[CTC] Analysts debate Section 301’s potential as a NAFTA enforcement tool

Fri Feb 8 05:24:37 PST 2019

Analysts debate Section 301’s potential as a USMCA enforcement tool     
Inside US Trade, 02/07/2019

The use of Section 301 of the Trade Act of 1974 to enforce provisions in the U.S.-Mexico-Canada Agreement, which U.S. Trade Representative Robert Lighthizer suggested this week in a meeting with key senators, could fuel retaliation and muddle the chances that the deal is approved by Congress, analysts said.

Inside U.S. Trade first reported on Wednesday that Lighthizer told Senate Finance Committee members and others on Wednesday that he thought Section 301, which the U.S. has used to impose multiple rounds of tariffs on Chinese imports, could be used to enforce USMCA provisions <https://insidetrade.com/node/165771>. The enforceability of key USMCA provisions -- especially those related to labor and environmental requirements -- is a major concern for Democrats as they evaluate the deal.
But many are questioning the effectiveness of such a tool to enforce a free trade agreement.

“There is no way to use Section 301 as an effective USMCA enforcement tool,” said Simon Lester, associate director of the Cato Institute's trade policy program.

“I'm not sure exactly what they have in mind here, but if Section 301 will be used to make a unilateral determination of a violation and then to impose tariffs, it won't make the USMCA enforceable,” he said in a Feb. 6 blog post <https://worldtradelaw.typepad.com/ielpblog/2019/02/section-301-as-an-enforcement-tool-for-the-usmca.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ielpblog+%28International+Economic+Law+and+Policy+Blog%29>. “It will just lead to Canada and Mexico retaliating with their own tariffs (the Section 232 steel/aluminum tariff example is instructive here), rather than complying with U.S. demands.”

The way to make the deal enforceable, he continued, is “simply to have dispute settlement rules that ensure that panels are appointed. It's not very difficult. Canada and Mexico would be on board, and the current rules can be adjusted without too much difficulty.”

But a trade lawyer told Inside U.S. Trade that because Lighthizer has not been fond of dispute settlement mechanisms, he might see Section 301 as another way to ensure a deal has teeth.

“It will probably work the same way [the administration] is using it now for China,” a trade lawyer told Inside U.S. Trade. “The point I think [USTR] is making is that the relative strength or weakness of USMCA enforcement mechanisms is irrelevant because Lighthizer is willing to use Section 301 to enforce NAFTA obligations.”

A Section 301 investigation, which would allow the U.S. to impose unilateral penalties, could be used instead of USMCA's dispute settlement process if a violation was found, the lawyer continued. “Before Trump, use of 301 was unthinkable because it's inconsistent with [World Trade Organization] rules and could lead to retaliation,” the attorney said. “But this administration is willing to use it and, if the other country retaliates, hit them back with additional tariffs.”

A WTO dispute settlement panel in 1999 ruled that Section 301 was not an “as such” violation of WTO rules because a U.S. statement of administration action said the U.S. would only utilize it in conformity with WTO rules.

Where the Section 301 statute will be referenced in connection to the USMCA remains unknown, though a forthcoming statement of administrative action and other documents that must be completed as part of the congressional consideration process have yet to be released.

The U.S. has used Section 301 to impose 25 percent tariffs on $50 billion worth of Chinese goods, with tariffs on $200 billion worth of Chinese goods scheduled to increase from 10 percent to 25 percent after March 2 if the two sides cannot reach a deal.

Bill Reinsch, senior adviser and international business chair at the Center for Strategic and International Studies, said Lighthizer's approach was “conceptually different, but I kind of see the point.”

“I can see why he suggested it because Section 301 is unilateral,” he told Inside U.S. Trade. “When most people think about enforcement, they think about a context in which one party accuses the other of doing something bad or not doing what they are supposed to do. And almost always, the other party denies that they have done anything wrong. And so then most enforcement between countries follows a kind of a dispute settlement path that involves arbitration and an independent panel that examines and comes to a conclusion.”

But such panels, he continued, “only have the power to determine who's right or who's wrong -- they don't generally have the power to assess penalties.”
Because the Trump administration “prefers an approach where the U.S. can throw its weight around and bully other parties,” the Section 301 tool makes sense and is broad enough to be applied in the context of the USMCA, he said.

Section 301 of the Trade Act of 1974 says the U.S. can impose trade restrictions on another country if it finds “an act, policy, or practice of a foreign country violates, or is inconsistent with, the provisions of, or otherwise denies benefits to the United States under, any trade agreement, or is unjustifiable and burdens or restricts United States commerce.”

Reinsch noted “that's kind of a big universe of things.”

“So, if either party were violating USMCA, he's right. 301 provides a basis for United States to act unilaterally in that circumstance,” he said, adding that while Lighthizer was correct, the use of the tool would be controversial.

Self-initiated Section 301 investigations like the one the Trump administration conducted into Chinese intellectual property and technology transfer policies sideline private parties, which could make it harder to gain support for USMCA, Reinsch continued. The statute is “not one that gives private parties any rights,” he noted.

“Talk about labor, for example. What the AFL-CIO would like is a process involving a local group of workers and to initiate and petition a process on its own,” he said. “This is not that …. If I were private parties I wouldn’t be very excited about this; it's not an improvement. It is the status quo.”

That could create a dilemma for the labor community, he said, contending this administration was more likely than its predecessors to identify USMCA violations.

“On the other hand, if you are thinking about how to structure a process in perpetuity -- one that will go beyond this administration -- I think you would want one in which private parties can initiate the process, which is not true here,” he said.

Reinsch also outlined potential avenues of recourse Mexico and Canada could take if they were hit with Section 301 restrictions. Those include the WTO and the state-to-state dispute settlement mechanism in USMCA, which was commonly referred to as “Chapter 20” in NAFTA.

“If we act under Section 301, Mexico [or Canada] could use Chapter 20. That wouldn’t bother Lighthizer because it's structured in such a way that nothing happens unless both parties agree,” he contended.

One of the reasons the state-to-state dispute tool has not been well used, he contended, is that for the parties to achieve anything, both have to agree. Reinsch likened it to a “forum” for negotiation.

“Which means if the U.S. doesn’t want to yield, it doesn’t have to,” he said. “The scenario we are talking about is if the U.S. acts, Mexico [or Canada] complains and files a Chapter 20 for having overstepped. They meet and talk and the U.S. says 'We are not going to change.' And I think that's the end of it.”

“Lighthizer's view has been as long as the U.S. can have the last word then it's an OK process, and [Section 301] is one where the U.S. has the last word,” he added.

The U.S. Court of International Trade, another potential option for recourse, is responsible for determining whether an administration interprets trade law as written and acts within its authority. But Reinsch said because the amount of discretion afforded to Trump under the Section 301 statute is so broad, the chances of success at the CIT would be low.

“If Lighthizer announced that Mexican practices burden or restrict U.S. commerce, I doubt that a court would question him on that. It would be hard to win,” he said.

Pointing to the Section 301 tariffs President Trump imposed on China, Reinsch said a stronger option could be to challenge the procedures behind the administration's actions rather than the substance.

“There are all of these steps, and occasionally people have argued that they didn’t follow the steps and therefore the action is invalid,” Reinsch said, citing an unnamed challenge that was mulled for the China restrictions. “Some people argue that 301 is a unitary process -- the administration announces an investigation of certain charges, investigates them, comes to conclusion and then negotiates a solution or imposes a penalty.”

In the case of China, he added, “somebody argued that the [tariffs imposed on the] first $50 billion was a penalty, but the argument then goes that you can't double dip. So, for the president to come in and say 'that wasn’t good enough' and come back later and assess more penalties, each of those rounds [should have] required a separate presidential decision and a separate investigation. This was raised at one point; nobody ever took [the administration] to court but there are process arguments you can make versus substantive arguments.” -- Isabelle Hoagland (ihoagland at iwpnews.com <mailto:ihoagland at iwpnews.com>)

Arthur Stamoulis
Citizens Trade Campaign
(202) 494-8826

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