Tag: NAFTA

Knowing Your NAFTA Dispute Chapters: 11 vs. 19 vs. 20

There is likely to be confusion over many issues in the upcoming NAFTA renegotiation, but one particular area where I already see some misunderstandings is the NAFTA dispute process. To illustrate this, here’s a recent statement by Canadian Prime Minister Justin Trudeau:

as our ambassador said just last week to the Americans, a fair dispute resolution system is essential for any trade deal that Canada signs on to and we expect that to continue to be the case in any renegotiated NAFTA.

In context, it is clear he was talking about a particular type of NAFTA dispute, rather than the more general proposition that there must be a dispute system in place.  But there are actually several dispute provisions in NAFTA, and I’ve seen a number of people get them mixed up.  As a result, I thought it was worth explaining the key distinctions in a blog post, which I can then link to whenever the issue comes up in the future.

There are three main types of NAFTA disputes, set out in separate chapters: Chapter 11 (litigation over the treatment of foreign investment), Chapter 19 (appeals of anti-dumping/countervailing duty decisions), and Chapter 20 (government complaints about compliance with NAFTA obligations).

Chapter 11 is part of the investor state dispute settlement (ISDS) debate. Under Chapter 11, a foreign investor of one NAFTA party can sue the government of another party (e.g., a Canadian company who has invested in the U.S. can sue the U.S. government) on the basis that it has been treated worse than its American competitors, or that it has been treated badly in general (e.g., it did not receive treatment that was “fair and equitable”). I have questioned the value of such procedures, but they are strongly supported by business groups. As far as I know, the Canadian and Mexican governments favor their inclusion in NAFTA, and the Trump administration’s NAFTA negotiating objectives seem to envision including them (although I can imagine some members of the Trump administration who worry about sovereignty will be pushing to take them out).

Next up is Chapter 19, which sets out a special appeals process related to the imposition of anti-dumping and countervailing duties. This is the dispute procedure Trudeau had in mind. Anti-dumping and countervailing duties are imposed on the basis of decisions by domestic agencies (in the U.S., it is the Department of Commerce and the International Trade Commission), and the decisions of these agencies can be appealed to domestic courts (in the U.S., appeals go to the Court of International Trade, then the Court of Appeals for the Federal Circuit, and then the Supreme Court). NAFTA Chapter 19, however, sets up a special appeals process which allows Canadian and Mexican respondents in U.S. proceedings to appeal the agency decision to an ad hoc NAFTA panel (i.e., private lawyers who act as judges in a particular case) instead of to domestic courts.  (The process is also available in relation to Mexican and Canadian anti-dumping and countervailing duty cases, taking appeals out of their domestic courts).  When reviewing U.S. agency decisions, a NAFTA Chapter 19 panel acts like the Court of International Trade, in the sense of reviewing the agency’s interpretation and application of U.S. law, and remanding to the agency if necessary. Unlike the Court of International Trade, NAFTA Chapter 19 panel rulings cannot be appealed.

It’s not clear to me that this process is constitutional (a law review article discussing the predecessor provision in the Canada-U.S. FTA is here), and I’m not sure at this point how different the results are as between U.S. courts and the NAFTA process (this is something I plan to look into further). The Canadians insist they want to keep Chapter 19, while the Trump administration says it wants to take it out, which means this could be a major hurdle in the negotiations.

Finally, there is NAFTA Chapter 20. This is the core state-to-state NAFTA dispute process, where one government can allege that another is not complying with its obligations. Chapter 20 has not worked that well in practice, in part due to problems with getting panelists in place. I am working on an article that proposes some fixes.

My hope is that these basic explanations can cut through some of the confusion. All of these provisions set out NAFTA dispute procedures, but the policy implications and the politics of each are very different.

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Carrier Revisited

President-elect Donald Trump has claimed victory in his effort to preserve employment for Carrier workers in Indiana.  Assisted by $7 million in tax incentives provided by the State of Indiana, Mr. Trump persuaded the company not to move 800 furnace manufacturing jobs to Monterrey, Mexico.  This works out to a taxpayer-funded subsidy of $8750 per job. 

Another 1300 Carrier jobs still will move to Mexico between now and 2019.  Published reports have indicated that the company anticipated cost savings of some $65 million per year from moving all 2100 positions to Monterrey.  So Carrier is taking at least a partial step toward maintaining its global competiveness, while at least partially appeasing the incoming president.

I wrote an op-ed in Forbes on August 22, 2016, in which I argued that Carrier no doubt had quite good business reasons for planning the move to Mexico.  Carrier’s February 2016 announcement of the decision said that it was due to “ongoing cost and pricing pressures driven, in part, by new regulatory requirements.”  

Carrier has been manufacturing products in Monterrey for some years.  The company certainly has a clear understanding of why moving production of some air conditioning units makes business sense.  It would not be wise for them to explain their reasoning in public because such proprietary knowledge would be of great interest to their competitors. 

Some commentators have opined that the decision was driven largely by lower labor costs.  Carrier’s expenses for employee salary and benefits average about $34 per hour in Indiana, while those costs in Mexico are only around $6 per hour.  It’s possible the move was prompted primarily by labor cost savings, although my analysis of data compiled by The Conference Board suggests otherwise.  The value generated by an hour worked in the United States has risen by 40 percent over the past 22 years of NAFTA.  In Mexico, the gain has been only 10.5 percent.  Productivity has grown faster in the United States, so the incentive to shift production to Mexico today ought to be weaker than it was 10 or 20 years ago.  (Note:  Those figures apply to the productivity of all workers.  If it was possible to analyze just the manufacturing sector, perhaps the findings would change.)

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Tilting at Sawmills: Extortion and Lawlessness Prominent in U.S. Approach to Canadian Lumber

Donald Trump has called the North American Free Trade Agreement the “worst trade deal ever negotiated.” If he were speaking on behalf of Canadian exporters or American consumers of softwood lumber, his point would have some validity. For more than 20 years, NAFTA has failed to deliver free trade in lumber. Instead, a system of managed trade has persisted at the behest of rent-seeking U.S. producers, egged on by Washington lawyers and lobbyists who know a gravy train when they see one.

Those who consider the United States a beacon of free trade in a swirling sea of protectionist scofflaws will be surprised by the sordid details of the decades-long lumber dispute between the United States and Canada. Among those details is the story of how the U.S. Commerce Department (DOC) ran roughshod over the rule of law to manufacture the leverage needed to extort from Canadian lumber mills a sum of $1 billion, which was used to line the pockets of American mills and the U.S. Forestry Service, while restricting lumber imports for nearly a decade through October 2015, at great expense to retailers, builders, and home buyers.

With that ugly history mostly expunged from the public’s memory, the U.S. lumber industry is back at the trough again, demanding its government intervene to restrict Canadian supply, following a whole 13 month period during which it was forced out of the nest to operate in an environment rife with real market conditions! In the quiet shadows of the Friday after Thanksgiving, U.S. softwood lumber producers filed new antidumping and countervailing duty petitions with the DOC and U.S. International Trade Commission (ITC), alleging that dumped and subsidized Canadian imports were causing material injury to the domestic industry.

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Ambiguities in U.S. Trade Laws Imperil Our Economy and Constitutional Order

In yesterday’s Investor’s Business Daily, Club for Growth President David McIntosh and I had a short piece on the perilous implications of President-elect Trump’s threats to unilaterally withdraw the United States from our trade agreements or impose punitive and wide-ranging tariffs on imports. The economic effects of Trump’s promises have been explored at length (see, e.g., this new one on NAFTA and Texas), but most trade law experts are just now digesting the legal issues. What we’re finding is, to use the technical term, a big mess that could have unforeseen economic and constitutional implications in the Age of Trump. As we note:

For almost a century, American trade policy has been formed and implemented by a successful “gentlemen’s agreement” between Congress and the president. Congress delegated to the president some of its Article I, Section 8 powers to “regulate Commerce with foreign nations” so that the president may efficiently execute our domestic trade laws. The president negotiates and signs FTAs with foreign countries, while Congress retains the ultimate constitutional authority over international trade, for example by approving or rejecting agreements or by amending US trade laws.

As a result of this compromise, the United States has entered into 14 Free Trade Agreements with 20 different countries and imposed targeted unilateral trade relief measures — all without significant conflict between Congress and the President.

The question now is whether Mr. Trump, as president, could and should single-handedly implement his trade agenda on Jan. 20, 2017 without any congressional action.

The IBD op-ed scratches the surface of these legal issues, but below are more details on just a few of the many ambiguities lurking in U.S. trade law—ambiguities that, if not properly clarified, could be exploited by a protectionist U.S. president against the original intent of the Congress that delegated their constitutional authority over trade policy under the (incorrect!) assumption that the president would always be the U.S. government’s biggest proponent of free trade.

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Reality Will Curb Trump’s Protectionist Fantasies

I said there was no way Trump would last through the early primaries.  I belittled the prospect of Trump even attending the convention, much less accepting the Republican nomination.  And I was cavalier in my certainty that Trump would be making a concession speech early Tuesday night.  In other words, by Washington’s standards, I have established credibility on the subject. 

So you should feel reassured that I am less bearish about the direction of President Trump’s trade policy than I probably should be given candidate Trump’s bellicose campaign rhetoric.

The trade policies Trump outlined in broad strokes on the campaign trail would – to put it mildly – devastate the economy.  For example, Trump has said he would:

  • impose duties on 35 percent on imports from Mexico and 45 percent on imports from China;
  • impose special taxes on U.S. companies that incorporate foreign components or labor into their production or assembly operations;
  • tear up the North American Free Trade Agreement – or at least renegotiate what he calls “the worst trade deal ever negotiated,” and abandon the Trans-Pacific Partnership, which he calls a “rape of our country”; 
  • declare China a currency manipulator and impose countervailing duties to mitigate the export price advantages that practice allegedly bestows;
  • use tax policy, protectionism, and the threat of more protectionism to compel China, Mexico, and all of the other countries with whom the United States runs bilateral trade deficits to buy more from U.S. producers and sell less to U.S. consumers in order to achieve a state of balanced trade;
  • tax manufacturing companies that lay off workers.

The list of angry, knee-jerk, foolish ideas goes on and on. If you take candidate Trump at his word, U.S. trade policy is going to be an unmitigated disaster.

100 Days of Trump Trade Policy

Donald Trump is well known for his vociferous complaints about foreign trade.  Trump has also gained notoriety for offering very vague policy proposals, and trade is no exception.  This has left observers knowing that Trump wants to do something big on trade but without much sense of what, specifically, that will be.  Now that Trump is president-elect of the United States, that uncertainty is bound to vanish as Trump’s plans and intentions necessarily become more concrete.

For the moment, however, we are left to speculate based on Trump’s vague and bellicose announcements.  The most reliable indicator of Trump’s plans is probably Trump’s “100-day action plan to Make America Great Again” he produced in the closing weeks of his campaign.  That plan has reportedly been fleshed out a bit by his transition team.  The plan includes numerous executive actions and a list of legislative proposals. 

In one section, Trump lists “Seven actions to protect American workers,” four of which directly involve trade.  Let’s go through them one by one.

Renegotiate of Withdraw from NAFTA

It’s no secret Donald Trump really doesn’t like NAFTA.  He has said that NAFTA “destroyed our country.”  It’s safe to assume Trump means to act on this.  According to Politico, the longer version of Trump’s 100-day plan specifies that Trump will start renegotiating NAFTA on day one and withdraw from NAFTA “by day 200” if he hasn’t gotten what he wants yet.

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Have Trade Agreements Killed the Manufacturing Sector?

An interesting 80-second video by Johan Norberg, executive director of Free To Choose Media and senior fellow at the Cato Institute, makes the case that trade agreements have not led to the deindustrialization of America.  He notes that the share of U.S. workers employed in manufacturing has been falling at an average of 0.4 percent per year from 2000 to 2010, but it also fell at that same rate between 1960 and 2000.  Thus, NAFTA and other trade agreements don’t seem to have had a great deal of influence on the gradual evolution of the economy away from employment in manufacturing and toward employment in services.

If he had more time, Norberg also might have pointed out that the U.S. manufacturing sector has never been larger.  Value added by the U.S. factories reached an all-time high of $2.4 trillion in 2015.  Manufacturing accounts for about 13 percent of GDP.

Yes, it’s true – fewer people work in manufacturing today than in the past.  Peak U.S. manufacturing employment was 19.4 million workers in 1979, but has generally trended downward since then.  Today only around 12 million people work for manufacturers, a decline of roughly one third over the past 35 years.  Productivity has risen so much that many fewer workers now produce many more manufactured products.

A recent study by the Center for Business and Economic Research at Ball State University found that trade has had some effect on manufacturing employment.  Researchers estimate that approximately 13 percent of manufacturing job losses have been due to trade.  But the dominant factor has been productivity growth, which accounted for 85 percent of the employment decline.  (Robots and computers ate the jobs.)  So imports bear a relatively small degree of responsibility for the reduction in manufacturing employment, but take a large share of the blame from politicians.

There are a lot of good things that can be said about U.S. manufacturing.  Workers are better educated, better paid, use more sophisticated equipment, and produce more high-value goods.  Our country may produce fewer shirts and tennis shoes than before, but we produce more valuable items such as airplanes, motor vehicles, and industrial equipment.  So even though there is an abundance of good news for manufacturers, don’t expect to hear much about it in this particularly anti-trade political season.

(A more detailed review of the economic effects of trade agreements can be found in this study by the U.S. International Trade Commission.)

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