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The Proposed Border Adjustment Tax Heads to the Freezer While the Renegotiation of the NAFTA Heats Up

Posted By Administration, Thursday, August 10, 2017
Updated: Tuesday, August 8, 2017


by Melissa Proctor, Polsinelli, P.C.


July ushered in significant new developments on the international trade front involving the controversial proposed Border Adjustment Tax and the renegotiation of the North American Free Trade Agreement (NAFTA). U.S. companies with international supply chains are urged to stay abreast of these new developments as they arise, assess how proposed changes to the NAFTA may impact their operations, and voice their interests to ensure that they are considered by key decision-makers and protected.

1. The Proposed Border Adjustment Tax Has Been Shelved
On July 27, 2017, House Speaker Paul Ryan (R-Wis.) announced that the previously proposed Border Adjustment Tax (BAT) would not be included in the upcoming House tax reform effort. The announcement, which was made by way of a joint statement issued by Speaker Ryan, Treasury Secretary Mnuchin, Senate Majority Leader McConnell (R-Ky.), Senate Finance Committee Chairman Hatch (R-Utah), House Ways and Means Committee Chairman Brady (R-Texas) and National Economic Council Director Cohn, stated that –

While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.

By way of background, the concept of a BAT was originally rolled out in June 2016 in the House Republicans' "A Better Way" publication (otherwise known as "the Blueprint"), which was intended as a means to encourage companies to manufacture their products in the United States. Generally, under a BAT scenario, the corporate income tax would not be assessed on worldwide income; rather, a U.S. company would pay the tax based on its domestic revenues minus its domestic costs – thus, the tax would be calculated on the place of production and sale of the goods (i.e., the destination). Both foreign and domestically produced products would be taxed, and the costs associated with any imported goods or supplies used in sales in the U.S. would no longer be deductive. At the same time, the BAT would not be levied on export sales at all.

Although only murky details were released about the BAT, it was speculated that a BAT could have increased taxes by almost 20% on goods imported into the United States, while offering significant tax incentives to U.S. companies supplying goods to overseas markets. Many in the trade industry also believed that the implementation of a BAT would likely be challenged by other WTO member countries as a prohibited subsidy under the rules of the General Agreement on Tariffs and Trade (GATT). Many industry sectors dependent on imports voiced their opposition to the BAT, including the textile apparel, footwear, computer and automobile industries whose supply chains depend on imports of raw materials and finished goods. The BAT proposal was also opposed by many in Congress, as well; thus, the decision to abandon the controversial BAT will also likely make it somewhat easier for Congress and the Trump Administration to move forward with an overhaul of the tax code.

2. The Renegotiation of the NAFTA May Launch in Mid-August
A recent U.S. Trade Representative (USTR) news release stated that the NAFTA renegotiation is planned to commence between August 16th and 20th, and it has been reported that there will be seven rounds of talks which will be held every three weeks in order to conclude the process before Mexico's 2018 presidential elections.

Previously, on July 17, 2017, the USTR published its specific objectives for the renegotiation of the North American Free Trade Agreement (NAFTA) as required by the Bipartisan Congressional Trade Priorities and Accountability Act of 2015. Acknowledging that the NAFTA, since its entry into force in 1994, has linked the continent through trade and provided new market access opportunities for American farmers and ranchers, the USTR nonetheless stated that the NAFTA has also created new problems for many American workers. The USTR requested public comments from interested parties with regard to the modernization of the NAFTA, and held a public hearing at the International Trade Commission. The USTR received more than 12,000 written responses and heard the testimony of more than 140 witnesses during the hearing, representing various industry sectors. The majority of comments that were submitted, as well as the testimony presented, reflected U.S. industries' support of the NAFTA because of increased U.S. exports to Mexico and Canada since 1994. They also urged that negotiations should not jeopardize existing market access gains and that the key negotiating principle should be, "Do No Harm" as suggested previously by USTR Lighthizer during his testimony before a House of Representatives Committee in June.

The USTR stated that its overall goals will be to break down barriers to American exports through the elimination of unfair subsidies, market-distorting practices by state-owned enterprises, and burdensome restrictions of intellectual property. The USTR also intends to work to modernize the NAFTA, address America's trade imbalances in North America, and ensure that the United States obtains more open, equitable, secure, and reciprocal market access. The stated objectives reflect many (though not all) of the items on the wish lists of various U.S. industry sectors, as offered in the public comments and testimony provided to the USTR. Even though the USTR would maintain existing reciprocal duty-free market access for trade in goods (including agricultural products), there was no specific mention of the application of the "do no harm" principle for the jobs, businesses and industries that currently depend upon that trade with Canada and Mexico. Many industry sectors urged the Administration to maintain current NAFTA benefits and to avoid disrupting the demand for U.S. exports. U.S. exporters, importers and retailers should continue monitoring the NAFTA renegotiation closely.


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:  Border Adjustment Tax  Exports  Imports  NAFTA 

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Yusen, We Have a Problem!: NAFTA, What Are You After?

Posted By Administration, Thursday, April 6, 2017
Updated: Wednesday, April 5, 2017



by Kirk White, Yusen Logistics (Americas) Inc.


January 1, 1994, The North American Free Trade Agreement (NAFTA, to its friends) went into effect. A truly bipartisan effort, it was brokered by George H.W. Bush and implemented by Bill Clinton. It has proven to be a controversial agreement – economists say it's great for business, businesses say it's bad for manufacturing, manufacturers say it's tricky for labor, and labor says "Please don't move our plants to Mexico." The new President has called it the "single worst trade deal ever" and has vowed to either renegotiate or abandon it.

A document provided by the Congressional Research Service on February 22, 2017 made comparisons to the effect of withdrawing from the Trans-Pacific Partnership (TPP) with the future state of NAFTA. Many of the countries originally negotiating TPP have decided to move forward with trade alliances that do not include the United States. Should the U.S. withdraw from NAFTA, there are concerns Mexico and Canada may negotiate separate free trade agreements with other countries, including China, which may have long term effects on the United States' being able to compete in certain markets.

The plan has its critics and its fans and one's opinion certainly depends upon where on the supply chain one finds oneself and, even more confusingly, the facts seem to support both sides of the coin – the economy has improved (a little) since its implementation, but factories and jobs, like Elvis, seem to have left the building.

Further confounding the aura of NAFTA is that many don't fully understand it. An impromptu, informal survey showed this author that the average citizen doesn't know much about NAFTA – none could fully explain the agreement, several couldn't define the acronym (even with prompting), a few didn't know which countries were involved, and there were a couple that didn't know it existed.

With battle lines clearly drawn – jobs vs. economy – and no clear indication as to how the new administration sees the future of NAFTA, it is a fascinating time to take a closer look at this agreement.

The very first line of NAFTA asserts that the governments of Canada, Mexico and the United States "resolve to strengthen the special bonds of friendship and cooperation among their nations," and pretty much everything after that has been subject to controversy. Champions of the measure lauded that the agreement would make the U.S. more competitive globally by reducing production costs, help build and strengthen the developing Mexican economy, and decrease some of the undocumented immigrant issues by providing gainful employment in Mexico. Finally, combining the three nations into one "common trade agenda" would benefit the region as a whole with regard to growth and opportunity.

Opponents countered with the fear of massive job losses in the United States. Then presidential candidate, Ross Perot, famously quipped that if NAFTA were signed into law, there would be a "giant sucking sound" of jobs going south to Mexico.

These arguments have continued for the twenty-three years NAFTA has been in effect, but are they valid? Certainly enough time has passed so that real, empirical data can be collected and analyzed. Who gets to say "I told you so" at the bar next week?

Turns out…BOTH.

Both sides are correct, sort of…

The economy did benefit from the agreement, sort of…

U.S. workers did lose jobs to Mexico, maybe…

One industry that has definitely benefited is the auto industry. NAFTA removed Mexico's protectionist automobile degrees – 25% tariffs on imports, prohibition on importing finished vehicles, requirements of specific exports for every dollar in imports – and business began to boom. Exports to Mexico increased by 262% and imports from Mexico grew a whopping 765% in the twenty three years since the agreement was implemented (CRS pg 17). However, despite this incredible boon, the overall economic effect is still minimal as U.S. exports to Canada and Mexico only amount to less than 5% GDP (CRS pg 15).

When the subject of job loss and wage depletion comes up, the answers are harder to come by and often based on which argument one is already making. A study by the Economic Policy Institute (mostly funded by labor unions) says that 700,000+ jobs have been lost to Mexico since NAFTA came into the fold. Factcheck.org claims that 25 million jobs have been created since NAFTA. Beyond those two outliers, most analyses concur that job loss and economic growth have been minimal. The International Trade Commission reports that NAFTA had "essentially no effect on real wages in the United States" (CRS pg 16). The Congressional Research Service concludes that "any changes in trade patterns would not be expected to be significant in relation to the overall U.S. economy" (CRS pg 15). And a 2014 report by Yale University and The Federal Reserve concludes that basically everyone is slightly better off.

And this doesn't even broach the fact that U.S. trade with Canada and Mexico was already increasing before NAFTA and would likely have continued if it had never existed. Food for thought.

It will be very interesting to follow the developments with this agreement as the next few months unfold. The President won't be able to enter into formal negotiations without a 90 day notice to Congress, which, as of this writing, hasn't been given.

[1] Wall Street Journal, "Ross Confirmed as Commerce Secretary" Tuesday February 28th, 2017
[2] Congressional Research Service (CRS): "The North American Free Trade Agreement (NAFTA)" February 22, 2017
[3] https://fas.org/sgp/crs/row/R42965.pdf
[4] http://www.cfr.org/trade/naftas-economic-impact/p15790
[5] https://www.cbp.gov/trade/nafta
[6] https://www.nafta-sec-alena.org/Home/Legal-Texts/North-American-Free-Trade-Agreement
[7] http://www.epi.org/blog/naftas-impact-workers/
[8] http://www.factcheck.org/2008/07/naftas-impact-on-employment/
[9] http://faculty.som.yale.edu/lorenzocaliendo/ETWENAFTA.pdf


Kirk White has worked in every division of Yusen Logistics. After a brief stint in Transportation, he transferred to Corporate, where he coordinated Yusen's Employee Empowered Kaizen system and served as a Specialist for the Business Process Re-engineering group, after which he moved to the Warehouse division to serve as the East Coast Quality Manger before ultimately joining the International division, where he hopes to use his Quality knowledge base to prove an asset to OCM.

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Tags:  NAFTA 

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Yusen, We Have a Problem!: In The News Round-up

Posted By Administration, Thursday, March 9, 2017
Updated: Wednesday, March 8, 2017



by Mark Kopp, Yusen Logistics (Americas) Inc.


Trade Deals
Cancelled? Renegotiated? New? Take your pick. The new administration has been very busy with trade pronouncements. But what do we really know?

Trans-Pacific Partnership (TPP)
This one is pretty clear. The United States will not pursue membership in this 12 nation multilateral agreement. The President signed an executive order to that effect on January 23rd. In a New York Times article of the same day, Australian Trade Minister, Steven Ciobo, stated there were benefits for all parties that were part of the deal and it would be a shame to lose those benefits. On the other hand, James P. Hoffa, General President of the Teamsters Union, said this was "the first step toward fixing 30 years of bad trade policies."1

So it depends on your point of view. As a retailer, any trade deal that opens markets to give retailers access to new sourcing opportunities, should be a good one. Retailers are constantly searching for new sources of quality product at the lowest price. Any elimination of trade barriers or tariff reductions should be viewed as positive from a retail point of view.

Will withdrawing from the TPP help or harm retailers? Only time will tell.

NAFTA – Rumors Abound
This will be an interesting one to watch. During the campaign, the President referred to NAFTA as one of the worst trade deals ever made. Now the rhetoric from the White House is about renegotiating and tweaking. Word on the street is Canada is open to modifications and Mexico will walk out of negotiations if tariff increases are involved.

The program could be modified to include new technologies such as e-commerce. It could also be expanded to include energy, not part of the original program. NAFTA could be scrapped altogether.

There has been talk of a 20% increase on all Mexican made goods, but that could be accomplished by a "border adjustment tax," which would be part of a change in overall corporate tax policy.

What to believe? Look at your supply chain. How will your company be impacted by any changes in NAFTA? Would your company benefit by some "tweaking"? Now is the time to let your Senators and Congress know how your company will be affected. Will your company be hiring or laying off if there are changes to NAFTA? Will your company have to pay more or less? And, most important, how will changes in NAFTA ultimately affect your customers? Let your representatives know where you stand.

U.S. – U.K. Bilateral Trade Agreement
During a recent meeting President Trump and Britain's Prime Minister May announced plans to work on a bilateral trade agreement. However, this may be harder and take longer to complete than it appears. A recent article in POLITICO states it could be months if not years before formal negotiations begin.2 This is largely due to the constraints Britain will be under until it formally leaves the European Union not before 2019.

However long this trade deal may take, expect bilateral negotiations to become the norm under this administration as opposed to the multilateral deals of the past several administrations.

Compliance
This column has often urged readers to examine their compliance procedures. The Department of Justice announced on their website on February 2nd, the conviction of an auto parts executive for obstruction of justice. Along with the $7,500 fine will be a 14 month prison sentence.

Are all of your employees, including those working overseas, up to speed on all anti-corruption and anti-bribery policies? Is everyone aware of the U.S. Foreign Corrupt Practices Act (FCPA)? We have seen an increase in enforcement of these actions over the last few months. Make sure you and your company are in full compliance – unless, of course, you have nothing better to do for the next 14 months.

[1] https://www.nytimes.com/2017/01/23/us/politics/tpp-trump-trade-nafta.html?_r=0
[2] http://www.politico.com/agenda/story/2017/02/us-britain-trade-deal-000306


Mark Kopp is currently the Senior Manager for Import Compliance for Yusen Logistics (Americas) Inc. Mark has over 30 years experience in all aspects of supply chain management and compliance - from product development and buying, cargo management and shipping, customs brokerage, to warehousing, distribution and retail sales. He has managed/directed imports for Kinney Shoe Corporation, Woolworth Corporation, Russ Berrie & Co. and DHL. He has also served on the Footwear Distributors & Retailers of America government customs council, been a member of the Board of Directors for the Toy Shippers Association, and been an instructor at The World Trade Institute in New York. Currently, he is a member of the NY/NJ Freight Forwarders & Brokers Association and serves on the American Apparel & Footwear Association Government Relations Committee. Mark graduated from Franklin & Marshall College in Lancaster, PA with a B.A. in Political Science.

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Tags:  Foreign Corrupt Practices Act  NAFTA  Trans Pacific Partnership  US UK Bilateral Trade Agreement 

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Proposed Border Adjustment Tax, Trans Pacific Partnership Agreement (TPP) & NAFTA in the News

Posted By Administration, Thursday, February 9, 2017
Updated: Tuesday, February 7, 2017


by Melissa Proctor, Polsinelli, P.C.


Several key international trade issues have been taking center stage in the headlines as of late – issues that U.S. importers, exporters, manufacturers and retailers should be tracking and monitoring closely as their operations, cross-border transactions and international supply chains will likely be impacted in the very near future.

1. Border Tax Adjustment
During the 2016 presidential election, Donald Trump mentioned the possible imposition of a border tax and new tariffs on goods from Mexico and China. In the summer of 2016, the House Republicans introduced the concept of a border adjustment tax in the publication "A Better Way" (otherwise known as "the Blueprint"). So, what exactly is a border adjustment tax? Essentially, under a border adjustment tax ("BAT") scenario, corporate income taxes would not be assessed on a U.S. company's export sales or worldwide income. Rather, corporate income taxes would be assessed on a U.S. company's domestic revenues minus its domestic costs, and the costs associated with imported goods or supplies used in sales in the U.S. would no longer be tax-deductible. Thus, a company that sources raw materials, parts and components from foreign suppliers would no longer be able to deduct those costs and would pay the tax on those imports. The BAT would effectively lower the tax rate on exports and increase the tax rate on imports. The BAT would apply to imported goods (e.g., raw materials, parts, components, finished goods), imported services, certain royalties and license fees. A BAT is designed to stimulate U.S. exports, and it would also have the effect of discouraging imports and cross-border manufacturing operations. It is possible that a BAT, if implemented, could be challenged by other WTO member countries as a prohibited subsidy; however, proponents argue that it is a type of indirect tax similar to the Value Added Tax (VAT) currently imposed in many countries (but not in the United States) which has been generally accepted by the WTO. A BAT, if implemented, would clearly benefit U.S. exporters of goods and services as there would be no tax liability for export sales. However, U.S. importers of finished goods, raw materials, parts and components could see significant increases in their tax rates. The BAT could also raise the tax rates on U.S. companies that own intellectual property rights outside the U.S.

It has been reported in the media that House Republicans may try to push ahead with tax reform legislation that could include a BAT even though it is not clear whether there are enough votes to pass the bill. However, in a recent interview with The Wall Street Journal, President Trump stated that he is not a fan of the GOP's border adjustment proposal that would tax imports and exempt exports, and that the lowering of the corporate tax rate and the imposition of a BAT would be redundant and too complicated (e.g., companies would receive credit on certain parts and not on others, companies would have to contend with messy country of origin issues, etc.). Further, just this week in a speech to the U.S. Chamber of Commerce, Senate Finance Committee Chairman Orrin Hatch acknowledged that the BAT raises questions as to whether U.S. consumers and businesses would be harmed, and whether it would pass muster under the WTO rules. He noted that there are a handful of Republican Senators who do have serious reservations about the rollout of a BAT. To date, there has been no formal BAT proposal issued by the Trump Administration or Congress. U.S. exporters, importers and retailers should continue monitoring this issue and fluid situation closely.

2. Power Granted to the President with regard to International Trade Agreements
As was reported last month in the RVCF Link, Congress has historically granted broad authority to the President to negotiate, enter and even withdraw from international agreements, including Free Trade Agreements (FTAs). For example, 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 may take such actions. In such situations, the Trade Act of 1974, as amended, authorizes the President to increase tariffs ranging from between 20% to 50% of the tariff rates that were in effect on January 1, 1975. However, if this were to occur, the existing preferential tariffs established under an FTA would likely remain in effect for a certain period of time after the President's decision to withdraw from the agreement in order to give U.S. importers and exporters time to adjust.

3. Status of the Trans Pacific Partnership Agreement (TPP)
The Trans Pacific Partnership Agreement ("TPP"), which included the United States and 11 other countries in the Asia Pacific region (i.e., Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam), would have become the largest regional free trade and investment agreement ever negotiated. In February 2016, the United States and the various signatory countries signed the agreement, but each country was required to ratify and implement it into their local laws. During the 2016 presidential campaign, both parties criticized the agreement, and Donald Trump vowed to withdraw from it completely. Consistent with his campaign promises, President Trump issued a Memorandum to the U.S. Trade Representative (USTR) on January 23, 2017, in which he instructed the USTR to notify the parties of the United States' decision to withdraw from the TPP, and to begin bilateral trade negotiations with those countries wherever possible. Thus, the remaining signatory countries may stay in the agreement without the United States, and then begin negotiating bilateral trade agreements separately with the United States.

4. North American Free Trade Agreement (NAFTA)
The NAFTA is, of course, the free trade agreement between the United States, Canada and Mexico which was signed into force by former President Bill Clinton in 1994. The NAFTA eliminated duties on "originating" goods and removed non-tariff barriers on goods and services traded amongst the parties. Section 2205 of the NAFTA provides that the parties may unilaterally withdraw from the NAFTA six months after providing written notice to the other parties, and the agreement would remain in force for the remaining parties. As noted above, the Trade Act of 1974, as amended, authorizes the President to unilaterally withdraw from FTAs such as the NAFTA, and to set higher rates of duties on imported goods without the formal approval of Congress.

During his campaign, President 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. The NAFTA has been modified by the parties several times since it went into force (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.). It is anticipated that if the United States were to withdraw from the NAFTA and impose higher tariff rates on 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. Canadian Prime Minister Justin Trudeau recently 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. Similarly, Mexico's Foreign Minister, Claudia Ruiz Massieu, recently 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. President Trump is expected to issue an Executive Order on the renegotiation of the NAFTA with Canada and Mexico at any time.

5. Conclusion
As noted above, there has been no formal BAT proposal issued and no Executive Order has been published relating to the commencement of renegotiations of the NAFTA or withdrawal from the NAFTA as of the date of the writing of this article. Even though the United States is formally withdrawing from the TPP, it is likely that new bilateral trade agreement negotiations between the United States and the signatory countries will be initiated in the new future. Therefore, U.S. exporters, importers and retailers should continue monitoring all of these issues and this fluid situation closely.


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:  Border Adjustment Tax  NAFTA  Trans Pacific Partnership Agreement (TPP) 

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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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