TRUMP ADMINISTRATION AND POTENTIAL EFFECTS ON INTERNATIONAL TRADE

President-Elect Trump has complained repeatedly about the unfair advantage enjoyed by nearly all of America’s trading partners. But will he see his policies through and what impact could they have.

A Tax on Imports?

Yes, this is under serious consideration.  President-Elect Trump has complained repeatedly about the unfair advantage enjoyed by nearly all of America’s trading partners, almost all of whom employ consumption-based value-added taxes (VAT) as a revenue source.  The “unfair” advantage results from zero-rating exports and fully taxing imports.  Because the US derives revenues primarily from income taxes, WTO rules make it difficult to implement a similar “border adjustment”

House Republican leaders endorsed a sweeping overhaul of the corporate tax system in their “blueprint for tax reform”, announced in late June, 2016.

Rep. Kevin Brady

Rep. Kevin Brady

A central idea in this “blueprint” is that goods would be taxed based on where they were consumed rather than where they were produced, meaning that imports would be taxed while exports would not. Tax experts call this a “destination-based consumption tax.”   The leading proponent of this is Representative Kevin Brady, a conservative Texas Republican and chairman of the powerful House Ways and Means Committee, who introduced the corporate tax overhaul proposals.

These proposals are based on a paper written in 2010 by Prof. Alan Auerbach for the liberal Center for American Progress and the Hamilton Project, a middle-of-the-road research group within the Brookings Institution.  Mr. Auerbach took ideas to overhaul corporate taxes advanced by President Obama and his team and argued they did not go far enough.  Although the National Retail Federation, among others, oppose the idea, the National Association of Manufacturers is, in principle at least, in favor of the changes. Prof Auerbach has since updated his plan in a paper published in November, 2016 entitled “The Role of Border Adjustments in International Taxation

Can the Trump Administration Impose New Tariffs?

The short answer is “probably.”  As with other trade issues, one key consideration is the extent of presidential authority to act unilaterally. Congress is constitutionally charged with imposing tariffs, although Congress has delegated some authority to the President to take trade-related action if he makes a specified threshold determination before taking a trade-related action. President-Elect Trump may argue that these existing laws give him sufficient authority to impose tariffs by executive action without seeking new legislation.  This argument has some historical precedent and is not without some legal merit.

On 15 August 1971, President Richard Nixon closed the gold window and imposed a 10% surcharge on all dutiable imports in an effort to force other countries to revalue their currencies against the dollar. The import surcharge was lifted four months later after an agreement led to new exchange rate parities.  Before the US Court of Customs and Patent Appeals ruled (526 F.2d 560) on the legal appeals that followed, Congress gave the President the explicit authority to impose an import surcharge in the future. Section 122 of the Trade Act of 1974 grants the president broad authority to impose duties (not to exceed 15 percent) or quantitative restrictions, or a combination of the two, for a period of up to 150 days, after which Congressional authorization would be needed. The surcharge must be applied on a non- discriminatory basis, although the president has the authority to impose it on just one or two large countries with which the United States had large and persistent trade deficits.

Wilbur L. Ross, Commerce Secretary

Wilbur L. Ross, Commerce Secretary

Section 201 of the Trade Act of 1974 permits the President to grant temporary import relief, by raising import duties or imposing nontariff barriers on goods entering the United States that injure or threaten to injure domestic industries producing like goods. This provision is the analog of GATT Article XIX, which allows GATT contracting parties to provide relief from injurious competition when temporary protection will enable the domestic industry to adjust to competitive pressures.

Section 301 authorizes the President to take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement or is unjustified, unreasonable, or discriminatory, and that burdens or restricts U.S. commerce. The law does not require that the U.S. government wait until it receives authorization from the World Trade Organization (WTO) to take enforcement actions.

There are additional tools at the President’s disposal, including antidumping and countervailing duties, the Tariff Act of 1930 §338(a); and, the Trade Expansion Act of 1962 §232(b)–(c).

Will the Trans-Pacific Partnership (“TPP”) and the Transatlantic Trade and Investment Partnership (“T-TIP”) Survive?

It does not appear that either agreement will survive.  After President Elect-Trump’s stated intention to withdraw from the Trans-Pacific Partnership (“TPP”) agreement on his first day in office, this agreement and, by implication, the Transatlantic Trade and Investment Partnership (TTIP) agreement with the EU are effectively dead, unless traditionally free-trade Republicans can convince the incoming administration that enforcement will be more effective than exiting regional trade deals. Trump has vowed to pursue bilateral agreements instead of multilateral ones like the TPP, which he continues to call a “disaster.” Without the United States anchoring the TPP, the TPP cannot enter into force.[1]  US withdrawal from the TPP provides new impetus to negotiations on the Regional Comprehensive Economic Partnership (RCEP). The RCEP would comprise Japan, China, India and 11 other Asian countries, plus Australia and New Zealand, and has been under negotiation since 2013.  Should the RCEP enter into force, the US will forfeit the opportunity to rewrite modern trade rules and must follow the rules defined by China, India, et. al.

What is the Status of the North American Free Trade Agreement (“NAFTA”)?

The status of NAFTA is still to be determined.  President-elect Trump has also expressed hostility towards NAFTA, and has indicated that he intends to renegotiate the deal with Canada and Mexico. There is no legal prohibition against any efforts to renegotiate NAFTA, in its entirety or parts of it.

Under H.R. 3450, the North American Free Trade Agreement Implementation Act, Pub. L. No. 103-182 (the “Implementation Act”), the President is not required to obtain Congressional authorization to withdraw the U.S. from NAFTA. As the President-elect has pointed out, NAFTA contains a “withdrawal” provision under Article 2205 which simply says: “A Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.”

Doing so raises new questions of U.S. constitutional law regarding presidential authority to exit treaties.  The Constitution covers treaties – not agreements – and NAFTA is not technically a treaty.  Within the framework of U.S. law, NAFTA is a “Congressional-Executive Agreement” (CEA).  However, if Congressional approval is required, Congressional pro-trade factions may be able to prevent a NAFTA exit.