In the days of old, before Donald Trump came to Washington and laid waste to what was once trade policy orthodoxy, a Commerce Department rule change set to take effect on April 6, which will treat undervalued foreign currencies as subsidies subject to duties under the U.S. countervailing duty law, would have been among the year’s most important trade policy developments.

But given the Commerce Department’s enthusiastic partnership in the administration’s project to expand the universe of import transactions subject to tariffs; Trump’s deleterious trade war on fellow Americans trying to transact with people in China; the renegotiation of NAFTA for the purposes of repatriating supply chains and eliminating trade deficits according to the tenets of Gunboat Diplomacy; and the president’s unabashed subversion of the World Trade Organization and the global trade rules, generally, these new regulations seem little more than business as usual.

But they’re not. They will grant the Commerce Department’s Office of Enforcement and Compliance—an agency that can’t utter the word “imports” without the modifier, “unfair”—another weapon to carry out the wishes of U.S. import-competing industries (regardless of the cost to others), including their wish to be import-competing in name only.

The modifications to the CVD regulations, according to the notice in the Federal Register, will “[C]larify how Commerce will determine the existence of a benefit when examining a subsidy resulting from currency undervaluation and clarify that companies in the traded goods sector of the economy can constitute a group of enterprises for purposes of determining whether a subsidy is specific.” (More on these points shortly.)

These new rules are poorly considered and, especially, do not belong in the hands of a Commerce Department that has overseen an unsavory steel and aluminum tariff exemption process that could inspire the next Martin Scorsese film. According to the Commerce Department’s own Inspector General, the process “is neither transparent nor objective” and has the “appearance of improper influence in decision-making for tariff exclusion requests.”

The question of whether and how to respond to foreign currency manipulation (more recently expanded to currency “undervaluation”) has been vexing policymakers for many years. Currency manipulation is said to occur when governments take actions to suppress the values of their currencies in order to advantage their own producers. An undervalued currency, it is argued, essentially serves as a tax on imports and a subsidy for exports.

In 2003, Sen. Chuck Schumer (D‑NY) first introduced his bill calling for a 27.5 percent tariff on all imports from China to compel the Chinese government to permit the yuan to appreciate. Schumer’s idea was roundly rejected in the Senate as a massive consumption tax on the American people—and WTO‐​illegal to boot (remember, this was back when the welfare of consumers and the rule of law were things.) But that setback didn’t stop Schumer from reintroducing the same bill in subsequent Congresses with Sen. Lindsey Graham (R‑SC)—also, to no avail. The measure, which was welcomed by domestic auto and steel producers would have been a disaster for U.S. consumers, who would have had less real income, and for export-oriented U.S. producers and their workers, who would have suffered the wrath of foreign retaliation.

Since then, other proposals for dealing with currency manipulation have come and gone—each with its own set of economic, methodological, or political problems. The idea of treating currency manipulation as a countervailable subsidy gained some traction during the legislative push for Trade Promotion Authority in 2015. At that time, Senator Schumer and others tried to attach an amendment to a companion bill to the 2015 Trade Promotion Authority legislation, which would have changed the statute to authorize the use of the countervailing duty law to offset the benefits conferred through an undervalued currency on a country’s exporters. That amendment didn’t survive the reconciliation process.

The idea that currency manipulation should be treated as a subsidy and remedied under the CVD law was embraced early on by the Trump administration. One of the problems confronting those charged with making this happen is that the law (and the WTO’s rules on these matters, which largely mirror U.S. law) requires the “benefit” from the alleged subsidy to be “specific.” This means, for example, that a subsidy must be provided to a specific industry or for a specific purpose in order to be countervailable under the law. Since the value of a country’s currency affects its economy broadly—including its exporters, importers, and import-consuming producers—it is hard to imagine that the “benefits” from currency manipulation could be considered specific enough to any particular group.

Commerce aims to remedy that by modifying 19 CFR 351.502 to explain that:

[E]nterprises that buy or sell goods internationally (i.e., enterprises in the traded goods sector of an economy) can comprise a “group” of enterprises for specificity purposes. The modification fills a gap in section 771(5A)(D) of the Act, which states that a subsidy can be specific if provided to “a group” of enterprises or industries, but does not define the word “group.” Existing 19 CFR 351.502 makes clear that in determining whether there is a “group,” Commerce is not required to determine whether there are shared characteristics among the enterprises or industries that are eligible for, or actually receive, the subsidy.

Commerce goes on to explain that this revision provides further clarification that the “traded goods sector” can be treated as a “group” for purposes of meeting the specificity requirement. Essentially, “specificity” loses its common meaning by being permitted a very broad application.

The other major modification is the addition of 19 CFR 351.528, which “provides guidance for Commerce’s determinations of undervaluation and benefit when examining a potential subsidy resulting from the exchange of an undervalued currency.” This regulation spells out Commerce’s normal practice in determining whether there is a subsidy and how it will calculate the value of the benefit it confers.

But a review of how Schumer came to choose 27.5 percent as his magic number back in 2003 illustrates why Commerce’s new regulation is a big problem. When Schumer introduced his bill, economists were generally in consensus that the Chinese currency was undervalued. But they disagreed widely about the magnitude. Economists from the IMF, the OECD, the Federal Reserve, the U.S Treasury, think tanks, and academia were all producing different estimates of undervaluation. Schumer chose 27.5 percent because it was the midpoint in a range of dozens of these estimates spanning from 10 percent to 45 percent.

More important than the imprecision in Schumer’s approach is the fact that reputable economists from esteemed institutions disagreed widely in their estimates of undervaluation. This meant that they took different approaches to estimating the difference between the yuan’s actual value and its true market value, which reveals that there is no consensus among economists about how to estimate currency undervaluation because there is disagreement about how to ascertain the true market value of a currency unless it is free-floating and determined by its supply and demand. This conclusion yields some important implications.

First, without knowing the true market value of a currency, it is impossible to calculate accurate countervailing duties to offset the effects of currency manipulation. Roughly speaking, a 10 percent countervailing duty implies that the currency is priced below its actual market value by 10 percent or that the manipulation amounts to a 10 percent subsidy for exports. But at best, a countervailing duty could only be an estimate of the value of a subsidy conferred through manipulation of the currency.

Considering that economists’ estimates of Chinese currency undervaluation varied by as much as 35 percentage points, and that any methodology employed by the U.S. Department of Commerce—in its zeal to protect domestic producers above all else—would certainly differ from one employed by an economist at the OECD or the IMF or MIT, countervailing duties would likely worsen any distortions caused by currency manipulation and inflict collateral damage on consumers and import‐​using producers.

As the Peterson Institute’s Fred Bergsten lamented after years of trying to make it work:

Determining the existence and extent of currency misalignment, especially as a possible trigger for remedial action [i.e., specifically, the application of countervailing duties under the Countervailing Duty law], has proven enormously difficult, however, both intellectually and politically. Numerous conceptual approaches to defining and measuring currency “misalignment” have been attempted. The IMF uses three different measures that often produce very different results. Most official discussions, and even many academic efforts, have foundered at this initial level.

Second, this doesn’t account for the costs incurred by exporters on their imported intermediate goods. Any benefits that may accrue to exporters from an undervalued currency must be offset by the higher costs of imported raw materials and intermediate goods consumed in production of the exported product. One person raised this issue with the Commerce Department after it published the proposed regulations, but Commerce was dismissive of it:

[A] commenter has argued that an undervalued currency may increase certain costs to a firm, which supposedly would negate or offset any benefits received by that firm due to an undervalued exchange rate. The commenter argued that an undervalued exchange rate will increase the firm’s costs for imported raw materials and equipment, which should be considered in determining whether the firm received a benefit from exchanges of the undervalued currency.

We disagree with this commenter that these modifications to our regulations should include this concept. We note that section 771(6) of the Act provides for only a limited number of adjustments to the gross countervailable subsidy in order to calculate the net countervailable subsidy. These are: (a) Any application fee, deposit, or similar payment paid in order to qualify for, or to receive, the benefit of the countervailable subsidy; (b) any loss in value of the countervailable subsidy resulting from its deferred receipt, if the deferral is mandated by government order; and (c) export taxes, duties, or other charges levied on the export of merchandise to the United States specifically intended to offset the countervailable subsidy received. The adjustment proposed by this commenter is not included within the list in section 771(6) of the Act, and therefore we are not including it in this final rule.

It’s fitting that Commerce modified its regulation to account for a possible new form of benefit-conferring subsidization but then refused to even consider that its new approach warrants a whole new set of potential offsets. To be fair, Commerce doesn’t have the authority to change the law. But it should at least be honest about the concerns.

Moreover, countervailing duties would address only the export subsidy portion of the distortion, leaving in place the import tax effect of the currency manipulation, even magnifying its adverse impact on U.S. exporters by keeping foreign products that would have been bound for the United States, if not for the countervailing duty, in the foreign market, increasing the supply and suppressing prices. There might also be overt retaliation. U.S. exporters, in other words, would get no relief and, in fact, would be punished by CVD measures.

Finally, if a currency’s true market value is determined by the intersection of its supply and demand curves, it is important to recognize that those curves (their shapes and positions) are affected by underlying economic activity, as well as public policy—monetary, fiscal, and regulatory. In other words, currency values reflect all sorts of policy decisions that it would be improper to indict direct manipulation occurring through currency market interventions, but not indirect manipulation delivered through other policy channels. After all, it is the effect of policy and not its intent that matters to the real economy.

Allowing the Commerce Department—especially THIS Commerce Department—these new authorities is something we will soon regret.

With Brexit Day upon us and the United Kingdom poised to reclaim control of its trade policy for the first time in 47 years, it’s worth sharing some preliminary thoughts about an eventual free trade agreement between the United States and the United Kingdom.

The first thing to keep in mind is that this process could take a while. The United Kingdom and the European Union are entering a transition period during which the terms of their existing relationship will continue, while they seek agreement on the terms of a new one. Understanding the rules and contours of that new relationship will be crucial to other governments interested in negotiating with the United Kingdom. In other words, it will be difficult to conclude a comprehensive U.S.-UK trade agreement until the terms of the new UK-EU relationship are settled.

Meanwhile, some less comprehensive deals between the two countries that build toward a full-fledged agreement are possible. But, eventually, there is likely to be a U.S.-UK free trade agreement, which we hope will move both countries closer to a state of free trade. Such a deal would reflect certain principles and include broadly liberalizing terms, as we described in a collaborative paper last year.

The core provisions of trade agreements concern market access for goods, services, and investment. The U.S.-UK deal should provide for the elimination of tariffs as quickly as possible, on as many goods as possible, and to the lowest levels possible. It should limit the use of so-called trade remedy or trade defense measures, as well as measures rationalized as national security imperatives. It should open all government procurement markets to each other’s goods and services providers. It should open all sectors of the economy to investment from businesses and individuals in both countries. It should open all services markets without exception to competition from providers of the other country. It should ensure that the rules that determine whether products and services are originating (meaning that they come from one or both of the agreement’s parties) are not so restrictive that they limit the scope for supply chain innovations. Those rules should reflect the fact that globalization has made it difficult—and sometimes arbitrary—to define a product’s origin. Because of cross-border investment and global supply chains, the DNA of products and services is very difficult to trace nowadays, and that is good. Finally, the agreement should simplify, streamline, and make transparent all administrative procedures governing customs clearance for goods and the admission of all qualifying persons for the purpose of conducting business services.

In addition to those free-market requirements, the U.S.-UK agreement must also include rules governing e‑commerce. Digital trade—data flows that are essential components in the provision of goods and services in the 21st century—must remain untaxed and protected from misuse and abuse. Rules that prohibit governments from imposing localization requirements or any particular data architecture that reduce the efficacy of digital services should be included, and obligations should be imposed on entities to ensure data privacy, consistent with the requirement that data flow as smoothly as possible.

When border barriers come down, the potentially protectionist aspects of regulation and regulatory regimes become more evident. If those regulations are comparable when it comes to achieving the same social outcomes—consumer safety, product reliability, worker safety, environmental friendliness—there may be scope to allow businesses to comply with only one set of rules. A regulatory cooperation mechanism to promote mutual recognition would be a useful innovation, as a means to reducing business costs (provided no deep cultural aversion or science-based reason exists for considering one regulation better than the other and worth the greater cost).

Finally, the rules must be enforceable. What’s the point of a trade agreement if its terms are just suggestions? To make sure governments keep their promises, the agreement should include a binding and enforceable dispute settlement mechanism. That mechanism would not be a true court, with the power to order governments to comply. Rather, the standard mechanism used in most trade agreements—with recourse to a third-party adjudicator for a ruling and then self-enforcement through authorized suspension of the trade agreement obligations—is sufficient.

On the other hand, some common free trade agreement provisions simply don’t belong in free trade agreements. Among the more prominent examples is overly protective intellectual property rules. It is important that intellectual property rules protect what is actually intellectual property and do not go beyond that or create rights where none actually exist.

Other examples include provisions on labor rights and environmental protections. These rules have expanded the scope of trade agreements far beyond traditional trade and commercial issues. The scope and reach of labor laws and environmental protections are a controversial domestic policy issue, and the use of international agreements to create a one-size-fits-all solution in these areas is problematic.

Furthermore, the United States and the United Kingdom are open, transparent, and free market-oriented economies. But if a U.S.-UK FTA is to be a model that applies to others, it is useful to set it up in a way that deals with issues that may arise down the road. Other countries’ economies are less open and have more state intervention; therefore, it is worth having the United States and the United Kingdom work out rules in this FTA that could apply to others who might want to join later. Examples include rules promoting transparency and disciplining the behavior of state-owned enterprises. The United States and United Kingdom should be able to agree to very high standards in these areas, standards that other parties might not reach. And then through the open accession clause, parties that wanted to reap the benefits of this agreement would have to accept these disciplines.

Summing up, an eventual U.S.-UK FTA should remove barriers to trade in goods and services, open up all sectors of the both economies to investment, and, ultimately, go as far as possible to remove all administrative impediments to economic integration without encroaching on the sovereignty of governments to pass laws and regulate in the public interest in ways that do not discriminate against foreign goods, services, and companies.

In practical terms, that means (subject to good faith, non-discriminatory public policy exceptions):

• Zero tariffs on all goods (agricultural commodities, primary industry resources, and manufacturing industry goods);
• Zero discriminatory non-tariff barriers, which means no discrimination by either party in the content or exercise of the laws, regulations, or practices affecting the provision of services of either party, including no restrictions on the entry of business people in the conduct of the provision of business services;
• Zero restrictions on competition for government procurement;
• Zero restrictions on foreign direct investment in the economy;
• Zero restrictions on cross-border data flow;
• Elimination to the fullest extent possible of impediments to expeditious customs clearance procedures for both imports and exports;
• Preclusion of antidumping or safeguard measures between the parties and special consideration for waivers when either party imposes trade restrictions for national security reasons.

Some of the country’s leading ferry systems are facing an increasingly precarious outlook. In Alaska, questions loom over the state‐​run ferry system’s future after the governor and legislature last year endorsed paring back massive subsidies needed to keep it afloat. In Washington state, meanwhile, a spokesman for Washington State Ferries (WSF) last March described the ferry system—plagued by old vessels and a numerically insufficient fleet—as “hanging by a thread.” Users of the government‐​operated ferries were hit with a fare increase in October and will face another this May.

These struggles can be at least partially explained by protectionist U.S. maritime laws. Ferries transporting vehicles—which is most such vessels in Alaska and Washington—are subject to the 1920 Jones Act, while those transporting people fall under the Passenger Vessel Services Act of 1886. Both laws mandate that vessels engaged in domestic transport be U.S.-built.

Politicians in Olympia, meanwhile, have worsened matters by mandating that WSF vessels not only be U.S.-built but constructed in Washington state. Not coincidentally, the Washington State Institute for Public Policy points out that the state has “received only one to two bids on all new ferries constructed in the last 30 years.” That may be a windfall for Vigor Industrial’s Seattle shipyard that has won most of these contracts, but it’s a kick in the teeth to everyone else.

Forcing vessels to be purchased from coddled and uncompetitive U.S. shipyards means unnecessarily higher prices. Indeed, a 2017 study by the Hawaii Department of Transportation into the feasibility of establishing a ferry system noted that the cost of vessel construction in the United States can be “significantly larger” than those built abroad.

Hawaii would certainly know.

In 2004 a company called Hawaii Superferry signed a contract with Australia-headquartered Austal to build two catamaran ferries at its Alabama shipyard for $178 million, or $89 million each ($123 million in 2019 dollars). In comparison, Austal announced last year that it was building a new catamaran ferry at one of its non‑U.S. shipyards for €83.65 million or approximately $93 million. That’s tens of millions of dollars less for a vessel with twice the passenger and vehicle capacity.

Another Austal ferry with a similar capacity as the Hawaii Superferry vessels, the Spirit of Ontario, was delivered in 2004 for $42 million, or roughly half the cost of the U.S.-built ferries.

That local build requirements result in higher costs cannot be disputed. That, after all, is the entire point of such laws. If U.S. or Washington shipyards were able to compete on price then such measures would not exist.

Maritime protectionism’s toll, however, does not stop with more expensive vessels. Faced with eye‐​popping acquisition costs, ferry systems often employ existing vessels well past their normal lifespan (WSF did not retire its 1927-built Steel Electric-class vessels until 2007, a full eighty years after they were built when their hand was suddenly forced by recurring cracks in the hulls). An aging fleet, in turn, leads to higher maintenance expenditures as the vessels inevitably degrade. As a 2019 report from the Washington Department of Transportation notes:

The [WSF] fleet has an average age of 29 years. Twelve of our remaining 22 ferries are more than 30 years old. Of those, four are at least 50 years old. This aging fleet requires more maintenance to deal with problems such as steel corrosion, replacing or repairing obsolete equipment, and preservation projects that have been deferred, leading to a higher risk of vessel breakdown.

A 45‐​year‐​old ferry in the Alaska Marine Highway System, the LeConte, offers a recent example. Sent for an overhaul last October, workers discovered $4 million in additional work that had to be performed. A 56‐​year‐​old ferry undergoing service around the same time, the Malaspina, rang up a $16 million repair bill. Saltwater is tough on steel.

These costly‐​to‐​purchase, costly‐​to‐​maintain vessels have to be paid for somehow. That means either more taxpayer‐​funded subsidies (all taxpayers in the case of Alaska—a new $244 million ferry is slated to be paid for with $222 million in federal dollars), higher fares, reduced service, or a combination thereof.

There’s a better way.

Like their neighbors in Alaska and Washington, British Columbia is also home to large ferry system called BC Ferries. Indeed, its fleet is actually more numerous than that of Alaska and Washington’s ferry systems combined. Unlike WSF and the Alaska Marine Highway System, however, BC Ferries can shop internationally for its vessels. As a result, they are typically purchased from European shipyards where BC Ferries receives far more value for its money. Limiting BC Ferries to Canadian shipyards, explains CEO Mark Collins, would force it to pay prices 30 – 50 percent higher for the vessels it buys — and result in a 25 percent fare hike.

This alternative scenario is the reality faced by U.S. ferry systems as a result of the Jones Act and similar laws.

Such protectionism is not only a disservice to taxpayers but harmful to the U.S. maritime sector itself. By raising the cost of waterborne transport such policies discourage Americans, the inhabitants of a country laced with mighty rivers and thousands of miles of coastline, from fully unlocking their maritime bounty. And it’s hardly been a boon to U.S. commercial shipbuilding, which—denied the tough competition which invigorates other sectors of the economy—has fallen well behind its international counterparts.

To fix the ills of U.S. ferries, as well as the broader maritime industry, repeal or serious reform of maritime protectionism must be firmly on the table. 

Yesterday, President Trump and Chinese Vice Premier Liu He signed a “phase one” U.S.-China trade deal. A “phase two” deal may be coming, although the timing is unclear, and many people (including us) are skeptical that it will happen any time soon. There are some technical and complicated parts of the phase one deal, and it will take some time to digest it all and come up with an overall evaluation. But it’s worth exploring some specific aspects right away. One of the most talked about parts of the phase one deal is the commitments by China to purchase large amounts of U.S. products, including agricultural products. Article 6.2, paragraph 1 of the deal has broad details of these purchases:

During the two-year period from January 1, 2020 through December 31, 2021, China shall ensure that purchases and imports into China from the United States of the manufactured goods, agricultural goods, energy products, and services identified in Annex 6.1 exceed the corresponding 2017 baseline amount by no less than $200 billion.

Given that U.S. exports to China in 2017 were about $180 billion, an additional $200 billion over two years would be a massive increase. The deal further divides up these purchases into manufactured goods, agricultural goods, energy, and services, with specified amounts for each. It then provides sub-categories, but it does not publicly break down the purchase amounts by sub-category (apparently it does so in a confidential version of the text).

This is not a typical trade deal. A normal trade deal would focus on liberalizing trade in both directions (although modern trade deals have gone beyond that and do a lot of regulating). By contrast, this trade deal is an extreme version of managed trade, with China agreeing to buy designated amounts of U.S. products (supposedly “based on market conditions”).

Beyond the problematic policy goals, it remains to be seen what all of this means in practice. Here are a few questions that arise: How exactly will China quickly ramp up its purchases? What is the role of the government in this shopping spree? What domestic process will the Chinese government use to induce companies to make these purchases? Are there accounting tricks they can rely on (e.g. reclassifying current Hong Kong imports as Chinese imports)? Will these companies shift current purchases of these products away from other countries’ producers and over to U.S. producers (and will those other countries be annoyed)? Can U.S. producers scale up production to meet these targets?

A wide range of products have been mentioned in this context, and how this plays out might vary by product. To help assess this, we thought it might be useful to focus on one product in particular. We are going to use beef as an example (a former Trump administration trade official was recently reported as having confirmed that “there would be purchases of poultry and beef – estimated at US$1.5 billion apiece – in the phase one deal, with American farmers gaining re-entry to the market after years of being left out in the cold due to China’s ban on certain hormones and additives used in US farming.”)

So how might U.S. beef exports to China fare as part of China’s promised purchases? Two years ago, we wrote about the possibility of increased U.S. beef exports to China. The removal of Chinese restrictions on U.S. beef — which had been put in place by many countries in 2003 after a BSE scare — was a key component of the 100-Day Action Plan reached between the Trump administration and Chinese officials in May 2017. As we explained then, China had become a big consumer of beef, and imports of beef into China were increasing. While many countries saw their beef sales rise, U.S. beef exports to China had been negligible due to the BSE restrictions. Removal of the Chinese restrictions was likely to help.

Unfortunately, the U.S.-China trade war got in the way. As a result of the retaliatory tariffs that China imposed in response to U.S. tariffs, most U.S. beef exports to China faced additional tariffs, beyond the normal Chinese tariffs, of between 10 percent and 35 percent, much higher rates than faced by their competitors in other countries. (Some of those competitors had negotiated free trade agreements with China, giving them an even bigger advantage).

As shown in Table 1, after the 100 Day Action Plan, the United States increased its beef exports to China from a negligible amount to $63 million in 2018. That was a good start. However, that number is only a small fraction of the total growth of imports of beef into China in that period, from $2.6 billion to $4.9 billion. Imports from other major beef-exporting countries, including Argentina, Australia, Brazil, New Zealand, and Uruguay, all witnessed a much larger jump than U.S. beef did.

For a long time, Chinese consumers preferred other meat products over beef, but as China has grown wealthier, their tastes have changed. As the table shows, their interest in beef has increased considerably. This is a development that U.S. producers should be able to take advantage of, but so far have done so only to a limited extent, whereas their rivals are moving much more quickly. Without a doubt, the Chinese retaliatory tariffs have been a significant factor.

Now with the phase one deal in place, it is likely there will be a tariff waiver on the relevant agricultural products, which will give U.S. producers a better chance to compete. In addition, language in the deal on certain regulatory issues may also help boost beef exports to China. For instance, China promised to remove the age limit for U.S. cattle, which had prohibited sales of meat from cattle over 30 months old at the time of slaughter.

However, U.S. beef sales will still face some hurdles: Their competitors have a big head start and have been developing relationships with Chinese customers for years; some competitors have free trade agreements with China and thus their products are subject to special, low tariffs; and China has had restrictions on sales of hormone-treated beef, which is a significant portion of U.S. production. (Under Annex 4 of Chapter 3, it looks like the issue of restrictions on hormone-treated beef will be addressed to some extent, which would be a big deal for U.S. producers.)

Market-sharing managed trade arrangements are a bad way to approach trade agreements, but even putting that aside, there is still the question of whether they work. It will be interesting to see how the U.S. strategy is effective here. Regardless of how it plays out, a better strategy would have been to push for an agreement like the ones Australia and New Zealand have with China, in order to get China to lower its tariffs further, rather than just restoring them to the pre-trade war level.

The U.S.-Mexico-Canada Agreement (USMCA) passed the Senate by a vote of 89–10 today. Last week, it was unclear whether or not the vote could take place before the president’s impeachment trial due to the fact that seven Senate committees were tasked with reviewing the deal first. The process by which the deal is reviewed is referred to as a “mock markup” where the bill is discussed and voted on, but no amendments can be made. It was largely expected that the committees would quickly advance the implementing bill so that the USMCA could be brought to the Senate floor as soon as possible. But this rush to vote on USMCA was misguided. Not only has Congress failed to debate the merits of a deal with our closest trading partners, the entire process by which USMCA came to a vote raises serious questions about how U.S. trade policy will be handled in the future.

The implementing bill for USMCA is over 200 pages long, and the text of the agreement itself includes 34 chapters, 13 annexes, and 16 side letters. While much has been retained from the original North American Free Trade Agreement (NAFTA), which this supersedes, and also from the Trans-Pacific Partnership (TPP) that the United States did not ratify, there are still a number of important changes that were made only about a month ago that warrant additional scrutiny. My colleague and I identified three major issues, which, taken by themselves, should be sufficient cause for an extended discussion of the deal—new auto rules of origin, labor reforms that were negotiated by House Democrats and seen for the first time last month, and the sunset clause.

On the issue of autos, it is still largely unclear how the more stringent rules will be applied when the agreement comes into force, leaving plenty of uncertainty for the integrated North American automotive supply chain. In fact, Maria Curi from Inside U.S. Trade recently reported that Mexico’s chief USMCA negotiator, Jesús Seade stated that how the rules will apply and be enforced still has to be sorted out, and that this process could take months. The major lingering question on the automotive provisions, which will in large part depend on how the rules are implemented, is whether this will raise the cost of production for autos in North America, shift supply chains, and hurt North American competitiveness in this sector. At the moment, we do not know. Meanwhile, other groups continue to lobby for protection they could not achieve through USMCA, with Amb. Lighthizer agreeing to review potential trade remedies for “certain unfair, non-market trade practices” of seasonal produce from Mexico. The passage of USMCA certainly does not guarantee an end to trade friction with our trading partners.

Labor reforms that Mexico agreed to at the eleventh hour are also of general concern for the potential it creates for a new litigation bonanza on the part of U.S. labor groups and industries seeking protection. These changes were outlined in a Protocol of Amendment, which was issued by the Office of the United States Trade Representative on December 10, 2019 after the conclusion of negotiations between Amb. Lighthizer and House Democrats. It is generally unclear what impact these new requirements will have on Mexico, which has independently undertaken labor reforms under the leadership of their current President Andrés Manuel López Obrador, who made such reforms part of his campaign. Asking Mexico for additional guarantees through a trade agreement is not only unnecessary, but also could further diminish trust between Mexico and its northern neighbors.

The third issue that should have been subject to far more scrutiny from Congress than it was afforded is the so-called sunset clause, which are a set of provisions that allow the agreement to automatically expire after 16 years unless the parties agree to extend it. The first sunset review would take place at 6 years after ratification, and the parties would have 10 years to decide the question of whether to extend or terminate. Simon Lester and I have described this as the new NAFTA’s “ticking time bomb” because it bakes in uncertainty to the USMCA in perpetuity. Furthermore, the most troubling aspect of the sunset clause is that it leaves the decision of whether to continue the agreement entirely in the hands of the executive branch. This is a major concern regardless of who is president, because it makes the decision of the agreement’s extension even more vulnerable to the political whims of that office. House Democrats had an opportunity to ask for clarification on the role of Congress in terminating USMCA, but completely failed to do so. But perhaps one should not be surprised, given how readily Congress has been willing to cede its constitutional authority to regulate commerce to the president. As with President Trump’s tariffs against steel and aluminum from our trading partners, Congress has been unwilling to take concrete steps, and so far, bipartisan efforts to rein in the president, such as from Sens. Pat Toomey (R‑PA) and Rob Portman (D‑OH), have been put on the back burner by Sen. Chuck Grassley (R‑IA), chair of the Senate Finance Committee.

In addition to the uncertainty regarding the substance of the deal, the way the final provisions were negotiated, and the process by which the USMCA has come up for a vote raises broader questions about the future of U.S. trade policy. While the USMCA was signed by the three countries in November 2018, it was not until a draft of the Statement of Administrative Action (which outlines the various changes to U.S. law for the agreement to take effect) was released in May 2019 that an effort to evaluate the deal by Congress really began. In June 2019, House Speaker Nancy Pelosi (D‑CA) established a working group of nine House Democrats to negotiate changes to USMCA, and that process was completed in December, which led to the Protocol of Amendments to the deal. With such a select group involved in the negotiations, however, one would have imagined that the final terms would be discussed with the broader House membership well before a vote would be held. That’s not what happened. Instead, House Democrats rushed to vote on the agreement before winter recess, and approved USMCA by a vote of 385–41, sending the bill to the Senate.

The lack of debate on USMCA has also raised questions about the future of Trade Promotion Authority, also known as “fast-track”—the process by which trade agreements can move through Congress expeditiously, facing only an up and down vote. TPA establishes certain guidelines for how the executive consults with Congress, as well as the order and timing of various steps in the process. However, the process by which USMCA has advanced through Congress does not appear to meet TPA requirements, and as Halie Craig argues, this means USMCA should not be eligible for an up or down vote in the Senate. Sen. Toomey also raised concerns today regarding the vote on USMCA’s compliance with TPA, noting the fact that the USMCA includes an emergency designation for increasing spending, a break from past practice. With TPA so openly ignored by both USTR and Congress, the entire process may be called into question in the future. If anything, the current process has simply increased the leverage of the executive over trade policy and weakened congressional oversight.

This all bodes poorly for the future of U.S. trade policy. The Senate’s affirmative vote of USMCA may have just solidified a new normal. In rushing to pass this protectionist love-child, Congress has further strengthened the executive in its ability to set trade policy, and left a great deal of uncertainty in its wake. Our future negotiating partners are surely taking note.

Optimism among U.S. manufacturers was near an all-time high in early 2017. Just eleven days into his presidency Trump signed an executive order specifically targeting overregulation. According to a survey by the National Association of Manufacturers, an advocacy group representing 14,000 U.S. companies, 93.3 percent of respondents felt optimistic about their company’s outlook. This optimism was driven by an expectation that the new administration would focus on deregulation, which would benefit the domestic manufacturing industry. The administration’s commitment to deregulation kept industry confidence high through much of 2017 and 2018 as regulations continued to be repealed.

However, the escalating trade war with China is erasing many of the gains from deregulation. Small and medium sized firms are being hit hard by high tariffs on steel and other imported components. The only hope for many companies is to apply for tariff exemptions, but the process is often opaque, arbitrary, and tilted heavily in favor of larger firms with strong lobbying power.

Pro Publica reports:

“Companies with enough resources and savvy can not only push their own cases, they can work to undermine those of competitors.”

“With new tariffs being announced and lifted on a few days’ notice and trade agreements constantly being renegotiated, companies have scrambled to protect themselves. Tariff exclusions are highly sought after because they offer a huge competitive advantage — especially if a rival still has to pay. The review of exclusions is happening on a compressed time schedule, with little warning before tariffs and a complex set of rules that few people understand go into effect. And there are no second chances.”

“The Commerce Department at first had projected that it would see only about 4,500 applications — a threshold that was passed almost instantly. According to a regulatory filing, USTR estimated that each exclusion request would take applicants two hours to prepare, at a cost of $200 each, and two and a half hours for USTR to process. For the China tariffs, adjudicating cases is expected to take 175,000 staff hours over the course of a year, at a cost of $9.7 million.”

Trump’s trade war is harming U.S. manufacturers, their employees, and their customers. While it may be too soon to determine the damage to the economy, the thirty percent drop in manufacturer confidence over the past year does not bode well.

Just before Christmas, Rep. Ed Case (D‑HI), citing the Jones Act’s contributions to Hawaii’s high cost of living, introduced three bills taking aim at the protectionist law. The first such bill, the Noncontiguous Shipping Relief Act, would exempt all non-contiguous U.S. locations from the Jones Act—essentially Alaska, Guam, Hawaii, and Puerto Rico—while the second bill, the Noncontiguous Shipping Reasonable Rate Act, would limit shipping rates to the noncontiguous states and territories to no more than ten percent above international shipping rates for comparable routes.

Perhaps most interesting, however, is the third piece of legislation. Known as the Noncontiguous Shipping Competition Act, the bill would grant Jones Act exemptions to any state or territory not served by at least three Jones Act ocean carriers, each of which must have at least 20 percent of the market. The bill, in other words, would grant exemptions from the law to those states and territories that suffer from monopolies or duopolies in the Jones Act trades.

Which is to say, all of them.

Ocean transport between the U.S. mainland and noncontiguous states and territories offers very little to choose from. Only two carriers, Matson and TOTE Maritime, provide ship service to and from Alaska while the Hawaii trade is the province of Matson and Pasha Hawaii (Matson admits as much in its most recent annual report, noting that it only faces “one major U.S. flag Jones Act competitor” in both markets). In Puerto Rico, meanwhile, a 2018 report sponsored by the pro-Jones Act American Maritime Partnership showed that 85 percent of the container capacity in its Jones Act trade is controlled by just two carriers, TOTE Maritime and Crowley.

Duopoly after duopoly after duopoly.

Compounding matters is that, due to the Jones Act’s U.S.-build requirement, the few carriers serving these areas must pay incredible sums for the ships they use. Matson, for example, paid approximately $918 million for its four most recent vessel acquisitions, while two ships on order from Pasha are said to have a combined price tag of over $400 million. In a foreign shipyard, these vessels would likely cost anywhere from one-quarter to one-fifth as much. That’s hundreds of millions of dollars in extra costs to be borne by shippers, and ultimately consumers.

Stifled competition and increased ship costs inevitably mean higher prices for transporting cargo to and from the U.S. mainland. That’s no small matter for the noncontiguous states and territories that overwhelmingly rely on shipping to acquire needed goods. And it’s not just more expensive transport. In some cases, the Jones Act fleet’s limited capabilities make the purchase of goods from the mainland outright impossible.

At this time, Rep. Case’s effort to relieve Hawaii and other noncontiguous parts of the United States from the Jones Act’s burden faces the longest of odds. Indeed, when he introduced three Jones Act reform bills in 2003 during a previous stint in Congress they did not receive so much as a committee hearing. It’s not clear that the political ground has sufficiently shifted in the intervening years to make passage a realistic outcome.

But encouragement can still be found in Rep. Case’s willingness to speak out about the issue in what is typically a pro-Jones Act echo chamber. While reforms to the Jones Act may not be imminent, perhaps the new legislation can help spark an overdue conversation about the costs stemming from this failed relic.