Diversity & Inclusion
U.S. international trade policy and enforcement were centerpieces of President Donald Trump’s campaign and are likely to feature prominently in the new administration’s agenda in the months ahead. The Trump administration has promised potentially seismic shifts in U.S. trade policy, with the likelihood of more aggressive enforcement of U.S. trade laws, significant action at the World Trade Organization (WTO), negotiation and renegotiation of important U.S. trade agreements, and measures to address the issue of border tax adjustability.
Vigorous enforcement of U.S. trade laws was a key plank in President Trump’s “Seven Point Plan to Rebuild the American Economy by Fighting for Free Trade” announced in June 2016. Since that time, President Trump has clearly expressed his intent to use every tool under U.S. law to address unfair trade practices affecting U.S. companies, workers and national security. Among the existing statutory mechanisms that could be utilized in these efforts are the following:
President Trump’s trade agenda calls for strong action at the WTO. Among other measures, the new administration is expected to increase the number and range of cases challenging the unfair trade practices of other WTO members, especially China.
Trump administration officials also have called for more effective use of U.S. leverage at the WTO to better enforce the terms of existing WTO agreements or potentially renegotiate such terms. This could include a withdrawal of some or all of the U.S. commitments under the WTO agreements if U.S. negotiating objectives are not achieved.
President Trump has called the North American Free Trade Agreement (NAFTA) “the worst trade deal ever signed” and stated his administration’s intent to renegotiate and potentially withdraw from the agreement. Priorities in any such renegotiation may include the NAFTA rules defining whether a good “originates” in a NAFTA member country, the rules governing investor-state disputes and appeals of AD and CVD cases, and the provisions on labor and environmental regulation.
Under the terms of Chapter 22 of NAFTA, the U.S. may withdraw from the agreement upon six months’ written notice. If NAFTA is terminated, the U.S. may seek to reinstate the Canada-U.S. Free Trade Agreement or negotiate new trade deals with Canada and Mexico.
NAFTA will not be the only trade agreement under reconsideration by the Trump administration. The administration has already taken action to withdraw from the Trans-Pacific Partnership Agreement (TPP). In addition, administration officials have heavily criticized the U.S.-Korea Free Trade Agreement, signaling a possible move to renegotiate or terminate that agreement.
At the same time, however, the new administration’s policies should not be taken to mean the end of new trade initiatives. In place of broad multilateral agreements such as TPP, the Trump administration seems likely to pursue a series of bilateral trade agreements with key trading partners such as the United Kingdom and Japan.
Trump administration officials have identified the value-added tax (VAT) systems of U.S. trading partners such as China, Mexico and the EU as one cause of the U.S. trade deficit and the offshoring of U.S. jobs. (See "Business Tax Reform All but Certain in US, Europe.") Under most countries’ VAT systems, VAT is charged on imports (such as imports from the United States) but is rebated on exports. Such VAT systems generally are permitted under the WTO agreements (such as the Agreement on Subsidies and Countervailing Measures) but are viewed as creating an export incentive and deterring imports, unfairly prejudicing U.S. companies.
Efforts to address this issue are likely to proceed on multiple fronts and may take various forms. For example, the Trump administration may seek to end preferential treatment of VAT systems under WTO subsidy rules or may address Mexico’s VAT system in the context of a renegotiation of NAFTA. Legislation also has been proposed that would create a border tax adjustment in the United States that would mirror the VAT systems of other countries in many respects. Under a proposal floated by the Republican leadership in the House of Representatives, the United States would implement a destination-based tax system that would eliminate the U.S. corporate tax deduction for the cost of imports and exempt income earned by U.S. companies on export sales. This and other measures are likely to continue to be considered and vigorously debated in the coming months.
The next few years could be some of the most momentous in the history of U.S. trade policy. Investors, companies engaged in international trade and U.S. companies affected by imports should pay close attention to the potentially dramatic changes on the horizon and be prepared for how they may impact their businesses and investments.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.