in a swath of industrial states that had historically voted Democratic or are "swing states:" Pennsylvania, West Virginia, Ohio, Michigan, Wisconsin--all of which swung for Trump and gave him victory in the electoral college. (5) This is the "base" that the President sees (correctly) as the key to continuation in power of his party, which is now the Trump Party more than a traditional Republican Party. (6) And he sees maintaining the allegiance of the base as being dependent on his Administration making good on the trade promises he made during the campaign.

   The Trump Administration therefore has little use for trade agreements or policies that enhance a rules-based trading system (7) or that facilitate the development or maintenance of efficient "value chains" which diversify the international sourcing of production inputs. (8) This view permeates almost every aspect of the Administration's thinking about trade-related issues. For example, the Administration is hostile to investor-state dispute settlement provisions in trade agreements (9)--not out of concern about the possible liability of governments, but based on the view that providing a remedy against unfair actions by host governments would make it safer for U.S. companies to establish production abroad. (10)

   Candidate Trump, in keeping with this view of trade, condemned the Trans-Pacific Partnership (TPP11) and President Trump withdrew from it. (12) For similar reasons, his Administration essentially discontinued negotiations with the European Union for a Transatlantic Trade & Investment Partnership (TTIP). (13) He condemned The WTO as hostile to American interests, and has recently threatened to "pull the United States out" if the WTO "does not shape up." (14) He also characterized the North American Free Trade Agreement (NAFTA) as "the worst trade deal ever," and the Korea-U.S. Free Trade Agreement (KORUS) as "a horrible deal," and pledged to either renegotiate or withdraw from them. (15)

   The Administration has also initiated a series of proceedings aimed at severely restricting imports of industrial products. (16) So-called "national security" investigations have been initiated under Section 232 of the Trade Expansion Act of 1962 (17) against imports of steel, aluminum, uranium and autos (including auto parts), and a further proceeding has been threatened against semiconductor imports. (18) In addition, a proceeding under Section 301 of the U.S. Trade Act of 1974 (19) against Chinese technology-related practices has resulted in tariffs on $50 billion of Chinese imports, with a specific threat of tariffs on an additional $200 billion of Chinese imports. (20)

   It is important to understand two reasons why the Trump Administration has turned to Sections 232 and 301 as the principal vehicles for limiting imports. First, unlike such traditional "trade remedy" laws as the antidumping and countervailing duty statutes (21), Sections 232 and 301 give the President essentially unlimited flexibility to devise whatever forms and levels of import restriction he deems appropriate. (22) Thus, these remedies can be adapted to achieve whatever form and degree of leverage the Administration deems necessary.

   Second, and perhaps more important, impositions of import restrictions under these laws are discretionary Presidential decisions that are not appealable to the U.S. courts. (23) Moreover, as to Section 232, it is this Administration's firm (but quite likely erroneous) view that a decision to restrict imports cannot be challenged in a WTO dispute settlement proceeding. (24)

   It would, in the opinion of this writer, be a mistake to view the use of these two statutes by the Trump Administration purely in terms of the stated purposes of those laws--namely the protection of U.S. national security (Section 232) and removal or amelioration of a foreign government's unjustifiable or unreasonable trade practices (Section 301). Rather, as the case-specific discussions in this paper will make clear, President Trump sees these proceedings as creating flexible threats of import restrictions that can be used as powerful leverage to put pressure on governments to make concessions in trade negotiations or to change trade (or other) policies in ways demanded by the United States.

   It is often observed that Donald Trump is a "transactional" president. (25) Nowhere is that more evident than in his approach to international trade. Issues are to be resolved and goals to be achieved by negotiating a "deal," (26) he is much less comfortable in negotiating about rules than he is about negotiating amounts and dollar values, as he has done in his long career in real estate. (27)

   In trade agreement negotiations, as well as in enforcement of U.S. trade laws, President Trump's strong inclination is to put primary emphasis on reducing imports into the U.S., rather than reducing or eliminating foreign barriers to U.S exports. (28) At bottom, his critique of U.S. trade agreements is that they have opened up U.S. markets to imports. (29) He quotes George Washington and Abraham Lincoln to the effect that it is important to protect U.S. industries from import competition. (30)

   Underlying President Trump's trade philosophy is a conviction that other countries have been "unfair" in trade. (31) In part, this represents such traditional trade concerns as subsidies, dumping, theft or forced transfer of U.S. firms' intellectual property, state control/guidance of producing enterprises and the like. (32) But his definition of "unfairness" also extends to low wage rates and even to foreign consumers' preference for German, Japanese or Korean automobiles over U.S. cars. (33)

   One is tempted to conclude that, except as to the Administration's efforts to force structural changes in China's "state capitalism" (discussed later in this paper), the allegations of "unfairness" are largely rhetorical and tactical. In most contexts, the U.S. is not seeking "fairness" for its own sake, but rather alleges "unfairness" as a justification for the threats of import restrictions that it uses as leverage to achieve the goals of eliminating bilateral trade deficits and bringing manufacturing--and jobs--back to the United States.

   Much of President Trump's approach to trade issues, and particularly to trade negotiations, is shared by his U.S. Trade Representative (USTR), Robert Lighthizer. For over a quarter century, Bob Lighthizer was the lead counsel in antidumping, countervailing duty, and safeguard cases brought by the American steel industry. (34) He shares the views that foreign governments and their exporters behave unfairly, that high tariffs are appropriate to respond to that unfairness and, most importantly for the discussion herein, that negotiations will not effectively address trade problems without the leverage provided by the threat that such high tariffs...