Making and Breaking Deals? Priorities and Strategy in Trump’s Renegotiations

In a time of relative volatility in the US administration’s approach to trade, it is interesting to compare its handling of two FTA  renegotiations that have been in the news recently: NAFTA (US-Canada-Mexico) and KORUS (Korea-US).

The administration views the scale of the issues differently: NAFTA is a “renegotiation” for which detailed objectives were released last year, while KORUS is just a “refurbishment” (hence no need to pass Congress) – its objectives occupied only a few lines in the annual trade policy agenda. This is interesting, since the underlying (stated) objectives for both talks are the same: “modernization”, i.e. adding rules on subjects like e-commerce that didn’t exist earlier; and ensuring “balanced trade”, an economically dubious argument aimed at appeasing voters. While it is true that the US runs high trade deficits with its trading partners (exact numbers are under debate), this is not necessarily bad for the US economy. And even if it were, the consensus amongst economists is that making adjustments to domestic policy would be the effective way of bringing about change. Another related theme is that of “job losses”, and while trade does affect domestic employment, it is unclear how President Trump’s suggested changes to the agreements will bring back jobs to the US. What can help is redistribution of trade gains – for example through the Trade Adjustment Assistance Program – something that Trump has not yet talked about.

Key US demands in NAFTA are: dairy access; changed content requirements for automobiles to qualify as a “NAFTA” product; the removal of state-to-state adjudication; and the safeguards exclusion, and a 5-year “sunset” review. Most of these are political and/or economic non-starters for Canada and Mexico, as a couple of climbdowns have shown. The demand for 50% US content for automobiles to qualify as a “NAFTA” product has been withdrawn and proposals to dramatically raise North American content have been moderated. In their place, the US has made some complicated suggestions linking origin to high-wage labour (for instance, granting “credits” towards meeting NAFTA content requirements by manufacturing specific critical automobile components using labour remunerated at more than $15 an hour).

With KORUS, the US wanted more US cars in Korea and less Korean steel and aluminium in the US. But most of what the US “won” in this agreement is air. The 20 year tariff extension on Korean pickup trucks is practically useless, since at present Korea does not export pickup trucks, and though the US doubled its automobiles quota, the original quota itself was never completely filled. Both KORUS and NAFTA featured the stick (USTR Lighthizer says carrot) of 25%/15% steel/aluminium tariffs: South Korea opted for the lesser evil of quotas (at roughly 70% of average exports during 2015-2017) and obtained an exemption; Canada and Mexico have so far resisted and have a temporary reprieve till 1 June 2018 (also the last day of current NAFTA negotiations).

There is also dissonance between what Trump and Lighthizer say, and even between what Trump says and what Trump does. Lighthizer says time for talks is “very short”, though Trump is in “no rush” to reach a deal. The tear-up-trade-agreements rhetoric has cooled down. Trump threatened to come down hard on currency manipulation, though Korea (and even China) escaped censure in the Treasury’s latest report.

But by coincidence or design, uncertainty is, in part, working for the US. Elections are upcoming in Mexico (where the probable winner is anti-NAFTA) and in Quebec and Ontario. And while talks are ongoing, companies are unlikely to shift operations out of the US, for the fear that the agreement may end up in the bin, and they end up locked out of the largest North American market. Even the law seems to be the ally of the US. Article 2205 of NAFTA could be easy to abuse: the US can signify its intention to leave, but it may not be obliged to eventually do so. Article 68 of the Vienna Convention on the Law of Treaties prevents revocation of a notice to withdraw where it has “taken effect” (interpreted as other parties having acted in reliance on it) – but then would Canada and Mexico really object to the US staying in? Hopefully this will remain a hypothetical question, but the bare fact that it can be asked shows just how far this administration’s strategy has undermined old certainties.

Written by Akhil Raina, Marie-Curie Fellow and PhD candidate at the Leuven Centre for Global Governance Studies.

Edited by the Linklaters Trade Practice. The views and opinions expressed here are the personal opinions of the author(s) and do not necessarily represent the views and opinions of Linklaters.