Trump’s Renegotiation Could Take the “Free” Out of NAFTA’s Trade

The Trump administration’s newly announced  objectives for the renegotiation of the North American Free Trade Agreement (NAFTA) are ambiguous in some respects. But one element is clear and worrisome: The administration wants to make it easier for the United States to restrict imports from Canada and Mexico. Ironically, the new document and the administration’s actions over its first six months in office make it more likely that Canada and Mexico will fight tooth and nail to resist the US negotiating objective.

The technical means by which the administration wants to restrict imports involve how the Trump trade policymakers want to treat “trade remedies”—i.e., import-restricting policies such as antidumping, countervailing duties, and safeguards—under a new NAFTA. Their specific goal is to make it easier for the United States to access such laws to impose trade restrictions on Canadian and Mexican goods.

Relaxing existing constraints on national use of these laws could—in a worst-case scenario—not only eliminate other trade liberalization gains arising through the NAFTA negotiations but also reverse previous gains. And of course, an increase in the US use of trade remedies against Canada and Mexico would likely result in those two countries responding in kind against US exports.

The Proposal

The document issued on July 17 by the United States Trade Representative (USTR) proposes actions to:

• eliminate the Chapter 19 dispute settlement mechanism and
• eliminate the NAFTA global safeguard exclusion so that it does not restrict the ability of the United States to apply measures in future investigations.

What is NAFTA Chapter 19?

During the original Canada-US Free Trade Agreement (CUSFTA) negotiations in the mid-1980s, Ottawa was keen on halting Washington’s escalating use of import restrictions under US antidumping (AD) and countervailing duty (CVD) laws. Section 731 of the US Tariff Act of 1930 is the main US

antidumping law and Section 701 of the same Act is the countervailing duty law. These laws were designed to address US imports from countries selling goods at low (dumped) prices or that were subsidized by the foreign government.

During the 1980s, the United States applied trade restrictions under those laws against imports of Canadian products like sugar, chloride, codfish, and raspberries. Furthermore, during a period of aggressive US use of trade remedies against fast-growing imports from Asia, Canadian companies that made steel, brass, and color TVs faced trade restrictions after being caught up in US cases in which the main target may have been Japan, South Korea, or Taiwan.

Also important was that the United States threatened on multiple occasions to impose CVDs on billions of dollars in annual Canadian exports of softwood lumber.

In 1989, CUSFTA  established Chapter 19 as a special dispute settlement procedure that any of the three NAFTA countries can utilize to legally challenge the AD/CVDs that one of the others imposes on its exports. NAFTA introduced a modified version of Chapter 19 in 1994.

Proponents view Chapter 19 as a check on national abuse of these laws by ensuring that proper legal and evidentiary procedures are followed before the imposition of trade restrictions. Opponents claim the opposite, that it impinges on national sovereignty by constraining how government authorities conduct their AD/CVD investigations.

What is the NAFTA global safeguard exclusion?

The global safeguard is a separate trade policy that countries can also use to limit imports. Unlike AD/CVDs, governments are not required under this law to provide evidence that trading partners have done anything “unfair,” such as pricing their product too low (AD) or providing an illegal subsidy (CVD). Thus, import restrictions under the safeguard law are supposed to be applied on a nondiscriminatory basis, equally affecting all foreign sources.

However, Article 802 of NAFTA articulates how members apply global safeguards toward imports from the other NAFTA countries. Except in special cases, global safeguards are supposed to exclude imports from the other NAFTA countries.

Consider, for today’s context, an example from 2002, when the George W. Bush administration imposed a 30 percent tariff on US steel imports as a global safeguard under Section 201 of the Trade Act of 1974. Steel imports from Canada and Mexico were excluded and continued to face a zero tariff (under NAFTA trade preferences), while other countries faced the 30 percent tariff in addition to the standard US most-favored-nation (MFN) tariff for steel products.

Again, Trump’s NAFTA objective is to eliminate the exclusion so that the United States can more freely restrict imports from Canada or Mexico under the safeguard law.

Has NAFTA limited US use of trade remedies against imports from Canada and Mexico?

Figure 1 illustrates the United States’ use of these policies over the NAFTA period of 1994–2016, as well as a projection for potential use in 2017 (more on this below). Each line represents the share of US imports from a different foreign source that are covered by US trade restrictions under these laws.

Figure 1 Share of US imports covered by barriers imposed under trade laws, including projection for Trump’s 2017 policies

Source: Author’s construction, building from Chad P. Bown, Steel, Aluminum, Lumber, Solar: Trump's Stealth Trade Protection, PIIE Policy Brief 17-21, June 2017.

Three results stand out: First, since China’s 2001 accession to the World Trade Organization (WTO), the United States has increasingly used these policies to target imports from China. In 2000, 1.4 percent of US imports from China were covered by US AD/CVDs; this share had increased to 9.2 percent by 2016. Some of this use is related to China’s treatment as a nonmarket economy in AD investigations.

Second, US coverage of imports from the rest of the world (ROW, non-NAFTA) has been declining over time. In 2016, only 2.7 percent of US imports from ROW were covered by these policies, down from 6.5 percent in 2000.

Third, these US barriers covered even fewer US imports from Canada and Mexico. By 2016, US AD/CVDs covered only 1.3 percent of US imports from NAFTA partners. There was a slight uptick during 2001–06 when the United States imposed trade restrictions on imports of Canadian softwood lumber.

Many factors contribute to the fact that the United States applied antidumping, countervailing duties, and safeguards against relatively few imports from Canada and Mexico over 1994–2016. First, there was a general decline in US AD/CVD use against imports from all (non-Chinese) foreign sources. A second factor is the deepening economic integration in North America under NAFTA. The groups that typically request that the US government impose new trade barriers under these laws have increasingly cross-border common firm ownership (including in steel) and common labor union representation of workers; this especially discourages US use against imports from Canada.

Nevertheless, the legal disincentives provided by NAFTA Chapter 19 and Article 802 likely contributed to the relatively low levels of US use of such laws against imports from Canada and Mexico.

Why are Canada and Mexico likely to fight to maintain—if not expand—these provisions?

Since assuming office, President Trump has signaled an aggressive use of a variety of US trade laws. Indeed, during its first 100 days, his administration self-initiated investigations into whether imports of steel and aluminum are a threat to national security under a fourth trade law, Section 232 of the Trade Expansion Act of 1962. President Trump and Commerce Secretary Wilbur Ross also politically welcomed the opportunity to impose duties on imports of Canadian softwood lumber. Finally, the administration also fielded new investigations into solar panels and washing machines under the global safeguard (Section 201) law, the first such investigations since 2001.

The dotted lines on the right side of figure 1 show the potential trade coverage if the Trump administration imposes new trade barriers at the conclusion of each of the ongoing investigations.

The main result for NAFTA countries is stark. Whereas only 1.3 percent of US imports from Canada and Mexico were covered by such policies as of 2016, Trump’s actions could increase trade coverage by more than five times that level—increasing to 6.6 percent of total US imports from NAFTA partners.

Figure 2 illustrates the trade coverage for each of these major cases. For example, if Trump imposed a general tariff on imports of steel products from all sources at the end of the Section 232 investigation, it would impact an additional 2.9 percent of Canada’s and 1.8 percent of Mexico’s annual exports to the United States, respectively. New Trump import restrictions on aluminum and softwood lumber could target another 2.6 and 2.5 percent, respectively, of Canada’s exports to the United States.

Figure 2 Share of additional US imports from NAFTA partners covered by Trump’s 2017 potential trade law use

Source: Author’s construction, building from Chad P. Bown, Steel, Aluminum, Lumber, Solar: Trump's Stealth Trade Protection, PIIE Policy Brief 17-21, June 2017. For context, as of 2016, 1.0 percent of US imports from Canada were covered by US-imposed barriers under its trade laws and 1.6 percent of US imports from Mexico were covered by US-imposed barriers under its trade laws. Total accounts for any removal of US-imposed AD or CVDs on Canada or Mexico in 2016.

Overall, Trump’s actions could impose major new trade barriers on Canadian exporters: from 1.0 percent of bilateral exports in 2016 covered by these US policies to 8.8 percent in 2017—approaching levels currently experienced by China. US policy coverage of imports from Mexico would increase from 1.6 percent in 2016 to 4.5 percent in 2017 under Trump’s actions.

Given prior US experience and that of the Trump administration, it is important to establish that these trade laws are increasingly fungible. During the global steel overcapacity of 2017, Trump has resorted to the national security law (Section 232). But in earlier episodes of import protection for steel, Washington resorted to global safeguards (2002) or AD/CVDs (1992).

Thus, the expectation is that Canada and Mexico strive in the NAFTA renegotiations to maintain Chapter 19—to limit their exporters facing US AD/CVDs—and the exclusion for NAFTA imports under the global safeguard law. However, given the Trump administration’s expanding reach, these partners may also seek to extend NAFTA import exclusion provisions to other US statutes, such as the national security (Section 232) law.

Without such protections, the Trump administration’s NAFTA could make US trade with Canada and Mexico much less free.