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Status of U.S. Trade Agreements Likely to Take Center Stage in 2017

Posted By Administration, Thursday, January 19, 2017
Updated: Tuesday, January 17, 2017


by Melissa Proctor, Polsinelli, P.C.


What could the election of Donald Trump and a Republican majority in the U.S. Congress mean for U.S. international trade policy in 2017 and beyond? And what are the potential opportunities and challenges for U.S. importers, exporters, manufacturers and retailers?

U.S. trade agreements, such as the Trans Pacific Partnership Agreement (TPP), the North American Free Trade Agreement (NAFTA) and other free trade agreements are likely to take center stage in 2017. The United States is currently a party to several free trade agreements involving twenty (20) countries. Free trade agreements (FTAs) are agreements between two or more countries that are intended to reduce or eliminate tariffs and non-tariff barriers on substantially all trade amongst the parties in order to allow for the free movement of qualifying goods and services in their territories. Goods that are subject to this preferential tariff treatment must satisfy certain FTA-specific rules of origin, which can include tariff shift rules, regional value content requirements, or a combination of the two. FTAs also result in significant cost and duty-savings for foreign customers of U.S. products, which make U.S. goods more attractive in foreign markets. In addition, FTAs result in lower costs for U.S. manufacturers that source raw materials, parts and components from FTA partner countries for manufacturing operations performed in the United States. Half of all U.S. exports are currently made to FTA partner country markets.

Presidential Authority to Negotiate, Enter and Withdraw from Free Trade Agreements
Congress has historically granted broad authority to the President to negotiate, enter and even withdraw from FTAs. The Trade Act of 1974,1 as amended, authorizes the President to negotiate trade agreements with foreign countries focusing on tariff and non-tariff barriers, and the resulting agreements are required to be submitted to Congress for approval.

The President currently has what is known as "fast track authority" or "Trade Promotion Authority" ("TPA") under which Congress agrees to consider trade agreements and vote on their implementing legislation without making any amendments to the agreements. This expedites the FTA implementation process and assures U.S. trading partners that the negotiated agreement will not be second-guessed or modified by U.S. legislators.

TPA is granted only for certain, limited periods of time, and must be reconsidered and reauthorized by Congress.2 Each time that Congress has extended TPA, it has also given the President authority to terminate or withdraw from FTAs. That is, after providing formal notice (i.e., six months) to FTA partner countries, the President has the unilateral authority to revoke prior Executive Orders that provided preferential tariff treatment under FTAs and to institute higher tariffs on imported goods. No formal approval from Congress is required before the President can take such actions. Per Section 125(c) of the Trade Act of 1974, as amended, the President is also authorized to increase tariffs on imported goods between 20% to 50% of the tariff rates that were in effect and applicable to the goods on January 1, 1975. However, the existing preferential tariffs established under an FTA could remain in effect for a certain period of time (i.e., 12 months) after the President's decision to terminate U.S. participation in an FTA in order to give U.S. importers and exporters time to adjust their operations and activities.

The Trans Pacific Partnership Agreement
The Trans Pacific Partnership agreement ("TPP"), which includes the United States and eleven other countries in the Asia Pacific region, would be the largest regional free trade and investment agreement ever negotiated. In February 2016, the United States and the various signatory countries signed the agreement. They currently have a maximum period of two (2) years in which to implement it into their local laws. If the TPP were implemented into U.S. law, the agreement itself would enter into force only after at least six of the signatory countries (that represent a minimum of 85% of the GDP of all of the participants) have implemented the agreement into their local laws. If the TPP were to enter into force, import tariffs on more than 18,000 "originating" goods traded between the parties would be eliminated.

The TPP was highly criticized by both presidential candidates. On November 21st, President-Elect Trump issued a YouTube video statement in which he stated that soon after the inauguration, he intends to submit formal notification to the TPP signatory countries of the United States' withdrawal from the agreement. Many of the signatory countries have already begun the TPP's ratification process. It is possible that they could enter into their own separate agreement absent the United States.

The North American Free Trade Agreement
The North American Free Trade Agreement (NAFTA) is an FTA that includes the United States, Canada and Mexico. It was signed into force by former President Bill Clinton on January 1, 1994, and eliminated duties on "originating" goods and non-tariff barriers on goods and services traded between the parties. According to the 2015 Congressional Research Services report on the NAFTA, U.S. trade with Canada and Mexico more than tripled since the agreement's entry into force. The report also stated that the NAFTA helped U.S. manufacturing industries, especially the U.S. automotive industry, become more globally competitive through the creation of new supply chains, especially along the U.S.-Mexico border.

The terms of the NAFTA itself, in Section 2205, allow the parties to unilaterally withdraw from the NAFTA after providing six months' written notice to the other parties. In addition, if the U.S. were to withdraw from the agreement, the NAFTA would remain in force for Canada and Mexico. It is anticipated that if the United States were to withdraw from the NAFTA and impose higher tariff rates to goods imported from Canada and Mexico, the costs borne by U.S. manufacturers that source Canadian and Mexican raw materials, parts and components would increase – those costs would likely be passed along to U.S. consumers in the prices of the finished goods. In addition, U.S. exporters would likely find that their products would become less competitive in Canadian and Mexican markets given that customers in those countries would be paying higher duties on U.S. goods.

During his campaign, President-Elect Trump criticized the NAFTA, and vowed to renegotiate the agreement or withdraw from it – it should be noted that President Obama made the very same promise when he was running for President, but never took steps to renegotiate or withdraw from the NAFTA. In November, Canadian Prime Minister Justin Trudeau announced that he is willing to renegotiate the NAFTA, and that trade deals such as the NAFTA should be periodically reviewed to ensure that they continue to provide benefits to the parties. Mexico's Foreign Minister, Claudia Ruiz Massieu, announced that the Mexican government would also be willing to discuss the NAFTA and how to modernize it, but ruled out renegotiation of the agreement. The NAFTA has been modified by the parties several times since it went into force in 1994 (e.g., changes in the rules of origin for certain products, modifications made to the dispute resolution processes, liberalized entry rights for certain professional occupations, etc.).

Other U.S. Trade Agreements
As noted above, the U.S. is currently a party to FTAs with twenty countries, and the Trump Administration would have the unilateral authority to terminate or withdraw from these trade agreements under the agreements themselves and the Trade Act of 1974, as amended, upon providing written notice to the various parties. The President would also have the authority to raise tariffs on goods imported into the United States from those countries. Such actions would likely draw opposition from many U.S. companies that have been relying on the preferential tariff treatment afforded under these agreements for many years. It is more likely that the incoming President would first seek to review these agreements and their renegotiation before moving to terminate them.

In addition to the FTAs that are currently in effect, the United States is also negotiating the Trans-Atlantic Trade and Investment Partnership (T-TIP) with the European Union, as well as the Trade in Services Agreement (TiSA) with twenty countries. To date, President-Elect Trump has not commented on the T-TIP. The Trade in Services Agreement (TiSA), currently in negotiations, is intended to promote and reduce barriers to international trade in services (e.g., business and professional services, such as accountancy, advertising, architectural and engineering, computer and related services, legal, communication, telecommunications, construction, energy, financial, transportation, and tourism services) amongst the U.S. and 20 trading partners that represent nearly two-thirds of global trade in services. Since the T-TIP and TiSA are still in their early stages, it is possible that President-Elect Trump will agree to allow the negotiations to continue. If the negotiations come to completion, if the new President does not oppose the agreements and if they were to come before Congress, it is anticipated that the Republican dominated Congress would approve them.

Companies that utilize FTAs are urged to stay abreast of the new developments and pronouncements from President-Elect Trump and his transition team, consider the various scenarios that could impact their sourcing decisions and supply chains in the near future, and begin thinking about contingency plans should the need arise.

[1] Trade Act of 1974, as amended (Public Law 93–618, as amended; 19 U.S.C. Section 12).
[2] The TPA was extended by Congress in the Omnibus Trade Act of 1988, TPA Act of 2002, and Bipartisan Congressional Trade Priorities and Accountability Act of 2016.


Melissa Proctor is a Shareholder with Polsinelli, P.C. With significant experience in the customs laws and regulations, export controls, economic sanctions, and international trade, Melissa is committed to understanding companies' operations and providing assistance geared toward helping them reach their specific business and operational goals. She may be reached at (602) 650-2002 or via e-mail at mproctor@polsinelli.com.

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Tags:  FTA  NAFTA  TiSA  TPP  trade agreements  Trump administration  T-TIP  world trade 

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