If Donald Trump wants to deliver on his potentially significant changes to trade, there’s quite a lot he can do without consulting Congress much at all.
Since taking office, the president has floated the idea of a blanket tax on imports from Mexico and China (two nations Trump has emphasized for having the largest trade deficits with the U.S.), begun the process of renegotiating NAFTA and cleared the Trans-Pacific Partnership off his desk from day one.
And little of these moves, it seems, has been made with much prior consultation, nor have they complied with the more conventional ways of handling trade.
“There seems to be this mentality on the Hill that we’re plowing ahead no matter what,” said Matt Priest, president of the Footwear Retailers and Distributors of America. “We constantly hear the president’s style is to toss a grenade in the middle of the group, get everyone off kilter and then go in and level the playing field.”
If Trump is throwing grenades, mulling a potential 20 percent tax on all imports from Mexico (despite NAFTA) and an even more punitive potential 45 percent tax on goods coming from China, were two that certainly served to get the global trade community off kilter. Relations with Mexico, one of the United States’ biggest trading partners, have grown increasingly strained in recent weeks, and China has threatened to commence a trade war, possibly imposing retaliatory tariffs on the U.S. if Trump’s promises pan out.
Though many retailers are paralyzed for next moves in trade considering the level of uncertainty still surrounding it, the big question has really been: what can Trump legally do on his own with regard to trade and how will it affect business?
“Anytime you have this kind of very significant change in trade policy dynamics, people are going to be wanting to understand where the new direction is going to take them,” Andrew Samet, principal at trade law firm Sorini, Samet and Associations. “The president has definitely successfully changed the political framework about how trade is being discussed, but there’s a lot of open questions still on what that new legal framework is going to look like.”
What’s the latest in terms of changes to trade?
For now it seems, the trade change most firmly in play is renegotiating NAFTA.
“The administration has indicated that it intends to formally renegotiate NAFTA,” John Foote, an associate at Baker McKenzie, said. “And to conduct a formal renegotiation, the president will have to work in consultation with Congress.”
With Trade Promotion Authority (TPA), which was granted to President Obama last year in anticipation of finalizing the TPP deal, Trump has to consult with Congress 90 days prior to any formal renegotiations, and then ultimately get the renegotiated deal over to Congress for an up or down vote, though it isn’t for Congress to weigh in and make changes.
Both political parties have already met with the president on the NAFTA renegotiation, and Mexico has taken the comparable step on its end to get the process started, so things look to be moving in that direction. Both Republicans and Democrats, Canada and Mexico appear open to the idea of taking another look at the nearly 25-year-old agreement and finding ways to improve it, and some are even seeing the renegotiation process as a potential for opportunity rather than solely a risk. Things like stipulations on labor and environmental standards that have made their way into more recent trade agreements could end up finding a place in a new-and-improved NAFTA.
“Ultimately, I think there will be some kind of meeting of the minds about what needs to happen to open up NAFTA. Mexico has really strong interest that NAFTA continues, as do we,” Priest said, adding however, “In all essence, NAFTA has been renegotiated. It’s just called the Trans-Pacific Partnership.”
If the U.S. happened to opt for withdrawing from NAFTA altogether (following Trump’s assurances that he would pull the U.S. from the deal if, in effect, he didn’t get what he was going for), though unlikely, the process could also be a fairly simple one for the president to do singlehandedly. All Trump would have to do is give Canada and Mexico six-month’s notice of his intent to drop out of the deal (under Article 2205 of NAFTA)—there seems to be no legal requirement that the president would have to consult with Congress on this. Trump would also have the authority to cut duty-free benefits for NAFTA originating goods before that six-month withdrawal period was up. From there, if the U.S. had withdrawn from the deal, the president could slap Canada and Mexico with duties as high as 37.5% for an unfixed duration of time.
What’s less simple than withdrawing from NAFTA, however, is whether potential proposed blanket taxes, like the floated 20 percent on Mexican imports, would actually be legal, and how that would work when free trade agreements are already in place.
How legal are these potential blanket taxes anyway?
What’s giving lawyers and trade experts pause is that some of Trump’s promises would be in direct conflict with U.S. trade commitments as a member of the World Trade Organization. Some of them also go against agreements made as part of existing trade pacts.
The U.S. and all other members of the WTO have commitments in place called tariff bindings, an upper limit members have agreed not to impose duties higher than. Those upper limits are also known as bound rates. As Foote explained, the duty rates WTO members pledge to apply to imports from other members, generally known as the most favored nation rate, are typically lower than the bound rates. From there, countries can negotiate their own, even lower duty rates through arrangements like free trade agreements.
So while Trump technically has the authority to impose a blanket duty rate like the one he’s threatened Mexico with, the U.S. would be in conflict with its WTO commitments, should he do so.
“The problem is,” Foote said, “Unless a member can validly claim an exception under WTO law, unilaterally imposing a 20 percent to 45 percent tariff on all imports from another WTO member would likely violate our WTO obligations by raising the applied duties to a level that is higher than the U.S. bound rates.”
Now, membership in the WTO is all voluntary, and though there doesn’t seem to be much talk of Trump considering nixing U.S. membership in the organization since that membership brings with it a slew of trade benefits for the U.S. as well, it is wholly possible that the president won’t consider WTO rules a constraint if he’s set on locking in a blanket tax. Considering Trump’s position on not letting multilateral organizations hinder U.S. autonomy in the name of bureaucracy—the president may push forth as he sees fit.
“Regardless of WTO rules, there’s authority the president would have to address what he would deem unfair trade acts or national security concern or balance of payments deficits, or any kind of national economic emergency that he might declare,” Samet explained. “The question is—and it would certainly go against NAFTA—would the president invoke some authority to try to justify it, and would there be any possibility of being successful if the claim was litigated?”
What authority does Trump have to unilaterally act on trade?
If the president wanted to, he could make certain declarations that could see these trade changes take shape just as quickly as his travel ban.
Drawing on loopholes in things like the Trade Expansion Act of 1962, Section 301 of the Trade Act of 1974 and the International Emergency Economic Powers Act, Trump could, for one, declare a state of national economic emergency. To do that wouldn’t take much other than the president simply issuing an order saying that there’s a state of national economic emergency, and that could serve as a “defense” for a 20 percent blanket tax on Mexican imports, say.
“There are other statutes that would allow him to accomplish something similar, but at the core they all run into the same problem, which is squaring that with our WTO participation,” Foote said. “If challenged at the WTO, the U.S. could always try to defend a duty like that by invoking a national security exception. The risk of doing so is that other countries might follow suit, which could ultimately jeopardize the global trading system.”
The global trade system lives and dies on the notion of exchange of offers and exchange of commitments, so throwing those to the wind could most certainly be grounds for a global trade war.
“It’s a pretty big undertaking to say you want to reshape trade policy as it’s been done for the last 50 years into something different. It remains to be seen how that’s developed and put forward,” Samet said. “The potential of the administration to upend the existing rules of the game is clearly there, but putting in rules of the game that are going to be effective and accepted by other trade partners is no small task.”
What contingency plans should apparel brands and retailers have in place?
With so much still unclear, it’s hard for apparel retailers—or any American trading businesses for that matter—to place bets on how to move forward. But trade lawyers are advising the rush of clients concerned with trade changes to have at least some kind of contingency plan in place.
“Given the attention recently paid to imports from China and Mexico, if U.S. brands and retailers dependent on supply chains in these countries have not already begun formulating supply chain contingency plans, now is the time to be doing so,” Foote cautioned.
Rather than wondering what could happen or how quickly it could happen, companies should be prepared for the potential of anything to happen—and rather quickly. It didn’t take long at all for the immigration ban to take effect and shake everything up.
By executive order, the president could declare a state of national economic emergency and raise the duties, and though he may not do that, he could, and the issue is enough within the administration’s focus that it warrants devoting resources to mapping out alternative supply scenarios.
Looking on a positive side of things, Samet added, “People need to plan defensively to protect their supply chain and their operations, but also need to look at what potential upside opportunities there may be going forward.” He added, “The new administration hasn’t taken off the table the potential to do new free trade agreements with new countries, or when they talk about modifying existing agreements, well there can potentially be some win-win modifications.”
In short, all brands and retailers should be prepared for changes in trade which could either be drastic or simply “tweaks.”
“Ultimately, if the president is determined to take certain steps, probably he can find the authority to do that,” Samet said. “Even if the authorities would be challenged subsequently.”