President Trump’s Early Trade Agenda: a Historical Perspective, Dennis M. Patterson and Ari Afilalo

The first week of the Trump Presidency witnessed the stark abandonment of a century of American international economic policy, but also an acceptance of the inevitability of globalization. President Trump reversed the Obama Administration’s denial of a permit for the Keystone XL Pipeline. This reflected a renewed, classically American embrace of free globalized entrepreneurship over competing labor, environmental or other domestic concerns. At the same time, President Trump flatly rejected the principle of non-discrimination against foreign economic interests and of multilateral legal cooperation, two basic tenets of international economic law. The result is a Trumpian mix of aggressive free trade tempered by flashpoints of protectionism, foreshadowing a redrawing of the international economic architecture.

The Pipeline decision effectively ended a claim before a NAFTA arbitral tribunal brought by TransCanada Corporation, the Pipeline operator, seeking no less than $15BN in damages. TransCanada claimed that it invested heavily in the Pipeline in reasonable reliance on assurances that the Obama Administration would grant the permit. Its ultimate denial of the permit, TransCanada argued, violated international investment law because it was an arbitrary shift in policy, intended to boost the United States credentials ahead of the Paris climate conference, long after the environmental impact of the Pipeline had already been assessed.

President Trump sided with TransCanada’s use of international investment as a vehicle to globalize entrepreneurship. This is a view long adhered to by the United States. Chapter 11 of the NAFTA, its “Investment Chapter,” is among the thousands of bilateral investment treaties that have come into effect since the early 1990s. The United States and its Western liberal democratic allies had long clamored for internationally guaranteed protection of their business interests in less developed economies. Mexico had led the opposition to international standards, arguing that foreign investors should comply with local laws applied by domestic courts. Those predictably discriminated heavily against foreigners to transfer much-needed resources to the local economy. The concrete impact ranged, at the time, from the legality of measures excluding foreigners from land ownership, requiring that domestic partners or suppliers be included in foreign-held enterprises, limiting access to justice for economic claims, changing government policy to annul benefits previously granted, or nationalizing property that domestic governments believed to have been acquired at overly favorable terms.

NAFTA and its sister bilateral investment treaties were a victory for the West, which had failed to prevail upon the South to enter a multilateral investment treaty. Investment law now squarely banned discrimination against foreign investors and provided for minimum standards of economic protection against adverse government action. Equally importantly, investment law fulfilled a “signal function” that a treaty country was safely open for business and welcomed international investment and free enterprise.

Investment law, however, quickly became the subject of criticism from the Left because, like trade generally, it was used to advocate for free market over regulation. Western business interests often used the international arena to re-litigate lost regulatory battles: Philip Morris sued Australia when that country imposed a “plain packaging” rule depriving the cigarette maker of the right to use its brands (or the Marlboro Man and other logos). Methanex, a Canadian producer of methanol, sued the United States when the State of California banned the use of that gasoline additiveBusinesses challenged environmental, safety, public health, and other regulation that reflected classical left-wing goals. Although arbitral tribunals rarely ruled for the plaintiffs, the lawsuits became flashpoints for critique from the Left of unbridled globalization.

The Left’s criticism mirrors its suspicion of globalized entrepreneurship taking front seat over regulation, more than displeasure with a specific case or controversy. President Obama, while a strong advocate of trade and a globalized marketplace, belonged to the more domestically liberal tradition that protected national sovereign regulation to a greater extent. Mr. Trump’s Pipeline decision is in line with the alternative view of free trade and investment, which privileges the globalization of entrepreneurship. The Pipeline will create jobs in the United States, which President Trump said motivated his decision from a domestic standpoint, but the real long-term impact of the project is to bind Canada and the United States to an energy partnership managed by a Canadian operator. In the process, environmental, cultural, and other domestic regulatory concerns will be subordinated to the market expansion. That is a classical pro-globalization scenario, of the more market-oriented view, and Trump squarely endorsed it.

On this score, President Trump acted within the parameters of American trade policy, and in fact was truer to the long-standing historical objectives of the United States than President Obama. At the same time, President Trump retreated from a fundamental tenet of American international economic policy: the principle of non-discrimination. During his campaign, most of Mr. Trump’s legitimate criticism of the globalized markets involved discriminatory practices against the United States interests. Currency manipulation, for example, distorts pricing in favor of foreign (Chinese) goods. While his arguments were inchoate, if properly translated Mr. Trump’s arguments challenged foreign measures that handicapped our ability to access foreign markets, while ours remains wide open under fair and transparent rules. This would be a legitimate trade battle to wage. In order to pry open Chinese markets, we can threaten or even impose retaliatory tariffs. In order to uproot hidden protectionism by our trade partners, such as currency manipulation, we can aggressively assert our economic interests even if it means blocking or taxing imports.

However, Mr. Trump went one significant step further: he is retreating from the principle that the international markets have to be origin-neutral and that governments may not act unilaterally to discriminate against foreign economic interests. This week, in the Pipeline case, he is seeking to discriminate against foreign businesses by making sure that steel and other materials are produced domestically. In his battle with Mexico, he is threatening to unilaterally give preferential treatment to U.S. goods by punishing the Mexican imports with a “border tax.” In his pressure on American companies to remain within the United States, he is indiscriminately favoring local jobs. This is done without any consideration of the extent to which compelling an American-based company not to outsource creates net gains greater than the inevitable loss of American export markets, jobs, and affordable consumer prices.

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