A Surge In Populism: Dangers To Transnational Trade In The Americas And Reasons For Hope

by Sheppard Mullin Richter & Hampton LLP

The ongoing presidential election in the United States has underscored a move against free trade by both of the main political parties.  This article briefly summarizes some of the proven benefits of free trade and juxtaposes these with the stated positions of the Democratic and Republican parties in the pending presidential election.  The article also examines, and disposes of, several of the key criticisms of the legal framework underpinning further trade integration.  The article ends hopefully—historically, U.S. Presidents have abandoned anti-trade campaign rhetoric once in the Oval Office.

During the last 30 years, Latin America and the United States have worked together to further integrate their economies by entering into bilateral and multilateral trade agreements.  The trend began with multilateral trade agreements, such as the North American Free Trade Agreement (“NAFTA”) between the U.S., Canada, and Mexico.  The U.S. has also entered into bilateral trade agreements with Latin American countries such as Chile, Colombia, and Peru.  Although the details of these agreements differ, they all share in common the goal of reducing and/or eliminating import tariffs and quotas which inhibit international trade.  The general consensus among economists is that the U.S.’s free trade agreements with Latin America have served to increase exports to Latin America, increased foreign direct investment in the Latin countries, and have resulted in a net increase in employment in the U.S.

Despite the benefits of free trade, future progress is not a given.  Opposition to NAFTA in its entirety—and to trade agreements in general—has become more vocal recently, with mounting calls for suspension or renegotiation of NAFTA and other trade agreements.

The Democratic party has long been considered more skeptical of the benefits of free trade, largely as a result of its reliance on the support of organized labor.  Nevertheless, until recently, the Democratic party has governed in a pro-trade manner.  Bill Clinton came out against NAFTA during his presidential campaign, only to then sign NAFTA into law.

The current trade item on the political agenda is the Trans-Pacific Partnership (“TPP”).  The TPP is a trade deal that the Obama administration negotiated with 11 other countries that border the Pacific: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.  Notably absent from this list is China.  If ratified, the TPP would set common rules in these countries for labor, the environment, and intellectual property.  The deal would also reduce the tariffs on imported goods.  Hillary Clinton, the Democratic party nominee for President, supported the TPP while she served as Secretary of State under President Obama.  On the campaign trail, however, Mrs. Clinton now argues against the TPP.  Mrs. Clinton claims the TPP does not meet her standards of creating more, new good jobs in the United States and of raising wages for U.S. workers.  However, President Obama and Tim Kaine (Mrs. Clinton’s running mate) both support the TPP.  On balance, given the split in the Democratic party regarding the TPP and prior historical examples, there is a very good chance that Mrs. Clinton’s approach to TPP will evolve should she become the next President.  Related legislation offering trade assistance and strict enforcement of TPP’s standards could, for example, be used to address the concerns she has expressed and enable her to support TPP without contradicting her current position.

Until quite recently, the Republic party platform was uniformly in favor of free trade.  At the 2012 Republican Convention, the party’s platform expressly made the case for trade:

International trade is crucial for our economy.  It means more American jobs, higher wages, & a better standard of living.  The Free Trade Agreements negotiated with friendly democracies facilitated the creation of nearly ten million jobs supported by our exports.

In fact, the 2012 Republican platform expressly called for a Republican President who could quickly negotiate and enter into the TPP.  Republicans have also typically argued for, and continue to argue for, a reduction in regulation which would arguably make the United States more competitive internationally.

Donald Trump, the Republican party nominee for President, has disavowed his party’s position on free trade.  Mr. Trump has characterized NAFTA as the “worst trade deal in history.”  Similarly, Mr. Trump has called the TPP “an attack on America’s business.”  Despite the rhetoric, however, there is cause for hope.  Mr. Trump’s running mate, Mike Pence, has an unblemished record of supporting free trade with Latin America.  Mr. Pence supported the Central American Free Trade Agreement between the United States and Central America.  In addition, Mr. Pence supported bilateral trade agreements between the U.S. on one hand, and Peru and Chile, on the other.  The Republican party’s historical support for trade and Mr. Trump’s selection of Mr. Pence as his running mate both indicate that Mr. Trump may soften on free trade should he be elected President of the United States.

Beside the candidates’ populist rhetoric, there are also other more substantive critiques of the legal regime created by the TPP.  For instance, a significant amount of the opposition to the TPP has focused on the alleged lack of enforceable provisions against currency manipulation.  U.S. auto manufacturers, for example, have accused Japan of manipulating its currency to maintain the competitive position of its automobiles, which they claim would enable Japan to use the TPP unfairly to increase U.S. market access for its automobiles.  U.S. tariffs on Japanese automobiles, however, are already very low – 2.5% – raising a serious question whether eliminating this remaining tariff would make any material difference in the U.S. demand for Japanese automobiles.  Moreover, Japan currently imposes no duties on U.S. vehicles.  U.S. industry complains that Japan maintains a thicket of other regulations that effectively block significant imports of U.S. cars.  The U.S. Trade Representative maintains that the TPP will remove these non-tariff barriers and has reportedly negotiated a robust series of commitments by Japan to reduce those regulatory barriers for U.S. auto imports into Japan.

A different complaint is that the TPP will become a vehicle for goods with substantial Chinese content to enter the U.S. duty free.  The theory here is that the Rules of Origin in the TPP are complex and for some products would allow significant parts to be imported into a TPP country from countries that are not in the TPP (such as China or Thailand), and used in final assembly of a product that would be TPP qualified, even though a large percentage of the content could be from outside the TPP countries.  This issue, however, works both ways.  It would allow U.S. producers (and their Mexican factories) to use the same Rules of Origin to export products to TPP countries with significant Chinese, Thai or other non-TPP content.  Thus, equipment manufacturers in non-TPP countries may benefit from the Rules of Origin terms in the TPP.

Both political parties have adopted rhetoric that decries free trade.  Actually implementing an anti-trade agenda, however, would be a mistake.  Protectionism hurts America’s status as a preferred trading partner and proponent of global growth.  As noted above, the arguments against trade fail when the benefits of fair and free trade are considered.  Withdrawing from the international trading system would allow the European Union and fast-growing Asian countries to take the lead in trade negotiations, which would put U.S. goods and services at a competitive disadvantage.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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