1 The Trump Administration and US Trade PolicyMiami, May 8, 2017 Copyright © 2017 Jon Fee All Rights Reserved

2 The Trump trade team Steve Bannon – Chief StrategistRobert Lighthizer – USTR Wilbur Ross – Commerce Secretary Peter Navarro – Director of the Office of Trade and Manufacturing Policy “[T]he most trade hostile and potentially disruptive group to occupy the White House in more than 100 years” – Forbes

3 Steve Bannon “The most dangerous political operative in America” – Bloomberg Businessweek Not subject to US Senate confirmation Identifies himself as a populist and “economic nationalist” Considers Trump’s withdrawal from TPP “one of the most pivotal moments in modern American history” He supports Brexit (the UK’s withdrawal from the EU) and supported France’s Marine Le Pen

4 Steve Bannon Skeptical of US participation in NATO, the United Nations and the World Trade Organization His focus is on an “America-first” foreign policy and he favors aggressive military action He vows to “bring high value added manufacturing jobs back to the United States of America”

5 Robert Lighthizer Still not confirmed by the US SenateDeputy USTR under Ronald Reagan, where the Trump transition team said he was “uniformly tough” on “unfairly traded imports” Led international trade practice at a major US law firm for 30 years Filed many AD/CVD cases against foreign steel and other goods

6 Robert Lighthizer Lighthizer criticizes US trade with China, Chinese “mercantilism” and alleged Chinese currency manipulation But he backed off on currency manipulation in his confirmation hearing Advocates harsh enforcement action against China through AD/CVD Considers Permanent Normal Trade Relations (PNTR) with China to have been a mistake

7 Robert Lighthizer “The recent blind faith some Republicans have shown toward free trade actually represents more of an aberration than a hallmark of true American conservatism” Lighthizer’s appointment “seems to confirm fears that US trade policy is descending into darkness” – The CATO Institute (a U.S. libertarian think tank founded by Charles Koch)

8 Wilbur Ross Confirmed by the US Senate on February 27Billionaire US investor in steel, coal and telecommunications In 2004, he combined bankrupt Cone Mills and Burlington Industries to form ITG, which he sold to a private equity firm in 2016 ITG had substantial operations in Mexico, taking advantage of NAFTA Opened a $100 million denim mill in Nicaragua in 2008, then closed it at a total loss in 2009

9 Wilbur Ross Bailed out Bank of Cyprus in 2014Formerly served as Co-Vice Chair with Vladimir Strzhalkovsky, former KGB officer and Putin ally The second largest shareholder is Renova Corp., chaired by Viktor Vekselberg, another Putin ally, whose $50,000 contribution to the Clinton foundation was called out by Trump in the 2016 campaign Former Trump campaign chair Paul Manafort deposited and withdrew $1 million at the Bank of Cyprus in one day in a suspected money laundering transaction

10 Wilbur Ross He claims that VATs employed by other WTO members hurt US exports as trade barriers and unfairly subsidize those countries’ exports Would pressure WTO to change this allegedly unequal (VAT) tax treatment

11 Wilbur Ross President Trump says Ross will renegotiate NAFTA (what about Lighthizer?) He has mentioned changing the NAFTA automotive rules of origin and the dispute settlement mechanism, but has himself suggested no other specific changes

12 Peter Navarro His position does not require US Senate confirmation and was created on the 100th day of the Trump Presidency by executive order Trump: “He [Navarro] has presciently documented the harms inflicted by globalism on American workers” “He’s someone who used to be a versatile and productive economist and is now a China-obsessed fanatic” – Mother Jones Navarro is a “China bashing eccentric” and his trade proposals are “fantasy” – The Economist

13 Peter Navarro He recently directed a documentary film, “Death by China,” based on his book of the same name, criticizing Chinese trade policies, particularly concerning exports This picture is a graphic from the movie’s opening scenes

14 Peter Navarro “… a rabid piece of agitprop …”… “with the strident brushstrokes of a bad editorial cartoon …” “… sky-is-falling hysteria …” “… the documentary equivalent of a raving street-corner derelict …” - Film critic Scott Tobias, on “Death by China”

15 Peter Navarro Navarro, like Ross, says a VAT is a subsidy to exports and a barrier to imports Trade with China and Mexico is a “zero sum game” Massive tariffs against China, Mexico and other countries will cause multinationals to “onshore new factories,” moving them to “Charleston, Detroit, Houston, Oklahoma City, Savannah, Youngstown and Toledo”

16 Peter Navarro Eliminating the US trade deficit will increase US GDP by an equal amount, raising $1.74 trillion in taxes in a decade, offsetting President Trump’s proposed tax cuts Greg Mankiw (economist for George W. Bush and Mitt Romney) and Paul Krugman (economist and NYT columnist) say this view contradicts college freshman economics

17 Peter Navarro He calls his office a trade “swat team”Free trade agreements should automatically be renegotiated if the US runs trade deficits with the other parties He would use “leverage” to persuade US trading partners to buy US products to reduce deficits

18 Possible contrary signs?Ascendency of Gary Cohn (head of National Economic Council) and his alignment with Ivanka Trump and Jared Kushner as more moderate influences; counterbalancing Bannon, Navarro, Steven Miller and Reince Priebus Cohn’s appointment of pro-TPP Andrew Quinn to his staff Lighthizer lightens up about NAFTA

19 Donald Trump on NAFTA “NAFTA is the worst trade deal maybe ever signed anywhere” “When do we beat Mexico at the border? They are not our friend, believe me” “NAFTA has been very, very bad” “We're going to make some very big changes or we're going to get rid of NAFTA once and for all”

20 Withdrawal from NAFTA NAFTA says “a Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties” The president has this authority without permission from Congress

21 Withdrawal from NAFTA On April 26, the White House drafted an executive order to withdraw The order was authored by Bannon and Navarro Trump claims he received calls that night from the presidents of Canada and Mexico, and that he agreed “not to terminate NAFTA,” but to renegotiate it instead

22 The withdrawal order said …NAFTA has caused a “massive transfer of wealth,” “waves of illegal immigration,” a “cumulative trade deficit” exceeding “one trillion dollars,” and the closure of “tens of thousands” of US factories Under NAFTA, “Canada has continued to exploit the American dairy and lumber industries”

23 What renegotiation requires90 days’ notice to Congress, and a detailed proposal for change, which Trump still hasn’t provided Confirmation of USTR Lighthizer Conduct of negotiations – is there time before Mexico’s elections in July 2018 or the US midterm elections in November 2018? Mexico and Canada are ready; the United States is not

24 What will they renegotiate?Tighten origin rules Address VAT concerns Eliminate NAFTA panel review of AD/CVD cases Facilitate Buy America Add special duty “safeguards” for increased imports Add digital trade and data flow rules* Enforceable rules on labor, environment and state owned enterprises (SOEs)* Revise investor state dispute settlement* Strengthen IP rights* *TPP ideas

25 What about other FTAs? On April 27, Trump told the Washington Post:The Korea FTA has “destroyed” the United States “It was a horrible deal” “It was a Hilary Clinton disaster, a deal that should’ve never been made” “It’s a one-way street” “I [will terminate] unless we make a fair deal” “We’re getting destroyed in Korea”

26 What about other FTAs? Trump signed an order on April 29 that presumes FTAs have failed FTAs should increase US economic growth, contribute to US balance of trade and strengthen US manufacturing In 180 days, performance reviews will identify “violations and abuses” and instances of “failure” Commerce and USTR shall take action to address violations, abuses and unfair treatment

27 What about CAFTA? Trump has not criticized CAFTABut the April 29 order requires review of “all” FTAs An April 28 White House “Fact Sheet” singles out Costa Rica and Nicaragua as two of eight FTA countries with which US trade balances have worsened since FTAs came into force, presumably justifying “leverage” or change

28 Donald Trump on tariffs against China“The 45% is a threat that if they don’t behave, we will tax you. It doesn’t have to be 45, it could be less. But it has to be something because our country and our trade and our deals and most importantly our jobs are going to hell”

29 Some of China’s genuine offensesPolicies inducing high household savings, deposited in state-owned banks, enabling the government to provide low-cost financing to exporters State owned enterprises (SOEs) dominate several industry sectors The government promotes critical industries through subsidies, preferential loans, tax exemptions and low-cost land and energy, creating surpluses of industrial production in steel, aluminum and other product categories Imposes discriminatory restrictions on foreign firms doing business in China

30 Currency manipulationCurrency manipulation occurs when a country buys or sells foreign currency to influence the exchange rate for its currency China did this until a few years ago, lowering the value of the yuan and making its exports cheap But in 2016, China sold off foreign currency reserves, actually propping up its currency to avoid a decline in the yuan

31 Currency manipulationTrump threatened to declare China a currency manipulator anyway This was a big campaign promise He called the Chinese “grand champions” of manipulation and that they were “stealing” American jobs by keeping their currency artificially low

32 The issue disappears On April 14, in a twice-annual report to Congress, Treasury said China was not a currency manipulator So Trump changed his view, suggesting a new reason on Twitter: “Why would I call China a currency manipulator when they are working with us on the North Korean problem? We will see what happens!”

33 Donald Trump on leaving WTOChallenged by newsperson Chuck Todd on the US TV program, “Meet the Press,” that new tariffs against China could violate the WTO, Trump responded: “It doesn’t matter, then we’re going to renegotiate or we’re going to pull out. These trade deals are a disaster, Chuck. World Trade Organization is a disaster”

34 Withdrawal from WTO The WTO is similar to NAFTA regarding withdrawal – the United States can pull out on six months’ notice There is no authority in the statute for Congress to object to or override the president’s decision to pull out

35 Some effects of withdrawal from WTOThe United States would enjoy the international trade status of Iran, North Korea, Syria and the few other countries remaining outside the 163-member WTO It would be free to raise tariffs against other countries, and other countries would be free to raise their tariffs against the United States

36 Some effects of withdrawal from WTOThe United States would lose the benefit of the binding dispute resolution process It would lose protection against non-tariff barriers to its exports It would lose protection of its intellectual property Mutually retaliatory trade wars would be more likely

37 Presidential authority to impose border taxes or raise tariffsPresident Trump has threatened 45 percent tariffs against China and 35 percent tariffs against Mexico He has also threatened “border taxes” against companies moving manufacturing to Mexico Withdrawal from NAFTA wouldn’t be enough to carry out the threat – it would just return Mexican goods to normal trade relations (NTR) duty rates, which are far below 35 percent What powers does President Trump have to levy discriminatory border taxes or to raise tariffs against these or other countries?

38 Border taxes “General Motors is sending Mexican made model of Chevy Cruze to US car dealers-tax free across border. Make in U.S.A. or pay big border tax!” – Trump Tweet There is no authority allowing the president or Congress to levy taxes or tariffs against one US company and not against other similarly-situated US companies Such a tax would likely face due process and equal protection challenges under the US Constitution

39 AD/CVD These are trade remedies, in the form of duties, to counteract dumping (in the case of ADD) or unfair subsidies (in the case of CVD) where there is material injury or the threat of material injury to a domestic industry There are many active AD/CVD cases

40 AD/CVD AD/CVD cases usually begin with a petition filed by a US manufacturer or industry association But the law also provides for rarely used “self-initiation” by the Department of Commerce Commerce Secretary Ross testified in his confirmation hearings that he is strongly interested in self-initiation: “I think it’s important both from its actual curative effect, its preventative effect, and the psychological effect on the cheaters” (i.e., Mexico and China)

41 Section 301, Trade Act of 1974 Rarely invoked since the adoption of dispute resolution mechanisms under the WTO Allows the president to retaliate against a country that denies US rights under an FTA or carries out practices that are unjustifiable, unreasonable or discriminatory and burden or restrict US commerce

42 Section 232(b), Trade Expansion Act of 1962Last threatened against machine tools from Japan and Taiwan in the 1980s Requires the Commerce Department, at the request of a federal agency or a private party, to investigate the impact on national security of imports of specific articles If Commerce finds an adverse impact, the president “shall” impose “import restrictions”

43 And they’ve done it On April 20, Trump ordered a section 232(b) investigation to determine whether steel imports are harming the national security One target will be China, but the action can affect steel imports from any countries Then, on April 27, Trump initiated another section 232(b) investigation of aluminum imports Ross has suggested there will be more investigations, possibly including semiconductors and shipbuilding

44 Section 122, Trade Act of 1974 Section 122 allows the president to impose a tariff of up to 15 percent, or a quota, for up to 150 days, to remedy “large and serious … balance of payments deficits” Remedies lasting more than 150 days require congressional authorization

45 Section 201, Trade Act of 1974 This is a “safeguard” covered by the so-called GATT “escape clause” Cases are rare, but there is one now pending about aluminum imports At the request of domestic industry, the president or Congress, the ITC investigates whether an article is being imported in such quantities as to be a substantial cause of serious injury, or the threat thereof, to domestic industry If the ITC finds injury, the President can impose a tariff or a quota for four years, which can be extended for no more than eight years The President can exempt FTA countries

46 Section 5(b), Trading with the Enemy ActCited by the old US Court of Customs and Patent Appeals in 1975 to justify President Nixon’s 10 percent duty surcharge imposed in 1971 because the Korean war (!) had technically not ended Gives the president broad power to regulate international commerce (presumably including tariffs) “during the time of war” Action could conceivably be based on military action in the Middle East

47 International Emergency Economic Powers Act of 1977IEEPA is the law under which the president invokes familiar trade sanctions against countries like North Korea, Iran and (recently) Russia to counter “unusual and extraordinary” threats against US interests Trade sanctions, to date, have forbidden trade with sanctioned countries or persons, but Trump could try to use the law to impose tariffs against China, Mexico or other countries

48 Trade policy agenda for 2017Released on March 1, without confirmation of Lighthizer as USTR Americans are “frustrated” because they do not see “clear benefits” from trade Actions will be designed to increase economic growth, promote US job creation, promote reciprocity and strengthen the US manufacturing base Priorities will be to defend US sovereignty, enforce US trade laws, use leverage to open foreign markets, and negotiate new and better trade deals

49 Trade policy agenda for 2017If the WTO rules against the United States, “the Trump administration will aggressively defend American sovereignty” The agenda specifically mentions AD/CVD actions (including self-initiation), and the possibility of actions under Section 201 and 301 of the Trade Act of 1974

50 Trade policy agenda for 2017Regarding leverage, the agenda says there are “several important players” that do not “adhere” to free market principles and whose legal systems are not “transparent” The Trump administration will therefore adopt “a more aggressive approach,” but the agenda does not specify the form that this approach will take

51 Trade policy agenda for 2017Regarding negotiating “better deals,” the agenda says the global trading system has been “great for China” but not for the United States The agenda singles out NAFTA and the Korea FTA as causing unacceptable trade deficits; “The time has come for major review” The administration will focus on bilateral rather than multilateral trade agreements

52 How might target countries react?If Trump brings actions under these various sections (other than AD/CVD), target countries could lodge complaints against the United States before the WTO, or they could take their own retaliation in the form of tariffs against the United States products without waiting for the WTO to adjudicate their claims These reactions would herald the beginnings of “trade wars,” about which Trump’s opponents have raised concerns

53 Border adjustment tax “Border adjustment” comes from a House GOP corporate tax blueprint called “A Better Way,” published in the summer of 2016 President Trump recently called it “too complicated,” raising additional questions about whether it will ever come to pass But Peter Navarro has spoken in favor of it

54 Border adjustment tax Border adjustment is only one of five features of the plan, which would alter the US corporate tax scheme: The corporate tax rate would be lowered from 35 to 20 percent Businesses would immediately write off, rather than depreciate, capital investments There would be no tax on overseas profits Businesses would not be allowed to deduct interest Corporate taxes would be subject to “border adjustment”

55 Border adjustment tax Border adjustment means that the revenue from exports would not be taxed and the cost of imported goods would not be deductible In other words, the corporate tax would ignore revenues and costs associated with cross-border transactions This sounds great for net exporters and not so great for net importers

56 Is BAT dead? Treasury Secretary Mnuchin and economic policy advisor Cohn presented a one-page “Tax Plan” on April 26 It includes a 15 percent corporate tax; but says nothing about BAT Ways and Means Chair Kevin Brady (R-TX) is still very pro BAT and says it is still alive; but exclusion from the president’s proposed Tax Plan could be fatal

57 TPP Trump signed an executive order on the third day of his presidency “formally” withdrawing the United States from TPP There is some possibility of FTA talks with Japan, Vietnam or the UK about bilateral agreements, in view of the Trump administration’s apparent preference for bilateral deals

58 Thoughts and implicationsIn March, Treasury Secretary Steven Mnuchin refused to join G-20 members in a statement against protectionism “By rejecting language that would have said the United States is opposed to protectionism, the White House sent a clear signal that it would not accept existing trade norms and could pursue a more antagonistic approach with trading partners around the world” – Washington Post

59 Thoughts and implicationsTrump could be using tariff and other trade threats against China and Mexico as a negotiation tool to win concessions from those countries, although specifics about those concessions remain unknown China may be difficult – President Xi Jinping may need to project nationalism and toughness on trade, rivaling Trump’s similar nationalism and toughness, as China approaches the upcoming replacement of many members of the Politburo Standing Committee at the 19th National Party Congress later this year

60 Thoughts and implicationsMexico might look to trade opportunities with other countries – Mexico is an accomplished FTA participant in deals with many other countries Other FTAs threaten to lower tariff and non-tariff barriers to US competitors, but not the United States Capital may move from the United States to other platforms offering more friendly market access

61 Thoughts and implicationsThe Trump administration has evidently ceded trade leadership to others in Asia and Europe, evidently betting on the United States’ strengths as an attractive market and competitive producer, even as it becomes more protectionist

62 Jon Fee Alston & Bird LLP 950 F Street, N.W. Washington, D.C. 20004