A Trump-Inspired Holiday Reading List... Humbug!!!!

There's no other way to put it, 2018 sucked. I still put a lot of faith in what James Madison wrote in the Federalist Papers about "ambition being made to counteract ambition" as an antidote to the "mischiefs of faction." Even if Trump's election in 2016 signalled the status quo was no longer acceptable (a judgement of voters I understood), I slept well at night knowing the the famous "checks and balances" and the "separation of powers" would limit any of the worst impulses of an inexperienced, incompetent narcissist such as we have.

Some Election Day Non-predictions

Today is U.S. midterm election day. I've been doing a lot more thinking about U.S. politics of late than writing about it, in part because it's become such a depressing, rapidly changing dumpster fire. Rather than a bunch of predictions about the outcome, or an effort at scenario forecasting, I simply wanted to get a few things on paper that I'll be focusing on starting Wednesday November 7

Time to Vote

1) The States, in particular, who controls governors' mansions and the state legislatures. If the Democrats can show some signs of life in places they've neglected while the GOP has placed a strangle-hold, the makings of significant change could be on the horizon.

2) The 2020 Presidential Campaign begins Wednesday morning. The Democratic bench still seems worryingly thin, although there will likely be no shortage of entrants. Who, if anyone, will challenge Trump in the GOP primaries?
2a) Primary season may kick off with the first debates among candidates as early as the spring of 2019 (good grief).

NAFTA2.0,... Ahem, USMCA?

So, we have a deal. But what's in it? Is the North American sky about to fall as I argued in my last post? Has the North American Idea been thrown overboard by Donald Trump, once and for all? Is the new NAFTA2.0 a retrograde descent into economic nationalism?

Name will take getting used to

Here are a few quick (possibly inaccurate) thoughts on some of the provisions of what's officially being called the United States Mexico Canada Agreement.

What's in a Name?

The first thing to change is the name of the Agreement. Trump thinks the NAFTA label came with too many negative associations. Indeed, NAFTA1.0 has been a political football from the start. The irony of Trump's complaints about the NAFTA name is that he contributed mightily in a very short time to creating those negative associations; worst agreement ever negotiated, our negotiators were really stupid, the world is ripping us off...

I don't think USMCA is going to stick, except among public officials who are compelled to use the name. Moreover, I am a little worried that if things go sideways at any point, this particular acronym will be framed as "United States Made Canada do it."

Requiem for the North American Idea

There are many things about the Trump Presidency that keep me awake at night. After Trump was elected, I was among those who turned to James Madison and the Federalist Nos. 10 and 51 for solace. I was certain the same institutional design that intentionally put so many barriers in the way of "getting things done" would constrain Trump's worst (but then not fully appreciated) excesses. My alarm at the damage being done grows by the day. In fact, as great as Madison's design is, I'm not sure it was designed to constrain this kind of aberrational president, nor the sustained assault on the core institutions of American democracy.

I openly wonder who is going to put the toothpaste back in the tube? Can it be put back? Trump didn't create this mess so much as he's a manifestation of a host of problems that have been simmering for a long time. Indeed, one of the most insightful comments I read during all of the memorials around Sen. John McCain's death is that in selecting Sarah Palin as his running mate in 2008, he played a significant role in laying the foundation of today's populist assault on the truth in the GOP

Rock Paper Scissors for Trade

To Trade or Not to Trade?

Of course, one of my interests is the global trading system and my alarm at the damage being done here is also acute. The amount of damage Trump has done to America's leadership credibility in global trade is going to take a very long time to repair. It's unclear to me that it can be repaired since, in my view, Trump has arrived at the most inopportune moment for resolving important problems within. Smarter, more thoughtful voices were already calling for significant changes to how the global trading system's rules were written. Of note here, the basis for the long-stalled Doha Round of the WTO launched in late 2001 was development; hence the name Doha Development Round. Indeed, issues important to the developing world were to be the center-piece of the Round, starting with agriculture. We know what has happened there.

Much as I turned to Madison to ease my concerns about the erosion of American political institutions during Trump's reign, I similarly sought solace in the rules of the global trading regime. "We'll be able to ride this out," I thought. Moreover, "we've seen this movie before." Indeed, xenophobia in the hands of anti-trade populists has been the weapon of choice for centuries. Yet, I reasoned that rules largely designed and underwritten by U.S. leadership would, even in the face of nonsense from Trump, not quickly be tossed aside.  It was in America's interests to stick to the rules. Not only had the United States been a financial beneficiary of open, rules-based trade, the political prestige and leadership benefits of being the "indispensable" country for that system would surely appeal to Trump's better senses (or at least his ego).

Nope.

The Trade and Tariff Trumpster Fire

I've been searching high and low for sources of solace about the state of global affairs with Trump in the White House. They are depressingly hard to come by. I've found a sliver of solace in, believe it or not,... trade policy.

Progressive Trade Policy, Redux

Last November, the Government of Canada launched what it called a "Progressive Trade Policy" agenda. I wrote a little piece offering a few critiques (linked here). The punchline was that I thought it was devoid of much substance, starting with default proposition that trade liberalization as practiced was not progressive. Trade liberalization is inherently progressive. Always has been.

Trump, Trade, and Train Wrecks

I have noted in a few posts over the past year and a half how frustrating it is to try and follow the chaos and incompetence that is the Trump Administration. Apart from being completely exhausted (and exasperated) by nearly everything, it hasn't gotten any easier to see anything resembling coherence or a grand plan.

Competence Need Not Apply

Just after Trump's election in November 2016, I'd have to characterize my outlook as a kind of hopeful resignation. I was resigned to the fact that nativist populism had carried the day and that Trump had put forward too many policy positions on the campaign trail I simply couldn't support. However, I was hopeful that there would at least be a modicum of competence in their implementation. "Perhaps I'm wrong," I thought. "Perhaps those who voted for Trump saw something in his messaging I was missing?" "Perhaps voters in the UK had seen something similar months earlier when they narrowly voted to exit the European Union?" I was well aware that there were voters out there, under pressure economically, anxious about their status in the global economy, and disgusted by the evident ineptitude of our political leadership to do anything about it.

A NAFTA 2.0 Breakthrough? Don't bet on it yet....

The Sounds of Compromise?

There were some small glimmers of hope floated last week (March 19-23) that the NAFTA 2.0 talks were moving in a constructive direction. The source of that hope was testimony by USTR Robert Lighthizer before the House Ways and Means Committee on March 21 and Senate Finance on March 22. Specifically, Ambassador Lighthizer suggested there had be a convergence of positions on some of the most pernicious issues in the talks, notably on America's nonsensical position on rules of origin.

NAFTA, Frisco Style

I made a quick trip to the Bay Area last week to give a presentation to a group of University of Alberta alumni. In one of the surest signs of my getting older, I keep seeing more and more former students at these things. Apart from that, however, it's gratifying to see them come out and to learn about the interesting things they are doing.

The topic of my presentation was the NAFTA2.0 negotiations. The timing was good. The 5th round of negotiations had just concluded in Montreal the previous week and Canadian Prime Minister Justin Trudeau was going to be in San Francisco in the following couple of days touting the merits of trade as well as the high-tech sector for Canada.

In future I might try and record some of what I say at these things. Now and then I say something interesting only to wish I had written it down somewhere. Actual PowerPoint presentation is linked here. However, I thought I'd try and reconstruct a bit of what I said with an "annotated" form of that presentation.

Is Dispute Settlement a Hill Worth Dying On?

Those of us following the progress (or lack thereof) through the first several rounds of talks aimed at renegotiating the NAFTA have lamented the difficulty posed for Canada and Mexico by a number of American negotiating positions; among them, tough positions on government procurement, investment protections, and rules of origin. Yet it is the American position on Chapter 19 dispute settlement that seems to be giving Canada one of the biggest cases of heartburn. Frankly, I am not sure why?

There are two reasons for my skepticism. First, Chapter 19 is far more limited in it's capacity to "adjudicate" disputes than is commonly believed. Second, data indicate that the incidence of NAFTA disputes is low, not because of dispute settlement, but because North America has become so integrated that the scope for these disputes is falling.

I'm not suggesting that Canada and Mexico should simply acquiesce to American demands on Chapter 19. But I do think Chapter 19 has become more of a psychological barometer of their relationship with the United States than a mechanism delivering sufficient value to be worth scuttling the talks. I'm not sure Chapter 19 is a hill worth dying on.

What is Chapter 19?

Trade buffs will know that NAFTA Chapter 19 set up a dispute panel system to deal with the application of domestic anti-dumping and countervailing (anti-subsidy) duties levied against imports from NAFTA members.  The idea was to take review of the application of these duties out of the national court systems and place them in some kind of quasi arbitral system. Anti-dumping and countervailing duty laws exist everywhere and are designed to protect domestic industry from the effects of dumping by foreign firms and/or subsidies to those firms conferred by foreign governments.

Progress So Far

In principle, such trade remedy laws are designed to level the competitive playing field. The reality is that national legislatures write these laws in ways obviously favourable to domestic commercial interests. More to the point, trade remedy laws are written in ways giving administrative agencies broad latitude in their application so as to defend domestic interests. To state the obvious, trade remedy statutes are among the most politically sensitive in any country; second only perhaps to agriculture and entitlements.

A dispute settlement system, it was thought, might take some of the air out of the politics, making the application of those duties fairer and less arbitrary. Moreover, by moving legal challenges to these laws away from domestic court systems and into bi-national dispute panels, some believed the legal process would be fairer as well.

Hills 1987 and 1993

In the fall of 1987, Canada and the United States were facing an October Congressional deadline for completing bilateral free trade negotiations. Among the final sticking points was dispute settlement around trade remedy laws. In the midst of a late September round of negotiations in Washington, the Canadian delegation got up and walked away (pictured below) from the table over American unwillingness to have trade remedy laws subject to dispute settlement. For a short time, the entire deal seemed dead.

A "Trade Time Out" 1987 Style

Canada wanted the agreement to permanently exempt each country's products from the application of trade remedy laws-- indeed, this was initially a red-line bargaining position for Canada. Maintaining the applicability of trade remedy laws in the context of a trade agreement ostensibly aimed freeing trade strikes many as inherently contradictory. For the U.S., both exemption from trade remedy laws and the creation of a supranational dispute settlement process with extra-judicial powers were both off the table.

When Canada came back to the negotiations, the two sides agreed to something that fell quite some distance short of what Canada wanted. Instead, Chapter 19 of the Canada-U.S. Free Trade Agreement included a bi-national dispute settlement mechanism to which Parties agreed to have disputes heard. However, the panel system's scope was limited in two very important ways: 1) panels could only investigate and rule upon whether administrative agencies actually applied domestic law as it was written. In other words, had they followed their own rules, and 2) rulings were essentially advisory. The panel had no enforcement power to force agencies to change anything.

Nevertheless, when the NAFTA negotiations began in 1990, Mexico figured it would give exemption from trade remedy a second try. Canada was rightly skeptical of Mexico's efforts, but both were eventually lucky just to get Chapter 19 enshrined in the NAFTA. As limited as it is, American legislators and subsequent administrations have had grave doubts about Chapter 19 from its inception; many arguing it created an unconstitutional, extra-judicial process by which foreigners could challenge U.S. law.

But Does it Work?

If Canada and Mexico are currently angst-ridden over America's NAFTA 2.0 position on Chapter 19, that must be because America is always losing cases, right? Perhaps Chapter 19's limitations are not so limiting after all? In 2002, Patrick Macrory argued that Chapter 19 had been successful in dissuading some of the more arbitrary applications of U.S. trade remedy law to Canadian and Mexican products. Yet, Chapter 19 has also been an abject failure in resolving disputes like softwood lumber. Indeed, every adverse determination by a Chapter 19 panel against American duties comes a new round of administrative investigations and Chapter 19 panels, eventually resulting in a politically negotiated settlement. As long as there's no supranational police power enshrined in dispute settlement mechanisms like Chapter 19, there will always be scope for one side to ignore the mechanism's findings.

Recent data presented by the Petersen Institute's Chad Bown suggests that the real reason for the apparent "effectiveness" of Chapter 19 may be connected to the process and depth of North American integration. Indeed, Bown demonstrates that between 1994 and 2016, the application of trade remedy laws by NAFTA countries against one another has declined and remained low (softwood lumber being an obvious outlier). One reason, Bown argues, is that growth of cross-border intra-industry trade has inherently undercut the rational for private actor claims of injury due to dumping or subsidy by a NAFTA partner. Moreover, each of the NAFTA countries is increasingly applying their trade remedy laws to the same non-NAFTA products from the same non-NAFTA countries.

In other words, it's North American integration itself-- not the dispute settlement mechanisms themselves-- that are driving the decline in anti-dumping and countervailing duty cases by NAFTA parties against NAFTA parties.

A Psychological Barometer

Hence, I think one of the more important components of NAFTA Chapter 19 for Canada is psychological. Chapter 19 has become a touchstone, of sorts, for Canada in terms of how it's being treated by the United States generally. For example, every time there's a Chapter 19 ruling in Canada's favor in the softwood lumber dispute and America more or less ignores it, a loud hue and cry in the Canadian press immediately goes up; American flouting the rule of law, America ignoring trade rules, or America is violating the spirit of the NAFTA.

In essence, Chapter 19 has become a symbol of access to American decision-making, a lever to be pulled to make Canada's case on trade issues that are invariably more important north of the 49th parallel than they are to the south. Chapter 19 is a formalized forum in which to drag the American side to the table to hear Canada's complaints about their treatment.

Moreover, Chapter 19 dispute settlement is something that the Americans have never extended in any other trade agreement... EVER. Canada (and Mexico) are special. Hence, given my doubts about the utility of Chapter 19 in resolving disputes, it's likely that it's become symbolic of the "special-ness" and regard with which Washington views its relationships with Canada and Mexico. For Donald Trump, Mexico certainly isn't "special," but neither is Canada.

How Red a Red Line?

So,... exactly how hard should Canada and Mexico push to preserve Chapter 19 in NAFTA 2.0? Should they demonstrate their resolve and stage a walk-out similar to that staged by Canada in 1987? My answer is no! Let it go! There are bigger fish to fry in these talks. Preserving and facilitating the deepening of North American integration is the greater, more long-lasting solution to any harassment from trade remedy laws. Even the dreaded softwood lumber dispute will eventually go away as firms, workers, and the supply of wood products both transcend and move unimpeded across borders.