Reinventing U.S. trade

By Chantal Wittman Meier, VP, International Banking

Take a closer look at the trade agreement renegotiation process, the tariff process and one trade agreement in particular, NAFTA.

Recently, one of the most discussed and debated political topics has been the need to reform U.S. trade policy. By pulling out of the Trans-Pacific Partnership, President Trump has made it known his intention to revise current U.S. trade policy. He can do so in a few ways — renegotiating bilateral trade agreements (a process that requires Congressional action), imposing tariffs (could be implemented by executive order) or a combination of both. But what is involved in these processes and how long would it take to negotiate new trade agreements or impose tariffs?

The process for renegotiating trade agreements

The Constitution gives Congress authority over regulation of foreign commerce and trade agreements. However, it also gives the president the authority to negotiate international trade agreements. If the president signs a trade agreement with another country or countries, it must be ratified by Congress before it can take effect.

Trade Promotion Authority, enacted in 2015, also gives Congress a meaningful oversight role in all trade negotiations. TPA allows any member of Congress to read the negotiating text and to attend negotiating rounds as an adviser. Additionally, it requires the president to publish the text of a completed trade agreement 60 days before signing it in order to provide adequate time for congressional review.

According to the House Ways and Means subcommittee on trade, TPA “…ensures Congress maintains control over changes to U.S law and provides rules for considering trade agreements.” One of these rules, referred to by the subcommittee as an “off switch,” focuses on accountability: TPA “…sets mechanisms for Congress to turn off the expedited procedures if the administration fails to meet its TPA obligations.” According to Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, a non-partisan international economic research organization, “… the history of bilateral trade agreements that the U.S. has negotiated shows that they take an awful long time to be ratified by Congress.”

However, Congress isn’t the only potential slowdown in the trade agreement process; a handful of U.S. proposed or pending bilateral free trade agreement negotiations have been on hold for more than a decade – some for diplomatic reasons, others for failure to come to agreement on specific provisions proposed by the U.S. or the trading partner country. Bottom line: restructuring the trade agreements currently in force would require dozens of individual and regional renegotiations.

The tariff process

Another economic policy that is receiving attention from the current administration is tariffs. Discussion has focused on proposed tariffs, aimed principally at China and Mexico, as well as penalties for U.S. companies producing products outside the country for sale to American consumers.

If the new administration does aim to impose tariffs, how long will that process take? Unlike trade agreements and membership in trade groups, tariffs can bypass Congress and be implemented by executive order.

Two laws — though seldom used — are in place that allow the president to act on tariffs without Congressional approval.

  • Trading with the Enemy Act of 1917 – This law allows the president to restrict the nation’s trade with an enemy country during times of war. Some experts believe the presence of U.S. Special Forces in Syria and Libya would meet that requirement. At present, the only country with which trade is restricted under the law is Cuba.
  • International Emergency Economic Powers Act of 1977 – Under this law the president can declare a national emergency in response to a foreign threat. The president may then ban trade with the country posing that threat. To remain in effect, the emergency declaration must be renewed every year, while Congress has the ability to rescind it.

And two laws previously cited by President Trump:

  • Trade Act of 1974 – This law gives authority to impose tariffs if there is an adverse impact on national security from imports. These tariffs can only be up to 15 percent on all goods. It is also short-term, only in force for 150 days before Congressional approval is required.
  • Section 232 of the Trade Expansion Act of 1962 – This allows tariffs to be imposed on certain industries. If an investigation by the Secretary of Commerce determines that, “…an article is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security…” the Secretary advises the president, who then has 90 days to decide whether to take action.

NAFTA: At the center of the targets for reform

One trade agreement with tariff implications that hits close to home is the North American Free Trade Agreement. NAFTA is a trilateral agreement which allows goods to move across the borders of Mexico, the U.S. and Canada without tariffs. In 2016, trade between the U.S. and the two countries totaled nearly $800 billion.

While President Trump’s previous comments have indicated he doesn’t support the current structure of the agreement, leaders of both NAFTA trading partners have signaled a willingness to negotiate: “If Americans want to talk about NAFTA, I’m happy to talk about it,” Canadian Prime Minister Justin Trudeau told The Toronto Star. And according to reporting by the Wall Street Journal, Mexican President Enrique Peña Nieto said recently that “…the clock was starting on a remaking of NAFTA, with Mexico beginning a 90-day period to consult with its private sector and prepare a negotiating position, and expecting the U.S. to do the same.”

NAFTA is an important factor in our region’s economy; Canada and Mexico are the largest international trading partners for Illinois, Wisconsin and Indiana. According to the Wall Street Journal and U.S. Census Bureau, Illinois ranks as  No. 5 among leading states exporting to Mexico, with $9.1 billion worth of exports last year, and in the case of Canada, 344,300 jobs and $17.5 billion worth of exports depend on Illinois’ No. 1 customer.

However, if negotiations to redraw the terms of NAFTA were to fail, the next step may be to withdraw altogether. That process begins with providing written notice of withdrawal to the other partners. Then the actual withdrawal takes place six months after the written notice. Going forward, the agreement remains in force for the other two countries, if they choose. In the U.S., Congress has the sole power to repeal or amend the law that implemented the agreement — the North American Free Trade Agreement Implementation Act. In short, stepping away from NAFTA may prove difficult and time-consuming.

How can business leaders prepare?

Early indicators point to President Trump altering U.S. trade policies. On his first Monday in office he stated he plans to renegotiate NAFTA and signed executive orders to formally pull out of TPP.

Confirmation hearings for Cabinet members provided some clues as to how the new administration will continue to proceed. Probably the best path for business leaders is to remain nimble and keep a sharp eye on developments in Washington and across the region. Talk to advisors who have deep experience in international trade. In addition, there are a number of local organizations and resources that can help; the International Trade Association of Greater Chicago, the Food Export Association of the Midwest or the Illinois Manufacturers Association. All can be sources of information that is a must-have for good decision-making and future planning for both domestic and foreign operations, sales and sourcing.