During the recent campaign and the transition, President-elect Donald Trump generally has advocated a more aggressive U.S. international trade and economic policy as part of his plan to generate economic growth and retain and return U.S. manufacturing. This week he also expressed an unusual willingness to directly engage with, and potentially take adverse actions against, U.S. firms planning to move their operations offshore.
The possible measures he has outlined include, among others:
(a) the potential withdrawal from trade agreements such as the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP);
(b) the negotiation of fairer bilateral trade agreements with foreign countries;
(c) a possible retreat from President Obama’s lifting of economic sanctions on Cuba;
(d) the imposition of high tariffs and other trade remedies against countries that allegedly engage in unfair trade practices such as China; and
(e) potential actions against U.S. firms that seek to move manufacturing plants offshore, including the possible imposition of border taxes on their imported products; and
While not explicitly mentioned during the campaign, it also is possible that the Trump Administration could take a different approach toward foreign investment from China or other countries that restrict U.S. investment opportunities.
As discussed below, U.S. law and regulations generally afford the President broad discretion to take most of these types of robust actions, subject to required procedures and, in some cases, legal limitations. At the same time, however, President Trump also can utilize the prospect rather than the actuality of tougher actions – withdrawal from trade agreements, high tariffs, “tweets” of disapproval over corporate moves offshore, or the imposition of sanctions – as a tool to achieve negotiated solutions rather than rely on blunt legal instruments that can trigger retaliatory actions and resulting costs for American workers, businesses and consumers.
While time will tell how the new Administration will proceed, the new team is already signaling that this type of deal-making approach may be used – i.e., that the prospect of selective 35% tariffs, for example, are more likely to be used as negotiating sticks if other countries or firms considering moving offshore are unwilling to bargain.
U.S. manufacturing and services firms, therefore, should carefully consider the potential effects of a more aggressive U.S. trade policy on their business operations at home and abroad, develop contingency plans as appropriate, and identify issues they would like to see addressed in any negotiations. Some of these U.S. government actions can be taken with little prior notice and could impact global supply chains, actual and potential offshore manufacturing operations, the right to provide services abroad and bid on government contracts, as well as other aspects of a company’s business operations.
I. North American Free Trade Agreement
A signature element of President-elect Trump’s campaign is his promise to renegotiate, or failing that, withdraw from NAFTA, which he called the “worst trade agreement in history.” Generally, the President has the authority to take these actions.
On the one hand, the President certainly can seek to negotiate amendments to NAFTA with Canada and Mexico if they are so willing, and submit a revised agreement to Congress for approval under so-called fast track (trade promotion) authority to facilitate an “up or down” vote on a revised agreement. Current fast track authority only pertains to agreements negotiated by June 1, 2018, but this authority can be extended by Congress at the President’s request.
On the other hand, should negotiations not succeed, NAFTA’s Article 2205 allows a party to withdraw six months after written notice to the other parties. Under applicable U.S. law, the President then would have the authority to proclaim increased duties on Mexican or Canadian imports subject to other trade agreements to which the United States and Mexico are parties. Since both countries are members of the World Trade Organization (WTO) and, therefore, are subject to its most favored nation treatment, the United States would likely be limited to imposing WTO-level duties.
But other legal interpretations may be possible, and the matter is not entirely free from doubt. While there is a legal provision calling for a public hearing before the imposition of such duties, the President also has the authority to postpone such a hearing until after duties are imposed if he or she determines it to be in the public interest.
Not only tariff levels would be affected by a NAFTA withdrawal. For example, NAFTA’s special rules of origin would no longer apply in determining which products are subject to tariffs. Rather, the normal rules of origin under the WTO, or, in their absence, under U.S. law would apply. Also, U.S. firms potentially could be denied participation in Mexico’s or Canada’s procurement system.
Accordingly, U.S. firms that have globalized supply chains or have manufacturing facilities in Mexico or Canada, which derived benefits from NAFTA, could potentially be adversely affected.
II. TPP and Bilateral Trade Agreements
Since the election, President-elect Trump has made it clear that on “day one” of his Presidency he will give notice of the U.S. withdrawal from the Trans-Pacific Partnership with 12 Asian rim countries (which has yet to be approved by Congress) and will instead “negotiate fair, bilateral trade deals that bring jobs and industry back to American shores.”
Certainly, a Trump Administration can negotiate bilateral agreements that include various types of preferential treatment between the signatories. The United States has negotiated a number of bilateral agreements in the past with key trading partners, including free trade agreements where the parties eliminate substantially all trade restrictions. Such bilateral agreements with built in preferences do, however, raise tensions with the most-favored-nation (MFN) provisions of the WTO, which generally require parties to offer the benefits of such concessions (e.g., lower tariffs) to third parties that are WTO members unless the agreement qualifies for a WTO exemption (e.g., such as a free trade agreement).
But the broad use of bilateral agreements that establish tariff and other preferences where WTO disciplines do exist, in addition to proving time-intensive, would raise serious questions about the future of the international trading system.
III. Cuba Sanctions
In recent years, the Obama Administration has partially lifted the U.S. Cuban Sanctions, issuing licenses and guidance that authorized specific types of travel, travel-related, trade and banking transactions. In numerous cases, U.S. and foreign firms have adjusted their business operations to take advantage of these liberalized rules.
With the death of Fidel Castro, however, there is a renewed focus on the new Administration’s relationship with Cuba and in particular whether the Obama Administration’s partial lifting of sanctions will be reversed.
Simply put, under the International Economic Emergency Powers Act, President Trump will have the authority to issue a new Executive Order that would re-impose such sanctions without prior notice; under the law, such an action generally would not be judicially reviewable. The re-imposition of sanctions also could be accomplished immediately, without an opportunity for notice and comment. While one assumes that a company’s actions prior to a new Executive Order would be grandfathered and, therefore, not subject to penalty, how this is handled and what transition rules would be implemented remain to be seen.
The President-elect threatened to re-impose full Cuba sanctions late in the campaign after taking a more flexible position earlier. Since Castro’s death, President-elect Trump has posted on Twitter earlier this week his view that “[i]f Cuba is unwilling to make a better deal for the Cuban people, the Cuban-American people and the U.S. as a whole, I will terminate [the] deal.” Earlier, he had suggested during the campaign that he would reverse the lifting of sanctions unless Cuba agreed to “religious and political freedom for the Cuban people, and the freeing of political prisoners.”
Whether Cuba and the United States would be able to reach an understanding that would enhance democratization in Cuba is an open question. Some members of Congress and supporters of the President undoubtedly will press for internal Cuban reforms that are unlikely to be forthcoming, while the business community is likely to advocate a continuation of the current approach.
In all events, at least some period of bilateral discussions are expected prior to any U.S. action on the existing sanctions. Nevertheless, U.S. firms in the travel, tourism and banking sectors, which may have changed their business operations in light of the recent partial lifting of sanctions, should develop appropriate contingency plans in case stronger sanctions are re-imposed.
IV. Self-Initiated Trade Remedy Proceedings for Steel and Other Industries
To more aggressively pursue unfair trade practices, President Trump could, as he promised in the campaign, self-initiate antidumping, countervailing duty and section 201 escape clause proceedings against imports of select products from China and elsewhere, and upon finding of unfair trade practices, impose high duties, or in the case of section 201, various other types of remedies. Also, President Trump can invoke section 301 of the trade laws to commence proceedings against China (whether under the WTO or otherwise) for various unfair subsidies.
In a globalized environment where domestic firms with foreign operations may be reluctant to bring antidumping and countervailing duty petitions (or may have difficulty meeting standing requirements), the Administration itself can bring these proceedings in order to impose duties in selective sectors – or to use these proceedings as a mechanism for seeking favorable settlement agreements.
This robust approach to trade enforcement has been tried in the past, typically with mixed success. The Reagan Administration robustly used sections 201 and 301 against a range of industries, and the Obama Administration has sought WTO relief against China with respect to various subsidies. In numerous cases, foreign governments have retaliated as well.
It is entirely possible that such proceedings could be brought in steel and other domestic manufacturing industries that have allegedly been injured by foreign competition.
V. Punitive Actions Against Firms That Move Facilities Offshore: Policy by Tweet?
A more controversial area would be potential punitive actions, including the imposition of border taxes, on products from U.S. firms that move their facilities offshore.
A core area of the President-elect’s campaign was his advocacy against U.S. firms moving manufacturing operations overseas and the need to change U.S. tax and other laws to create a more favorable environment to retain these facilities and jobs at home.
The President-elect’s actions and statements during the transition signal that he may take a more direct and engaged approach than past Presidents with respect to U.S. firms planning such offshore moves in the future.
For one thing, his recent negotiation with Carrier’s parent Company, United Technologies, and its decision to keep one of Carrier’s Indiana facilities open (after receiving Indiana tax incentives and possibly other benefits) suggests a willingness to use the power of the Presidency to directly influence corporate decision making on offshoring. The combination of direct outreach to United Technologies, a major federal contractor, and the state tax incentives apparently caused Carrier to reverse direction (although the plant will have a lower level of employment than in the past and another domestic facility will still close).
In a statement made yesterday while at the Carrier facility, the President-elect explicitly warned that businesses that decide to go abroad will pay a price through stiff tariffs on imports back to the United States. “This is the way it’s going to be,” Mr. Trump said in an interview with The New York Times. “Corporate America is going to have to understand that we have to take care of our workers also.” He added that “I don’t want them moving out of the country without consequences.”
The President-elect’s willingness to directly engage with, and threaten punitive actions against, U.S. firms that plan to move offshore – possibly by “tweet” – is largely uncharted territory. While other Presidents have engaged with private industry, it has rarely been done on this type of company-specific basis. Rather, it is usually accomplished through the setting of broad policies that incentivize private business conduct.
In any event, certainly, the President has the authority to engage directly with individual companies and to threaten punitive actions. Whether the President has specific authority to actually put punitive tariffs in place remains to be seen, however, and would depend on the particular type of action taken.
It may be possible to do this, as discussed above, on a broader basis, in the context of self-initiated unfair trade proceedings, or the use of authorities under the International Economic Emergency Powers Act, which is the legal basis for most sanction regimes. But the President’s authority to impose duties on a particular company’s imports that has moved a facility offshore is uncertain at best. And, depending on the country involved, there may be limitations on Presidential authority to impose tariffs of this nature under the WTO or other agreements, such as NAFTA, to which the United States is a party.
Nevertheless, firms considering whether to move manufacturing facilities abroad now need to carefully evaluate the implications of this option for their overall business. Will they be putting federal business at risk? What are the costs of adverse publicity - possibly by “tweet”?
VI. Foreign Investment: Possible Reciprocity and a Policy Tilt on China
While not directly addressed during the Presidential campaign, it is possible that the U.S. review of foreign acquisitions on national security grounds under the Exon-Florio law may become more restrictive, especially with respect to China, during a Trump Presidency.
The U.S. Committee on Foreign Investment in the United States (CFIUS), which administers the law, already has taken a more robust view in recent cases involving China. As Chinese investments have substantially increased, CFIUS has stopped an increasing number of acquisitions of U.S. firms in sensitive sectors or located proximate to sensitive U.S. facilities.
In this context, there is a real prospect that U.S.-China relations will become more contentious in the early years of the Trump Administration; the President-elect campaigned on a platform of eliminating unfair Chinese trade practices (including currency manipulation), and it is reasonable to believe that these types of disputes will likely spill over into CFIUS and affect its deliberations.
A recent report by the U.S.-China Economic and Security Review Commission recommends that the United States block all Chinese state-owned companies from carrying out U.S. acquisitions. “There is an inherently high risk that whenever an SOE acquires or gains effective control of a U.S. company, it will use the technology, intelligence, and market power it gains in the service of the Chinese state to the detriment of U.S. national security,” the Commission Report declared.
While the Trump Administration’s approach to CFIUS remains to be seen, it is possible that the Commission’s approach may resonate with it given its apparent attitudes on globalization generally and China in particular. In particular, under President Trump, there also may be more willingness to take investment reciprocity into account (i.e., how China treats U.S. investors) in making CFIUS determinations. While Congress declined to expand the criteria for CFIUS decisions to include economic security, the law’s “national security” standard nevertheless affords it considerable discretion in its judgments.
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In sum, it remains to be seen whether and to what extent President Trump will follow through on the robust international trade positions he advocated during the campaign – and whether he will use the threat of agreement terminations or trade remedy actions to achieve new arrangements prior to resorting to unilateral tariffs or other sanctions.
Nevertheless, U.S. manufacturing firms with globalized supply chains or operations abroad and U.S. services firms whose interests are affected should review the potential actions and develop contingency plans as appropriate.