How Congress Can Take a Step Toward Trade Stability

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After protracted smashmouth negotiations, the United States, Canada, and Mexico agreed to replace the North American Free Trade Agreement (“NAFTA”) with the new United States Mexico Canada Agreement (“USMCA”) on November 30, 2018. The new USMCA is largely NAFTA with certain positive elements drawn from the Trans-Pacific Partnership (“TPP”). Unfortunately, certain new protectionist provisions unnecessarily take the USMCA in the wrong direction.

Now, a new trade bill called the “Reciprocal Trade Act” could make trade turmoil much worse.

First, let’s consider the USMCA. Commentators have hailed the signing of the USMCA as ending uncertainty related to the NAFTA negotiations. Of course, it was the United States that unnecessarily created the uncertainty by demanding the renegotiations and threatening to pull out of the trade pact in the first place. To the extent that there was uncertainty that disrupted American businesses, it was self-induced.

One positive from the new USMCA is the increased access to the Canadian dairy market. However, as Scott Lincicome has pointed out, the USMCA only opens up the Canadian dairy market by .34 percent more than would have been but for the withdrawal from the TPP. This is hardly a major accomplishment that is worth months of uncertainty and diplomatic ballyhoo.

The USMCA fails to remove the tariffs on imports of steel and aluminum from Canada and Mexico pursuant to Section 232 of the 1962 Trade Expansion Act. Under Section 232, Congress delegated its Article 1, Section 8 constitutional authority of regulating trade by authorizing the president to impose tariffs in cases necessitated by national security. The president’s claims that tariffs are necessary to protect the US steel industry on the grounds of national security are belied by the facts that the US Defense Department only requires about 3 percent of steel produced domestically and that US steelmakers enjoy a market share of about 74 percent of the domestic steel market.

The steel tariffs on Canada, Mexico, and other importers are harming American companies. Canada has retaliated against the US steel 25 percent tariffs by imposing its own 25 percent tariff on US steel imports into Canada.

The failure of the USMCA to resolve the issue of the steel tariffs, whether in the body of the agreement or by side letter, is a disappointment.

Now, Congress has some decisions to make.

Before the USMCA goes into effect, the United States Congress has to ratify it. The president has threatened to withdraw from NAFTA if Congress does not ratify the new USMCA. In light of the contentious government shutdown negotiations, it is less than certain that Congress will approve USMCA. Congress should ratify the new USMCA to avoid the trade turmoil that would come from not having either NAFTA or USMCA.

Still, Congress could make matters even worse.

Representative Sean Duffy (R-WI), working in concert with the White House, has authored the Reciprocal Trade Act, which would expand presidential powers to raise US tariffs. According to the Peterson Institute of International Economics: “The bill would give Trump unfettered discretion to raise US tariffs against imports from countries that impose higher duties than existing US rates.”

Congress should reject the Reciprocal Trade Act, then turn to legislation to rein in the president’s authority to impose Section 232 tariffs. The latter would require a veto-proof majority. Such a level of bipartisanship is probably too much to hope for in today’s Washington. But approving the USMCA and rejecting the RTA would be a step toward trade stability.