In early 2025, a new US administration and European Commission will be in place. It will then be more critical than ever that the United States and the European Union (EU) coordinate their approaches to international trade across a wide range of issues. A significant impediment to this coordination is the persistent temptation—by a range of players in transatlantic circles—to articulate and emphasize supposedly fundamental differences between Washington and Brussels in a way that highlights the virtues of one and denigrates the other. As satisfying as that classic conflict narrative is, it has real-world negative consequences for both parties and should be reassessed by all players in favor of the reality that what unites the United States and the EU dwarfs their differences.

State of play and the strategic imperative

Leading into 2025, cascading joint challenges of supply chain vulnerabilities, climate change, deindustrialization, competitiveness, geopolitical crises, and damaging third-country non-market economy policies and practices—coupled with an international rules system designed for another era—will increasingly drive both sides to use unilateral measures to protect and achieve legitimate policy goals. The US tariffs on steel and aluminum and the Inflation Reduction Act are two such examples; the EU Carbon Border Adjustment Mechanism (CBAM) and Deforestation Regulation are two others. Other measures risking transatlantic friction include the EU’s Corporate Sustainability Reporting Directive, the longstanding Boeing-Airbus subsidies dispute, previous tensions over the EU digital services tax, a failure to reach a critical minerals agreement, and US companies’ compliance with the EU’s Digital Markets Act.

The current trend is not abating. Unless the United States and the EU cooperate on those unilateral measures, there is a high risk that they will result in significant bilateral trade clashes. At a minimum, this will undermine achieving generally shared goals; at worst, it could result in spiraling bilateral trade retaliation.

A significant barrier to transatlantic trade cooperation is the persistent underlying narrative—among policymakers, think tankers, and others—that the United States and the EU approach the world from fundamentally different perspectives. In the memorable words of a distinguished commentator twenty years ago, the United States is from Mars, and the EU is from Venus. This can be an attractive narrative, as it allows each to claim virtues that the other supposedly lacks. It allows Washington to take pride that it is tougher and more clear-eyed than a feckless EU; it allows Brussels to claim that it is more law-abiding and multilateral than the “Wild West” United States.

But this narrative is a choice, not a fact. And the strong inclination to triumphantly celebrate supposed fundamental differences has negative real-world impacts. This narrative finds its way into public statements, is sometimes amplified by a press happy to report on big-picture fights, and can end up deeply embedded in the public consciousness, determining whether or not there is public support for US-EU cooperation. And this narrative of fundamental differences between the United States and the EU—each side claiming the higher virtue—undermines US-EU cooperation.

Further, US-EU cooperation is a necessary but insufficient condition for making progress on these global challenges. In a context in which cooperation with other trading partners is essential, setting up a sharp divide between the United States and the EU encourages those trading partners to take sides and discourages their cooperation with the EU and the United States.

Recent among many examples are the discussions over the Global Arrangement on Steel and Aluminum. To recall, the United States imposed tariffs on steel and aluminum from around the world because of damaging subsidized and non-market excess capacity in China, and the EU retaliated with its own tariffs on US products. Both sides brought dispute settlement disputes to the World Trade Organization (WTO). The United States and the EU de-escalated the situation by agreeing to a temporary two-year settlement in October 2021, under which historical levels of EU steel and aluminum could enter the United States duty free, and the EU suspended its retaliatory tariffs. By the end of October 2023, the EU and the United States were to have reached a permanent arrangement to free up bilateral trade in steel and aluminum and eliminate retaliatory tariffs. It didn’t happen, amid somewhat angry recriminations, but at the last nail-biting minute, Washington and Brussels agreed to extend the truce for another fifteen months to give breathing room to negotiate a deal.

The inability to reach a final arrangement on such a tight timeframe was not surprising. Its goal is as ambitious and unprecedented as it is critical: Climate change is an existential crisis, and non-market-based products threaten key industries and their ability to produce sustainable products. Washington and Brussels urgently need to address these issues, and this novel arrangement is a way to tackle both simultaneously: It would incentivize bilateral trade in environmentally sustainable and market-based products and disincentivize trade that is not. US National Security Advisor Jake Sullivan declared the arrangement “could be the first major trade deal to tackle both emissions intensity and over-capacity.” Negotiating such an agreement is not only novel, but it is challenging in an international rules system that prohibits discrimination against “like” products and that was negotiated when non-market state actors were not much of a factor.

That this was a groundbreaking negotiation addressing critical new joint challenges could and should have been the explanation for the inability to reach a permanent arrangement. That narrative would have supported the parties’ continued work to reach a final arrangement.

Instead, the public explanation from Brussels for the failure was that the United States was insisting on WTO-illegal tariffs and an illegal free pass on the EU’s CBAM as part of the arrangement. The EU’s trade chief, Valdis Dombrovskis, largely stuck to the line ahead of negotiations, stating, “As the EU, we’re committed to multilateralism, to the rules-based global order. We would like to avoid engaging in agreements which manifestly violate World Trade Organization rules.” Later, he hit Washington for failing to provide a clear path to end the tariffs, which Brussels deemed illegal. The United States was less vocal publicly on the failure to reach an agreement, but trade watchers understand the United States’ implied position is that the EU is institutionally hidebound, unwilling to reach beyond currently existing regulations that have failed for decades to fix the problem.

Each of these positions fit into the Mars-Venus narrative—and left each side convinced that it was right. But when talks break down with one party characterized as a rule breaker and the other as being rigid and unimaginative, it does not create an environment for further joint progress. How does the EU then justify negotiating with a rule breaker or ultimately finding a compromise along the lines of something it condemned? How does the United States justify continued discussions with a rigid institution that is unwilling or unable to be creative enough to meet new challenges?

To be clear, the United States and the EU will have good-faith disagreements over their approaches to issues, even those on which they agree. There is nothing wrong with confronting and trying to resolve those disagreements. But the readiness to attribute those disagreements to values-based fundamental differences digs a virtually unbridgeable gulf.

Looking ahead

This dynamic has shaped (and thwarted) cooperative US-EU efforts in numerous areas, including reforming WTO dispute settlement, addressing distortions caused by non-market actions of state enterprises, subsidies, excess capacity, coercion, and a host of other issues. Unless there is a change, it will continue to do so. And the number and significance of areas in which US-EU cooperation will be critical will only increase as joint global challenges mount.

Policy recommendations

There are ways to lay a better foundation for US-EU cooperation going forward:

• Focus messaging on common values and interests. All proponents of stronger transatlantic ties—think tanks, academics, business and nongovernmental organization (NGO) stakeholders, and government officials alike—should emphasize publicly and privately the reality that what unites the United States and the EU in the world trade order dwarfs their disagreements. These proponents should avoid the temptation to signal the virtues of one partner by denigrating the other and creating appealing, but largely false, fundamental differences. Those narratives, setting up epic conflicts between the forces of “good and evil,” are exciting but have profound negative effects in the real world.
• Identify priority areas for coordination and work most intensely and cooperatively on those aspects for which there is maximum overlap of interest. US and EU government officials should focus now, ahead of and in early 2025, on specific priority issues that require the most intense coordination. Issues represented by the Global Arrangement on Steel and Aluminum—climate change, including CBAM and similar measures—and non-market policies and practices should top the list. For each of those priority issues, the parties should identify the areas of strongest overlap in interest and work intensely on those areas. Where there are significant differences in approach that cannot be entirely bridged, those should be cabined off and addressed separately. The United States and the EU should also agree on principles of cooperation that avoid casting aspersions on the other party.
• Build buy-in from all stakeholders. Finally, the United States and the EU’s joint work on identified priorities, and the messaging that accompanies that work, should be strongly informed by the broad US and EU stakeholder community—including business, agriculture, labor, NGOs, think tanks, and others. This would ensure that the priority areas of work are, in fact, those that have a meaningful real-life impact, and would crystallize a positive public narrative supporting that work, both domestically and internationally.

To improve the cooperative dynamic in 2025, the United States and the EU should focus less on whether one is from Mars and the other from Venus, and more on the planet they share: Earth.

L. Daniel Mullaney is a nonresident senior fellow with the Atlantic Council’s Europe Center and GeoEconomics Center. He served as assistant US trade representative for Europe and the Middle East in the Office of the United States Trade Representative from 2010 to 2023.  

To read the report as it was published on the Atlantic Council webpage, click here.

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Wendy Cutler: Please share with us, from an Asian perspective, why it’s so important for the United States to have an active economic agenda with its Asian trading partners?

Minister Han-koo Yeo: There are many countries in the region that want strong, credible, and also predictable U.S. leadership and economic engagement in the region. Let’s think of this as two categories of countries: first, advanced countries and second, developing countries in the region. First, advanced countries, including Korea, Japan, and Australia, have gone through a paradigm shift in the trade environment and have also experienced supply chain disruption, climate crises, and other challenges. These countries need to tackle these global challenges with a strong partnership with the United States. Additionally, China’s economic ride for the past couple of decades has been phenomenal, and I think the United States could play a constructive role of balancing it out in the region.

When it comes to developing countries in the region, e.g., ASEAN (Association of Southeast Asian Nations) countries, India, they need market access to the United States and they want to be integrated into the U.S.-led global supply chain. In fact, many countries in the region, starting with Japan, Korea, and Singapore, have moved up in the industrial and technology ladder through economic cooperation with the United States. So, from the perspective of both developed and developing countries, U.S. economic leadership in the region is critically important. The current U.S. administration should get credit for returning to the region and resuming its leadership, even if the economic and market access engagement in the region is not as robust as many would have preferred.

Cutler: You mentioned that developing countries in the region welcome becoming part of the U.S.-led supply chain network. But, would this not be at the expense of China?

Yeo: No. These countries are being rapidly integrated into the supply chain led by China. But they realize that if there is too much dependence or too much concentration on one country, that becomes a vulnerability and a risk. It’s a matter of overall overdependence on one partner, especially China. So, developing countries want to expand their trade and supply chain integration with China, while also seeking a more active regional role from the United States and participating in these U.S.-led supply chains as well.

Cutler: Under the Biden administration, the United States has basically retreated from pursuing market-opening agreements or free trade agreements. Is there still a hope in the region that at some point the United States will go back to that model, even if not as robustly as it has in the past? Are countries still interested in pursuing free trade agreements with the United States?

Yeo: Obviously, they woke up to this brutal reality that things have changed in the U.S. political environment. In my view, it’s inconceivable to go back to this previous era where the United States played a leadership role in bilateral, regional, and multilateral trade negotiations. But I also think that there’s wishful thinking that maybe four years or even eight years from now, a return to a market-opening agenda could happen.

Cutler: Let’s discuss the Indo-Pacific Economic Framework (IPEF), the cornerstone of the Biden administration’s economic engagement in the region. Many people, both in the United States and Asia, have been skeptical about this initiative. But I note, Minister Yeo, that you have been supportive and have written a number of pieces pointing to potential benefits and the importance of this initiative. Can you share with us your views on IPEF, and in particular do you think it will be able to deliver concrete outcomes and provide benefits to all its members the way it’s constructed now?

Yeo: Yes. We live in a different world right now. For example, Korea has gone through a series of supply chain shocks and disruptions for the past few years. Like others, we quickly realized the absence of a new template for internal cooperation to cope with these new kinds of global challenges. Korea is one of the most wired countries with its extensive FTA network with countries all around the world, including RCEP, and Korea has been aiming to join CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership). But these traditional FTAs weren’t really designed to deal with the new types of challenges that we are facing. That’s why I think that these new types of economic cooperation agreements, such as IPEF, could play a meaningful role to fill the gap left by more conventional types of trade agreements. I believe that we should continue to advance trade liberalization through conventional FTAs (bilateral and plurilateral) but also, we need these new templates for new challenges, such as supply chain resiliency, decarbonization, and so on. Although IPEF is not perfect, it’s a meaningful first step.

Cutler: If Vice President Harris becomes president, there is an assumption that she would continue many of Biden’s policies and initiatives in this space, including IPEF. If you could offer her some words of advice on how to build on the current IPEF to make it more meaningful for Asia, what elements would you suggest could use strengthening?

Yeo: Vice President Harris is known for her strong advocacy on climate change and her environmental agenda. So, for example, the clean energy agreement in IPEF could be a starting point on which to build. The current text creates a cooperative work program, which is a way in which IPEF member countries can launch concrete projects that are of common interest to these countries and then aim to produce tangible outcomes. For example, they launched a regional hydrogen power project, which is a promising new source of clean energy, with new supply chain development and new ways to trade hydrogen. However, there’s a lot of work to do to develop tangible ways to activate this hydrogen power market. I think that this kind of project could show that IPEF could be useful in bringing tangible outcomes and benefits to these member countries through dedicated implementation.

You may also know that a couple of months ago, Singapore hosted an IPEF clean energy investor forum, and it was reported that about $23 billion of potential clean energy investment opportunities were identified. Of course, what matters is how much of these investment pledges can actually materialize into projects; but in order to do that, IPEF members need to work together to resolve investor grievances, including extensive red tape and bureaucratic hurdles.

Cutler: As you know, the United States has put the IPEF trade pillar effectively on hold through the election season. A lot of progress was made, but we also hear that a number of developing country members of IPEF had concerns about the labor provisions, in particular. Do you think if these talks were resumed quickly after the election that they could be swiftly concluded or do you think that there are larger differences in positions between the countries that could necessitate a lengthy negotiation?

Yeo: I think it’s more of a problem on the U.S. side than for other IPEF members. What I’m particularly worried about is the digital trade component. Recently, the WTO (World Trade Organization) e-commerce plurilateral joint statement initiative was concluded with its text “stabilized.” Although there is a shortage of more ambitious outcomes, I still think this is a meaningful achievement. The digital trade and e-commerce market in the region is exploding. These markets have young populations and growing middle classes, and many are interested in joining the Digital Economy Partnership Agreement (DEPA). China is also showing interest in DEPA, so now the United States is falling behind. There are no rules of the road for digital trade and without globally agreed, high-standard, digital trade rules, I think these countries in the region tend to copy and paste the standards and infrastructure available from China. So, I am afraid that the United States is falling behind in developing new global standards and rules for digital trade.

Cutler: Former President Trump has made it clear that if he is elected, he would, early on in his administration, instruct the United States to exit IPEF, calling it “TPP-2” (Trans-Pacific Partnership). How do you think the region would respond to such a move? My sense is that many countries in the region are still trying to get over the U.S. exit from TPP, so how would such an act by President Trump be perceived in the region?

Yeo: First of all, IPEF is not TPP-2 — it’s completely different. U.S. withdrawal from IPEF is a very undesirable scenario that we want to avoid at all costs. I also think if that happens, the credibility of the United States will be damaged severely. And, I think it’s not just short-term fallout but would impact relations in the more medium and long term too. To have a flagship U.S. economic engagement project and make a 180-degree U-turn would be damaging to U.S. credibility and leadership in the region.

Cutler: Trump also has been very vocal about his intention to increase tariffs against China as high as 60%, but he is also advocating for an across-the-board tariff increase of 10% on all products and for all trading partners. While there may be exceptions, that’s his current proposal. How would these actions be viewed in the region?

Yeo: This is very, very worrisome. If you look at the big picture of what is happening in the region, I believe that U.S. industrial policy has been quite effective, at least up to this point, such as the U.S. Inflation Reduction Act (IRA) and the CHIPS and Science Act. Because of these policy actions, many cutting-edge companies from Korea, Japan, and Taiwan are investing massively in the U.S. market for semiconductors, batteries, EVs, etc. This new trend of diversification and “China plus one” business strategies is providing countries like ASEAN members or India with new opportunities to develop their industries. They weren’t really given such opportunities before because everything was concentrated in China, but now they are being integrated into new global supply chains led by the United States. Against this backdrop, if the United States takes a complete opposite turn in its policy direction and imposes tariffs against the products from its friends and allies, it will be very counterproductive to the momentum building in the region and will damage U.S. national interests in the end.

Cutler: A number of countries retaliated against the United States during the first Trump administration, when tariffs were imposed, particularly on steel and aluminum, and China retaliated with its own sizable tariffs on U.S. imports. Are countries in the region likely to try to negotiate a deal to head off tariffs, or do you think that they are already planning retaliation moves against the United States?

Yeo: I think China will definitely retaliate, but it’s a more complicated picture for other countries in the region. In terms of security cooperation, I think many of these countries are under the U.S. “nuclear umbrella” or under some sort of security arrangement, so countries will take into consideration economic aspects as well as security aspects when deciding on the appropriate response.

Cutler: Under the Biden and the Trump administrations, the United States has retreated from its leadership role in the WTO. How do you see the WTO operating in the coming years, particularly as issues like supply chain resiliency, export controls, and advanced technologies become more and more prominent? Do you think the WTO risks becoming sidelined or irrelevant? Or, in light of the recent announcement on a digital trade agreement between many of the participants in the Joint Statement Initiative (JSI) on E-commerce, do you think that there is hope for the WTO to take on some of these challenging issues?

Yeo: Yes, obviously there’s a leadership vacuum at the WTO, and because of all these global challenges that we have discussed, today, more than ever, we need an organization like the WTO. But obviously, the WTO is not living up to the needs of the time. However, what is encouraging, despite overall difficulties that we are facing, is that recently middle-power countries have stepped up and have been playing a constructive leadership role. For example, the negotiations for the Investment Facilitation for Development (IFD) were led by Korea and Chile. The JSI e-commerce agreement that you mentioned, which was concluded recently, was led by Japan, Australia, and Singapore. I think, more and more, these middle-power country groups need to step up to fill the void left by the superpowers at the WTO. I also think that the WTO needs to tackle these newly emerging global challenges. For example, while there are widespread concerns with Chinese export surges and overcapacity issues, there is no global dialogue on this issue. I think the G7 is probably the only dialogue raising its voice on this issue, but its approach is more confrontational than collaborative.

If you look at WTO data on ongoing anti-dumping and countervailing duty investigations which were reported to the WTO after 2020, actions against China have comprised 30% to 40% of the total actions. This means that there is a structural issue, not just a case-by-case temporal matter. This also means we need more evidence-based, objective discussions on the extent and nature of the problem, and how it is impacting not just U.S. and China relations but also third nations including the EU, Korea, Japan, and the Global South. We need to explore global solutions to address these global issues. But there is no such global discussion underway right now. I think the WTO will need to play a more authoritative role as the only global trade body that is supposed to discuss and find solutions to these international trade issues. Also, as you mentioned, we have all of these newly emerging national security arguments regarding export controls, investment screening, and so forth. We have to decide whether to bring these matters into the realm of the WTO.

Cutler: How realistic is it though for the WTO to have a reasonable conversation on the overcapacity issue when top officials from China are denying that there actually is a problem?

Yeo: It is a difficult issue. I understand that some Chinese scholars acknowledge the need to have a global dialogue, but it’s very challenging to expect the WTO to have an effective role in taking up these very sensitive and difficult issues. However, if we were to find any place where we could have these kinds of conversations, I can’t see any other venue than the WTO.

Cutler: My final question is that if you had the opportunity to go into the Oval Office and brief our next president on these issues with very little time, what points would you highlight with respect to policy actions that they should or should not take? As the United States contemplates some of the policy measures we’ve been discussing, how would you urge the president to think about the region?

Yeo: It’s a very difficult question. If I had 30 seconds, I would make three points. First, U.S. trade and industrial policy can have a significant impact on shaping the economies and supply chains in the Indo-Pacific, as we have witnessed for the past few years. Second, nevertheless, sometimes the U.S. policy goal of strengthening U.S. leadership in the region and encouraging diversification and friendshoring of allies and partners doesn’t match its policy actions to achieve that. Third, therefore, it would be critical for the United States to step up its economic engagement in the region by providing tangible incentives for allies and partners with market access, industrial policy benefits such as the IRA tax credits, and digital trade rule-making leadership.

Han-koo Yeo is a Senior Fellow at the Peterson Institute for International Economics and Former Korean Trade Minister.

Wendy Cutler is Vice President at the Asia Society Policy Institute and the managing director of the Washington, D.C. office.

To read the interview as it was published on the Asia Society Policy Institute webpage, click here.

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It won’t be easy. Ambitions to broaden and deepen the transatlantic marketplace suffer from past disappointments. The Transatlantic Trade and Investment Partnership foundered in disputes over hormone-treated beef and investor-state dispute settlement. The current EU-US Trade and Technology Council has produced only narrow benefits. In the absence of coordination, both Washington and Brussels have resorted to unilateral measures, such as the US Inflation Reduction Act, national security-related tariffs on steel and aluminum, and the EU’s doubling down on its long-proposed carbon border adjustment mechanism. In the future, the need to take urgent unilateral measures will only increase as the dire consequences of failing to act become clear.

A comprehensive transatlantic economic agreement—not a traditional trade agreement—could avoid relitigating the issues that have sunk past US-EU trade and investment initiatives. Rather, learning from the lessons of past efforts, Washington and Brussels must accept that, despite their shared interests, Europe and the United States have decidedly different economic cultures and polities. And any new comprehensive agreement should accommodate these differences while coordinating parallel approaches to the rapidly evolving global economy.

One pillar of such an agreement should be addressing third-country practices. Both the EU and the United States are currently implementing a lengthening list of defensive trade measures—tariffs on electric vehicles and solar panels and investment screening—to protect their domestic industries and workers from subsidized Chinese competition. Unless Washington and Brussels can agree on mutually reinforcing defensive measures, Beijing will simply exploit differences in future US and European market openness. Recent experience with US duties on Chinese subsidized steel and aluminum production painfully demonstrates that unilateral defensive trade measures can adversely impact European producers. Washington and Brussels have spent more time and effort fighting each other than jointly confronting China’s nonmarket practices.

A bilateral comprehensive agreement could identify a set of policies—the types and levels of state subsidies, the use of stolen intellectual property, state regulatory and other protectionist measures—that Washington and Brussels agree lead to “unfair” competition and thus merit parallel defensive measures that do not distort transatlantic commerce.  

The second pillar of a comprehensive agreement should be improved regulatory cooperation. Regulations often seem esoteric, but they set the rules of business behavior. In a world in which market-based economies are in competition with state-driven economies, the United States and the EU need regulations that reinforce each other, do not conflict, and do not inflict unnecessary collateral damage.

Regulatory cooperation is not about adopting identical rules (the United States and the EU have tried and failed before). Nor is it about forcing US and European regulators to sit down and talk with each other (which has produced little in the way of results). Rather, Washington and Brussels need to first agree that in a deeply integrated transatlantic economy, regulations should achieve their objectives without unnecessarily undermining bilateral trade. Second, they need to agree on joint pre-regulation research and information-gathering so that regulators are each working with a common set of facts. And the US and EU regulators need to offer each other’s stakeholders a meaningful opportunity to provide pre-standard-setting and pre-regulation input to minimize business friction.

Finally, successful coordination of external measures and future regulation will not be possible without a third pillar—greater ongoing input from the business, labor, consumer, environmental, and political communities. It is a fundamental principle of democracy that those affected by governmental actions have a right to participate in such decision making. But it is also practical. As the ones directly affected, these stakeholders can ensure that the issues addressed are of practical significance. In this regard, it is particularly important that the US Congress and European Parliament are fully involved as negotiations proceed, to ensure that whatever is agreed upon has a chance of entering into force.

As both Brussels and Washington face an uncertain and challenging 2025 and beyond, they cannot afford to allow past failures to constrain future ambitions. They face too many shared challenges. Going forward, the EU and the United States can either row together in increasingly turbulent waters, or they will most assuredly sink separately.

L. Daniel Mullaney is a nonresident senior fellow with the Atlantic Council’s Europe Center and GeoEconomics Center. He served as assistant US trade representative for Europe and the Middle East in the Office of the United States Trade Representative from 2010 to 2023. He was chief negotiator for comprehensive trade agreements with the EU and the United Kingdom, as well as trade lead for the US-EU Trade and Technology Council.

Bruce Stokes is a visiting senior fellow at the German Marshall Fund, a former senior fellow at the Council on Foreign Relations and the former international economics correspondent for the National Journal.

To read the blog as it was published on the The Atlantic Council webpage, click here.

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Worldwide support for investor-state dispute settlement (ISDS) — a legal mechanism that permits foreign investors to pursue binding, third-party arbitration against a country over actions that harm their investments — has been under attack from Western democracies since at least 1998, when opposition by the U.S., Canada, and France led to the termination of negotiations toward a Multilateral Agreement on Investment (MAI). However, for more than two decades following this step, the EU and U.S. continued to negotiate bilateral investment treaties (BITs) and free trade agreements (FTAs) with ISDS provisions, including the 2015 Trans-Pacific Partnership (TPP) between the U.S. and 11 other nations and the 2016 Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada. 

More recently, indications that new ISDS agreements may be coming to an end have proliferated, at least with the EU and U.S., as discussed in this report. But the most recent and, perhaps, clearest sign of ISDS losing its appeal for the largest capital exporting jurisdictions is the EU’s unanimous decision in April 2024, effective in May 2024, to withdraw from the 1994 50-plus member European Union Energy Charter Treaty (ECT). The fact that the ECT had been renegotiated in 2022 because of concerns about its inconsistency with government responses to climate change were apparently not decisive. For the EU, the ECT is essentially abandoned. The future of ISDS, even with substantial reforms, such as those being discussed by the seemingly endless United Nations Conference on Trade and Development’s (UNCTAD) Working Group III, remains uncertain, although many developing countries, such as Mexico, still see it as a valuable stimulus for foreign investment despite reservations.

The U.S. had concluded multiple FTAs and a few BITs as late as 2007. More recent agreements were the TPP and the United States-Mexico-Canada Agreement (USMCA). The U.S., under former President Obama, was among the principal supporters of the TPP in 2015 — an agreement that incorporated then-traditional ISDS provisions. However, the U.S. withdrew under the Trump administration in January 2017, and the TPP became the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The 2018 USMCA saw a radical reduction in the scope of investor protection, with ISDS eliminated between the U.S. and Canada entirely and circumscribed between the U.S. and Mexico, with the full range of enforceable protections limited to a handful of government concession agreements. Since 2018, the large majorities of the Democratic Party as well as many Republicans are opposed to new — and in some cases, existing — investor protection provisions, with the opposition led by former U.S. Trade Representative Robert Lighthizer and Democratic Sen. Elizabeth Warren of Massachusetts. While business groups continue to strongly defend ISDS provisions in U.S. FTAs, they have not prevailed over U.S. anti-ISDS policies.

That being said, the investment law bar and young lawyers who wish to join should take note: ISDS will be a feature of the international legal and investment world for decades to come. ISDS will still be of importance even if the U.S. avoids new agreements and withdraws from existing ones — the latter being difficult and, in my view, very unlikely, as discussed below — and if the EU and its members avoid new commitments. Why? Because worldwide, there are a total of about 2,222 BITs in force and 388 investment provisions in FTAs. Although a few International Centre for Settlement of Investment Disputes (ICSID) member countries, such as Bolivia, Ecuador, and Venezuela, have withdrawn from the ICSID Convention and terminated some of their BITs, the vast majority of ICSID members remain party. Several dozen new cases of BITs are still being registered each year.

To sort all this out, this report is structured as follows: 

• Section II summarizes the content of typical BITs and their evolution in recent years.
• Section III analyzes the driving forces that led to the ICSID Convention’s establishment in 1964.
• Section IV traces the proliferation of BITs and FTA investment provisions after the ICSID went into force, to the golden age of awards, effectively spawned by the 1994 North American Free Trade Agreement (NAFTA).
• Section V addresses forces leading to the demise of ISDS, clearly in the U.S. and EU but not necessarily in other major capital exporting countries, such as Japan and Canada, and emphatically not with China.
• Section VI offers brief conclusions.

The reader should keep two major caveats in mind. First, the U.S. and EU, while leaders in foreign direct investment (FDI), are not the only sources, and EU and U.S. dominance in the investment field likely will decrease in the future with the expanding participation of South Korea, Singapore, China, and other major economies in Asia. Second, ISDS has been the subject of thousands of articles and hundreds of books. Any attempt, such as this one, to address these issues in a single piece, will reflect some critical omissions, for which I apologize in advance.

II. Content of Typical Investment Treaties and the EU Energy Charter Treaty

NAFTA and Its Successors

In this discussion, it may be useful to set out what we are discussing when we use the term “ISDS.” For this purpose, we will begin with NAFTA’s Chapter 11, as the standard example, in large part because it has been widely copied elsewhere, not only in subsequent agreements concluded by the three NAFTA parties. In the interest of brevity, procedural provisions and scope issues will be set aside as they are available by reviewing the text and voluminous academic and other commentary.

Key protections of NAFTA’s Chapter 11 include the following:

• Guarantees of national treatment.
• Most-favored-nation treatment.
• Minimum standard of treatment.
• Ban on performance requirements.
• Flexibility in the appointment of senior management.
• Financial transfer rights.
• Protection against direct and indirection expropriation.
• Exceptions for certain industries or sectors, depending on the agreement.

For purposes of this discussion, Section B: “Settlement of Disputes between a Party and an Investor of Another Party” of NAFTA’s Chapter 11 is also relevant, because it provides detailed rules for mandatory third-party arbitration of disputes between a NAFTA investor and another NAFTA government (ISDS).

While there have been many changes over the more than 20 years between NAFTA and TPP negotiations, the most significant updates relate to environmental concerns. For example, the TPP and many other investment chapters incorporate the following language: “Non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances.”

The Energy Charter Treaty

The original ECT as amended is more limited in scope, perhaps reflecting an early objective to encourage multilateral cooperation among many countries in the energy sector as the Cold War appeared to have disappeared. Key provisions include:

• Freedom to select key personnel for positions in an investment project.
• Compensation for losses related to war or other armed conflict.
• Protection against direct and indirect expropriations.
• Freedom to transfer funds.
• Subrogation of government investment guarantors when the host country has taken action covered by an investment guarantee.

However, the ECT does not provide national treatment, most favored nation treatment, or a guarantee of fair and equitable treatment like many more traditional ISDS agreements. It also contains specific recognition of “state sovereignty and sovereign rights over energy resources” and rather weak language on “sustainable development” and avoidance of environmental degradation. After briefly addressing transparency, taxation, state enterprises, and coverage of subnational authorities, along with certain exceptions and provision for economic integration agreements — e.g., FTAs and customs unions — the treaty also incorporates a broad investor right to international arbitration. In a major departure from BITs and FTA investment chapters, which usually provide only for actions by foreign investors against host government, the treaty provides for settlement of disputes between the state parties also via third-party arbitration.

III. The International Centre for the Settlement of Investment Disputes 

The ICSID Convention, according to one of its principal negotiators and advocates, the late Andreas F. Lowenfeld, Herbert and Rose Rubin Professor of International Law Emeritus at New York University, reflected a lengthy debate in the U.N. between two main entities:

• Developing countries, most of which advocated “Permanent Sovereignty over Natural Resources” and rejected the application of international law to investment disputes.
• Capital-exporting countries, which sought mechanisms that would provide third-party arbitration for investment disputes and accept the international requirements inter alia of prompt, adequate, and effective compensation.

Industrial states, which were the principal donors at the World Bank, were no longer providing sufficient capital for development; rather, such funding depended increasingly on private investors. The result was a mechanism for addressing investment disputes, but no agreement on the principal obligations of host states to investors. After several years of debate on the idea of a convention, the World Bank’s executive directors approved a draft of what would become the ICSID in 1962. As Aron Broches, then the World Bank’s general counsel, noted, “If the parties had agreed to use the services of the Center for arbitration as the sole means of settling their dispute, the government party should not be permitted to refer the private party to the government’s national courts, and the private party should not be permitted to seek the protection of its own government and that government would not be entitled to give such protection … Finally, … the Convention would provide that such awards would be enforceable in the territories of the countries adhering to the Convention.”

Significantly, as the italicized phrase demonstrates, the parties to ICSID are not, by becoming parties, obligated to accept third-party arbitration under the ICSID Convention. Rather, consent must be registered separately, typically under a BIT, under a dispute settlement chapter of a trade agreement — such as NAFTA’s Chapter 11 discussed above — in an investment contract, or in an agreement between an investor and ICSID party for resolving a particular dispute.

The requirements and procedures for ICSID arbitration have been widely discussed elsewhere, including but not limited to ICSID’s own website. The treaty entered into force in 1966, and as of 2024, it includes 158 contracting states.

IV. The Golden Age of ISDS 

While NAFTA itself resulted in more than 60 notices of arbitration and some 30 final arbitral decisions from 1994 through June 30, 2023, the total number of known treaty-based ISDS claims as of July 31, 2022, is reported to be 1,229. NAFTA was unusual for its time in that it provided for ISDS between two developed nations, Canada and the U.S. Over the period of NAFTA’s reach — January 1994 to June 2020 — there were more claims between Canada and the U.S. than between any other two parties. In the past, as noted earlier, the general assumption had been that ISDS would typically take place between developed country investors and developing country host governments. While this has certainly been the predominant pattern worldwide, several other major international agreements with ISDS provisions were concluded after NAFTA, including the ECT, which included most European and many developing nations, and the TPP, which is also a mix of developed and developing countries.

As an academic observer during most of this period and an arbitrator in two ISDS proceedings, my sense is that the explosion of ISDS cases under NAFTA and elsewhere was driven by a variety of factors, including increasing volumes of private FDI across borders. These included, in many cases, decisions by host governments to change the conditions under which the investments were originally made unilaterally and to increase environmental protection after mining concessions had been negotiated and granted, particularly with the installation of new, more environmentally conscious governments. In my view, the creativity of many U.S. and international investment lawyers was probably a factor as well, particularly under NAFTA. It is also significant that many developing countries have been persuaded that the existence of a BIT or FTA investment chapter with a capital-exporting country can be a major factor in attracting FDI in an increasingly competitive world.

This latter conclusion is sometimes reached despite the lack of any clear data, suggesting that the treaties were a controlling factor in attracting FDI, rather than simply one aspect of creating a favorable investment climate. As an UNCTAD summary noted, “Overall, developing countries stand to benefit from engaging in IIAs in terms of increasing their attractiveness for FDI, and therefore the likelihood that they receive more FDI. … Furthermore, — and this point cannot be emphasized enough — the conclusion of IIAs needs to be embedded in broader FDI policies covering all host country determinants of foreign investment. IIAs alone cannot do the job.”

This view seems supported by anecdotal evidence. For example, there is no investment treaty between the U.S. and China, Brazil, or India, yet U.S. investors over the past several decades have flocked to all three countries, at least as long as other aspects of the host country’s investment climate were generally positive — true in some periods but not in others — and the potential for financial gains was robust. That being said, it seems self-evident that an investment protection agreement can in some instances be decisive in encouraging an investor to pursue a project in a given country, with Mexico’s experience in NAFTA being a good example, as discussed below.

As of June 2024, the total number of cases submitted to ICSID arbitration was 1,020. However, while the first case was registered in 1972, no more than four cases were registered annually until 1997. From 1997 to 1999, 9 or 10 cases were registered each year, for a total of 29 cases. ICSID usage continued to expand in the 21st century, with 12 in 2000, 14 in 2001, 18 in 2002, and 57 in 2023. Twenty-one cases were registered in the first five and a half months of 2024. The expansion probably reflected several factors, including the pressures of multinational enterprises on their lawyers, and the replacement of public foreign investment with private FDI. Still, the most important reason for the increase may have been the proliferation of BITs and investment chapters of FTAs. According to the UNCTAD Investment Policy Hub, by 2024, 2,835 BITs had been negotiated, and 2,222 were in force, while another 462 investment provisions in trade agreements have been agreed upon, of which 388 are in force.

V. Summary of Forces Behind the Demise of ISDS

EU

EU members’ opposition to the ECT and other investment protection agreements with ISDS chapters seems to have been fueled significantly by a broadening populist trend that favors “sovereignty.” In this respect, a major critique of ISDS is that it authorizes private arbitrators rather than democratically chosen national or EU judges to make binding decisions. A widespread belief exists that ISDS is unfair because of the following:

• Is nontransparent.
• Is overly expensive leading to the exclusion of all but the largest enterprises.
• Allows investors to ignore or downplay environmental concerns.
• Does not offer workers and environmentalists a similar opportunity to seek arbitration against host governments.

However, in my opinion, a series of highly publicized arbitrations between developed European countries along with several decisions of the Court of Justice of the European Union (CJEU) seeking to prevent intra-EU arbitration are also responsible. While the European Commission (Commission) abandoned traditional ISDS in the CETA negotiations in 2015 in favor of its investment court mechanism, as discussed below, and has continued to advocate for a multilateral investment court, no EU member or other country has endorsed the project, as far as I am aware.

Opposition to ISDS is shared by the CJEU because the justices appear to view it as a usurpation of CJEU authority, although currently their case law applies only to intra-EU member arbitrations. As one international law firm explained in 2023, 

“The European Union’s (‘EU’) policy against arbitration of intra-EU investor-State disputes remains largely cabined to its borders. Arbitral tribunals continue to reject objections to their jurisdiction on the basis of the CJEU’s Achmea, Komstroy and PL Holdings judgments, the sole exception being the Green Power decision, in which the tribunal was seated within the EU. The EU’s attempt to renegotiate the Energy Charter Treaty by, among other things, carving out intra-EU arbitration did not succeed, and the EU is now advocating for a coordinated withdrawal instead. And while EU Member States courts have set aside intra-EU awards issued by tribunals seated in their jurisdictions, U.S. courts have allowed requests for enforcement of intra-EU awards to proceed, showing that investors can still obtain relief outside the EU.”

This policy seems to have expanded despite the fact that some arbitral tribunals have refused to recognize the applicability of Achmea and related cases, although such rejection may not be absolute. For example, in Green Power v. Spain, the arbitral tribunal decided it had no jurisdiction over the claimant’s claims and dismissed the case, essentially on grounds that an arbitral tribunal operating under the ECT cannot override EU law, as reflected in the CJEU decisions, because EU law is lex superior.

To the best of my knowledge, no similar ISDS tribunal has taken this approach. However, in June 2024, the Commission and EU members formally declared that the ECT “cannot and never could serve as a legal basis for intra-EU arbitration proceedings,” further limiting the scope of ISDS as it affects EU member states. As no EU members remain party to the ECT and increasingly respect the CJEU rulings, there will be fewer opportunities for intra-EU arbitrations, although arbitrations under existing BITs with non-European countries remain available.

Significantly, under the Treaty of Lisbon enacted in 2009, EU member states were no longer authorized to negotiate their own BITs, FTAs, or many other international agreements. As a result, not only was intra-EU arbitration precluded by Achmea, but the change led the Commission to promote and seek to implement a new approach to ISDS, consisting of a permanent investment court and appellate mechanism. The investment court mechanism was initially included in the CETA and the FTA with Vietnam. However, a decade after entering into force provisionally, this CETA remains under provisional application, with the application of the investment provisions excluded. Ten of the 27 EU members have refused to approve it in part because it includes the EU’s novel investment court and appellate mechanism for resolving investor-state disputes, believed by many to be a challenge to national sovereignty like a traditional ISDS.

EU FTAs with Vietnam and Singapore that originally were to include ISDS mechanisms were restructured to isolate the ISDS provisions, which remain in limbo with Vietnam’s agreement, or shelved indefinitely for later negotiations with Singapore’s. While the Commission does not seem to have abandoned its investment court mechanism, no significant progress toward bringing the mechanism into force appears to have been made beyond agreeing with Canada on rules that would govern the investment tribunal, mediation, and binding interpretations, along with a code of conduct for the judges.

As far as the ECT is concerned, as of January 2024, Denmark, France, Italy, the Netherlands, Poland, Slovenia, and Spain had or were in the process of withdrawing from the ECT, with the Commission endorsing the withdrawals of all EU members. Regarding actual disputes, the ECT secretariat reported that as of May 2023, 158 known cases had been instituted under the treaty. Of these, as of June 2022, Russia, the Ukraine, or Moldova were respondents in only eight cases; more significantly, among the largest EU members, Spain was the respondent in 51 cases, Italy in 13, Poland in 5, and Germany in 4, while France and the U.K. were the respondent in no cases.

The ECT is one of a relatively few ISDS agreements, along with NAFTA, where one developed country’s investors can bring a claim against another developed country. Before NAFTA and the ECT, such claims were rare at best, mostly under BITs and FTAs, where despite reciprocal provisions, the principal purpose was to protect capital exporting country investors from arbitrary actions in developing countries with weak legal systems.

U.S.

Similar anti-ISDS views are prevalent in the U.S. Notably, U.S. Trade Representative Katherine Tai recently commented: “President Biden does not believe corporations should receive special tribunals in trade agreements that are not available to other organizations, and he opposes the ability of private corporations to attack labor, health, and environmental policies through ISDS. I share these views, and the United States is not currently pursuing any trade or investment agreements that would establish ISDS.”

Although such opposition did not represent a significant majority position in the U.S. Congress and with U.S. presidents until relatively recently, its origins go back at least as far as the negotiation of NAFTA in 1991–92. In a more recent statement at the time of the USMCA negotiations, such organizations as Public Citizen attacked the ISDS provisions of NAFTA as a “stunning corporate power grab: NAFTA grants rights to thousands of multinational corporations to bypass domestic courts and directly ‘sue’ the U.S., Canadian and Mexican governments before a panel of three corporate lawyers.” Sen. Warren has opposed ISDS in trade agreements at least since the TPP negotiations in 2015, while Lighthizer’s public opposition is somewhat more recent — albeit for different reasons — with the USMCA negotiations. As he observed in 2017, “The bottom line is business says ‘We want to make decisions and have markets decide. But! We would like to have political risk insurance paid for by the United States’ government.’ And to me that’s absurd. You either are in the market, or you’re not in the market. They’ll come in and say ‘Ambassador, the market’s dictating we go to Mexico to invest in certain things.’ And my reaction is, ‘Then go to Mexico and invest. That’s what the market’s for.’” What is most significant is that — for sharply differing reasons as noted in the introduction — the U.S. left and right has strongly opposed ISDS in both current and future trade agreements; many also are eschewing all significant trade agreements entirely, as has been the Biden administration policy.

However, strong opposition to the elimination of ISDS in existing and future agreements is widespread among business groups. As a letter from the Business Roundtable, National Association of Manufacturers, and the U.S. Chamber of Commerce at the time of the USMCA asserted: “ISDS does not infringe U.S. sovereignty. Rather, it upholds the same fundamental due process and private property guarantees protected by our Constitution, and it obligates other countries to uphold these precepts as well. ISDS 2 cannot overturn U.S. laws or regulations: All arbiters can do is award compensation when a government expropriates property or otherwise tramples on the rule of law.”

Such opposition has not been limited to business groups. A commentary published by the independent, nonpartisan Center for Strategic and International Studies (CSIS) has also advanced strong reservations, suggesting that administration and congressional opposition to ISDS is based on “shaky and short-sighted premises”; it argues that “the legal certainty and stability provided by ISDS mechanisms will prove critical in facilitating cross-border investment,” particularly with privately financed wind, solar, hydro, and nuclear power projects.

Still, under the circumstances, and despite the potential adverse impact on green power projects worldwide, in my view, it will be very surprising if the U.S. under either a Harris or a Trump administration negotiates any new ISDS provisions or other trade agreements in the foreseeable future.

Mexico

Although Mexico remains very much a developing country with a commitment to ISDS — weakened considerably in the case of the ISDS under the USMCA — Mexico merits discussion of its historical relationship to ISDS in NAFTA, the USMCA. and other agreements. Prior to the NAFTA negotiations, Mexico had long been legally and constitutionally committed to the Calvo Clause, which stipulates that disputes with foreign investors must be resolved by national courts and tribunals. It also bars recourse by foreign investors to the diplomatic protection of their home countries.

In the course of the 1991–92 NAFTA negotiations, Mexico’s adherence to the Calvo Clause was largely abandoned, with Mexico accepting ISDS in NAFTA’s Chapter 11, even though it did not become party to the ICSID Convention until 2018. This sea change in Mexico’s investment policies occurred apparently because officials were convinced that Mexico would not benefit fully from NAFTA’s duty-free, quota-free access to the U.S. and Canadian markets unless foreign investors had greater confidence in Mexico’s investment climate and the rule of law. Chapter 11 addressed, inter alia, the weakness of Mexico’s domestic foreign investment legislation, the mandatory requirements for majority Mexican ownership, and the uncertainty the existing system offered to foreign investors. Foreign investors won other major incentives in NAFTA, including commitments to national treatment of foreign investors and improved protection for intellectual property, which Mexico fulfilled.

Mexico has concluded 36 BITs, all post-NAFTA, as of 2021, including 15 with the U.K., Switzerland, and other European countries. In addition to Canada and the U.S., Mexico has trade agreements with nearly 50 countries, most of which include investment protection provisions. Two of the most important are trade agreements with the EU concluded in 2000 and Japan in 2004. The agreement with Japan incorporates an investment protection and ISDS chapter. The EU-Mexico Economic Partnership Agreement does not include this chapter, presumably because, as noted above, many of the then-existing EU members had separate BITs with Mexico.

Mexico is currently in FTA negotiations both with the EU and the U.K. A public draft of the EU-Mexico Global Agreement from 2018 indicates that the FTA, which was approved by the EU Council in September of 2020, incorporates the usual protections for foreign investors, but no ISDS. A separate statement on the agreement from the EU indicates that the Commission intends to include the investment court system in in its agreements with Mexico. However, efforts by the EU to amend the agreement in 2022 were apparently opposed by Mexico, which among other things wanted modernized investment protection to be included sooner rather than later, suggesting continued support for ISDS. Presumably, any ISDS provisions will be in a separate agreement when and if the trade agreement is concluded to avoid the delays experienced among EU member states in ratifying CETA.

The U.K. and Mexico signed a “continuity agreement” in 2021 which essentially replicates the 2000 agreement with the EU; negotiations of a broader FTA with or without ISDS provisions were initiated in July 2022 but apparently have not progressed.

Despite these last activities, for Mexico the most important consideration for foreign investors is not the availability of ISDS, but the fact that the López Obrador government has been highly critical and dismissive of foreign investment, even though the continuing viability of Mexico’s economy depends on it. President-elect Claudia Sheinbaum may be able to moderate the anti-capitalist rhetoric but could be unwilling or unable to change significantly Mexico’s dismal investment climate. She is promoting a new doctrine known as “Shared Prosperity Plan,” and no one knows what impact, if any, it would have on investors and their capital. Add to this the possibility of another Trump presidency, with its strong opposition not only to ISDS but to U.S. investment outside the U.S., and one wonders whether even significant actions by Sheinbaum to improve the investment would have the desired effect, at least for U.S. and other enterprises seeking to sell their products in the U.S.

Canada

Canada’s approach is more difficult to fathom. Canada has not concluded a new BIT since 2018, a few weeks after the USMCA was signed. In the USMCA negotiations, it agreed to eliminate ISDS between Canada and the U.S. entirely, although ISDS with Mexico is available under the revised CPTPP, as both countries are parties. Canada concluded a BIT with China in 2012 with modified ISDS provisions. The country concluded CETA with the EU in 2017, with the EU’s still pending arbitration court/appellate mechanism, and published a model BIT in 2021 with contemporary ISDS provisions.

There appear to be no trade or investment agreements concluded by Canada since December 2018. Still, as the 2021 model BIT indicates, Canada has not necessarily rejected ISDS for the future. 

Elsewhere

China is the country with the most BITs concluded, as recently as 2023, as noted earlier; 146 are reportedly in existence, although some are not in force. It is not known how many are currently under negotiation. Japan, another major capital exporting nation, has negotiated only 38 BITs, the most recent in 2023; thus, it is too soon to predict whether Japan’s policy is under review. South Korea also appears active regarding BITs, with its most recent agreement concluded in 2023, the 105th it has negotiated. Singapore, another developed economy, remains a leader in concluding investment agreements with ISDS, including its 53 BITs and 42 FTAs, most recently concluded in 2023.

In the U.K., opposition exists to the ECT, as in the EU. However, views on ISDS seem unclear; in any event they have not been clearly articulated by the new Labour government. The U.K. accepted traditional ISDS in the negotiations with the CPTPP and in the continuation agreement with Canada. As one analysis concludes, “The UK’s position on the inclusion of ISDS seems ambivalent.”

VI. Conclusions

As noted earlier, several countries have withdrawn from the ICSID. Others such as South Africa, Brazil, and India have eschewed agreements with traditional ISDS provisions. But even if the EU continues to insist on their unique investment court and appellate mechanism approach to ISDS, many countries, including Canada, China, Hong Kong, Japan, Singapore, and South Korea, have not followed suit. If the capital exporting countries that are part of the EU and the U.S. oppose ISDS agreements in the future, and the Commission has no more success with its investment court mechanism than it has in the past, this could have a significant impact in the body of investment treaty law in the coming decade. 

The impact on several thousand existing and new BITs and FTA investment provisions would be minimal, at least in the short and medium term, since renegotiation or termination of most such agreements is problematic. It is also possible that future U.S. policies may seek to broaden restrictions on outbound investments to China, Hong Kong, and Macao beyond current law for national security or other reasons.

EU or U.S. investors’ decisions to reduce their activities in countries where they enjoy no ISDS protection, whether for green energy or other long-term projects, would be more significant in their impacts. Given the fact that there are currently thousands of U.S. and EU private sector investments in China, Brazil, and India — where ISDS protections do not exist for the U.S. and in most cases for the EU — one hesitates to make such predictions. However, as long as the EU countries and U.S. investors account for a disproportionate share of FDI, the U.S. and EU countries, including former member the U.K., represented five of the top 10 foreign investors, with the others being Hong Kong, China, Japan, and Canada. Per World Bank data from 2012–22, the six accounted for 70% of the total — the anti-ISDS policy changes could ultimately have a significant impact.

A promise by developed countries to provide $100 billion annually to developing countries for climate action has not materialized. Thus, ironically, broad opposition to ISDS from environmental groups concerned with “sovereignty” or other related issues could backfire by discouraging new green investment, particularly in countries where the rule of law is uncertain, as in Mexico as well as much of Latin America and Africa.

To read the report as it was published on the Rice University’s Baker Institute for Public Policy webpage, click here

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As the U.S. tightens trade and investment restrictions with respect to China and invests in developing critical sectors such as semiconductors, electric vehicles (EVs), and clean energy, deeper cooperation between the U.S., Canada, and Mexico under the United-States-Mexico-Canada Agreement (USMCA) is needed. The USMCA gives businesses and traders certainty about the economic relationship between the three countries, and the long history of their cooperation should make North America the key economic platform for a more competitive and dynamic economy that is best placed to reduce exposure to Chinese supply chains and compete globally. However, in order for this to happen, USMCA countries need to work together to address the gaps that have opened between U.S. trade and investment restrictions on China and Mexico and Canada’s trade and investment settings. Going forward, the U.S. should coordinate more closely with Canada and Mexico on any new trade and investment restrictions applied to China. The fact is that for the U.S. to effectively de-risk its economic relationship with China, a more coordinated North America approach is required. Failure to build a cohesive North American approach will likely lead to the U.S. adopting a more go-it-alone, less effective approach when it comes to China, and would be a missed opportunity to further strengthen North American economic relations.

The economic importance of North America

Trade and investment across North America underpinned by the USMCA is the most important economic relationship for the US, Mexico and Canada. Over $1.8 trillion dollars in annual trade happens between these three countries, accounting for approximately 17 million jobs. Around 75% of Canada’s exports and 78% of Mexico’s exports are to the U.S., and around 33% of U.S. exports go to Canada and Mexico. As a result, North America is a geography of deeply interconnected supply chains, particularly in automotive, but also medical equipment, IT products, pharmaceuticals, chemicals, and more.

De-risking the US economic relationship with China

The U.S. goal of reducing its economic interdependence with China—so-called de-risking—is a key focus for the U.S. that will likely only intensify. To this end, the U.S. has adopted a range of trade and investment restrictions on China. These include tightened inbound investment screening, new requirements on U.S. investors to notify the U.S. Treasury Department about investment into China into particular sectors, export controls that include restrictions on access to U.S. technology used to produce high-end semiconductors, and tariffs. Recently, the United States Trade Representative (USTR) completed its Section 301 review of the U.S.-China tariffs which led the Biden administration to increase tariffs on $18 billion of imports from China, which included increased tariffs on semiconductors, 100% tariffs on EVs, and higher tariffs on EV batteries, to name a few.

A new North American approach to China?

While the U.S. has been working to restrict trade and investment with China, Canada and Mexico have not taken similar measures. For instance, Mexico does not have an inbound investment screening regime and Canadian and Mexican tariffs on Chinese imports are in many cases significantly lower than U.S. tariffs. These differences in trade policy toward China is increasingly in tension—economically and politically—with the very open trade economic relationship under USMCA. The central issue is that U.S. action to reduce Chinese access to its markets and technologies can be undermined should China increase trade and investment with Mexico and Canada in order to enter the U.S. market while avoiding U.S. trade and investment restrictions. For example, exports from Mexico of EVs from facilities owned by Chinese EV maker BYD could enter the U.S. under USMCA and pay zero tariffs if it meets the agreement’s rules of origin, regional steel and wage rate requirements, and could also benefit from the $7500 IRA tax credit for EVs assembled in North America. Alternatively, BYD could still export EVs to the U.S. from Mexico and pay the WTO MFN rate of 2.5% for automotive imports, compared to the 100% tariff rate the U.S. would apply to imports of EVs directly from China.

Developing a North American EV sector should be the goal for all USMCA parties, leveraging the already deep automotive supply chains. For instance, in 2022, over 50% of Mexico’s imports of parts and accessories for motor vehicles came from the U.S. Accelerating the mining of critical minerals in Canada and Mexico, expanding refining capacity, and building battery manufacturing will also be needed.

Yet to ensure that the U.S. continues to see EVs (as one example) as an industry that should be built out across North America, gaps in economic policy toward China between the U.S., Canada, and Mexico need to be addressed. In the case of EVs, this could include Mexico adopting an inbound investment screening regime and Mexico and Canada adopting tariffs similar to the U.S.’s on EVs from China.

Some progress under USMCA

Thankfully, it does appear that closer cooperation on China is starting to come into focus for the three governments. At the fourth annual meeting of the USMCA Free Trade Commission (FTC) on May 22 led by USTR Ambassador Katherine Tai, Canadian Trade Minister Mary Ng, and Mexican Secretary of Economy Raquel Buenrostro, how North America can cooperate more effectively to address the China challenge was a consistent theme.

For example, the parties agreed to “jointly expand their collaboration on issues related to non-market policies and practices of other countries, which undermine the Agreement and harm U.S., Canadian, and Mexican workers, including in the automotive and other sectors.” The nonmarket economy of most concern is China, and responding to China’s trade practices and broader global impact of its economic model will be key to ensuring that the investment by the U.S., Canada, and Mexico into their EV sectors are not undermined by imports of heavily subsidized EVs and components from China.

Another area of cooperation identified in this FTC meeting was building on a previous agreement by the three governments to develop better ways to cooperatively respond to emergency situations that impact trade flows. During COVID-19, a lack of coordination led initially to trade across North America shutting down. Strengthening processes for cooperation across North America can help each government respond to future pandemics and other emergency disruptions to trade, including those caused by rising tensions with China. The underlying point here is the opportunity and need for North American cooperation in order to strengthen collective economic security.

A third area of focus in this FTC meeting was agreement to do more together to prevent imports of goods produced with forced labor. This is a commitment that all parties have made under the USMCA. The main focus here for the U.S. has been preventing imports of goods from the Xinjiang region made using Uighur labor, and the U.S. has legislation that addresses this specifically. However, much work remains to be done, including increased transparency into supply chains. North American cooperation on these labor issues would send a strong signal about shared values in North America around slave labor and labor rights more broadly.

Recommendations

Deepening cooperation among the U.S., Mexico, and Canada when it comes to China is needed to ensure that the USMCA and the open trade and investment regime it enables is supportive of intensifying economic competition with China. Failure to cooperate more deeply on how to respond to China risks the U.S. adopting a more go-it-alone approach. The outcomes from the recent USMCA FTC meeting are a good step toward deeper cooperation on China, however a more comprehensive approach is needed. This could start with the three governments working together, along with industry and other stakeholders, in reviewing their economic policies toward China, identifying where differences in economic policy create risks of Chinese goods entering each of their markets through one of the other partner markets, particularly in sectors deemed critical from a national security and economic security perspective. Assessing what could then be done to plug these gaps would help to develop a more coordinated approach to North American economic policies concerning China. Making progress here would strengthen North America as an economic unit and underscore for the U.S. that its economic well-being and strategic goals are best achieved by working within North America, rather than going it alone.

Joshua P. Meltzer is a senior fellow in the Global Economy and Development program at the Brookings Institution.

To read the full commentary as it was published by the Brookings Institution, click here.

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One of the most high-profile results of a friend-shoring policy is that Canada and Mexico have recently replaced China as America’s largest trading partners by total trade, while Mexico has overtaken China as America’s top importer. This followed the introduction of Donald Trump’s trade strategy, which aimed to reduce US dependence on Chinese goods – partly for political reasons and partly because of Trump’s perception of China as a rival power.

Joe Biden has also placed restrictions on trade with China in an attempt to strengthen US competitiveness with China and grow the US tech industry.

The US raised tariffs on imports from China significantly during the Trump administration. These levels remain high, making the costs of importing goods from China to the US more expensive.

In addition, the International Labor Organization Global Wage Report 2022-23 shows that China has experienced the highest rate of real wage growth among all G20 countries over the period 2008-22, also pushing up the price of Chinese goods.

The Biden administration continues to champion friend-shoring, which has further encouraged companies to shift production from China to Mexico as they weigh up geopolitical risks against differences in the costs of production.

While data on the number of firms relocating production is not available, the latest trade data suggests Mexico has managed to capitalise on the US-China rivalry.

Closer relationships with allies can be created by forming new trade agreements, for example, the US, Mexico, Canada Agreement (USMCA), which is more about geopolitics and friend-shoring than lowering tariff barriers as was the case of its predecessor, the North America Free Trade Agreement (Nafta).

But the USMCA was also a product of its time. US political will had shifted towards undermining political competitors and setting out anti-China political statements that resonated with voters.

Trump, a consistent critic of Nafta, had argued that it undermined American jobs and wages, a statement that undoubtedly played well in US industrial states experiencing manufacturing decline. A paper from the National Bureau of Economic Research suggested that far more US jobs were lost due to competition with China.

Doing business with your friends

Friend-shoring is a new term for something that has been around for a long time. Countries engaged in sanctions, blockades, and friend-shoring during the first and second world wars on a much larger scale.

In 1948, the US initiated economic sanctions against the Soviet Union, a 50-year-long strategy that started with export restrictions and was solidified by the Export Control Act of 1949.

These sanctions, intensified after the Battle Act of 1951, were aimed at limiting strategic goods to the Soviet bloc and became a permanent fixture of cold war policy following the escalation of the Korean war.

Data analysis shows how trade responds to political factors. For over sixty years, trade economists have made extensive use of the gravity model of trade, which has provided empirical evidence that countries tend to trade more with countries geographically closer to them as well as where there is a common language, common legal system, common exchange rate regime and shared colonial history.

Research also shows how political distance between countries and formal military alliances affects trade.

Governments can use trade policy to strategically support their own industries, so reducing trade with rivals can be part of a political agenda based on boosting domestic manufacturing (and jobs) rather than relying on imports. The US Chips and Science Act, and in the EU, the European Chips Act, are examples of policies that can inflict economic pain on adversaries while ensuring domestic production of this key component in high-technology manufacturing.

However, developing an industry takes time. By the time the industry is established, it may not pay off, either due to falling prices caused by increased supply or an economic slowdown that suppresses demand.

In the case of US chips, it is particularly interesting to note that the existing industry focuses on design and production of high-quality chips. Therefore, the latest policy will see low-cost microchips, the mainstay of the Chinese chip industry, start to be produced in the US and compete with the established US high-end suppliers.

The US has experienced the negative effects of these types of policies before. Just consider the US support for the steel industry, a popular choice among US presidents, including the current administration. Under the Trump administration, this saw 25% tariffs imposed on steel imports, which benefited the US industry but imposed costs on steel users.

Countries such as Australia were exempt from this policy, while other allies, such as the EU, were hit hard. Industrial policy can reduce dependence on rivals, but it’s not clear that friends always get special treatment.

Other policies can tie in with a friend-shoring agenda. The new generation of EU trade agreements deal with issues including labour rights and environmental protection, making it clear that third countries that want to do business with the EU need to meet the same standards. The EU has also been debating new anti-forced labour legislation, so this type of legislation may also start to get more serious consideration in the UK, for instance.

Friend-shoring policies aren’t new, but the slogan is. Self-sufficiency at the national level can inflict short-term pain on adversaries but may hold limited benefits in the medium term. However, there is broader acceptance that businesses need to have the certainty of trading bloc friends.

Half of all trade currently takes place between members of trade blocs, and recent trade data for the US and Mexico suggests that trade blocs may become more important over time as production moves.

To read the full article as it appears on The Conversation’s website, click here.

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Almost since its inception, the North American Free Trade Agreement has generated controversy far out of proportion to its economic consequences. From Ross Perot’s 1992 warning that NAFTA would create a “giant sucking sound” of jobs flowing to Mexico to Barack Obama’s (and Hillary Clinton’s) campaign trail threat to pull out of the agreement to Donald Trump’s 2016 description of it as a “disaster,” criticism of the trade deal has been a near‐​constant feature of American politics.

Veracity aside, such swipes are curious. The agreement signed among Mexico, Canada, and the United States — building on a pre‐​existing free trade deal between the latter two — was never going to significantly alter the United States’ economic trajectory. It just wasn’t possible. Eliminating US tariffs on imports from a single, relatively smaller country already facing very low tariffs — an average of two percent — isn’t the stuff that economic game‐​changers are made of.

Perhaps, then, NAFTA is best understood as a lightning rod for criticism of globalization more broadly. Ire directed at the agreement is as much aimed at trade conceptually as it is at NAFTA itself, if not more so.

It is in this spirit that one best understands Helen Andrews’ recent critique of NAFTA in The American Conservative to mark the agreement’s 30th birthday. While Andrews, a senior editor at The American Conservative, directs several barbs at the trade deal, her main beef is the era of globalization she holds NAFTA responsible for helping usher in.

In Andrews’ telling, NAFTA was merely the first of several important free trade dominos to fall, setting off a “chain of events that allowed globalization to run free the way it did.” NAFTA’s entrance into force on January 1, 1994, she notes, was accompanied around the same time by other important milestones of expanded economic integration including the agreement creating the World Trade Organization, the formation of the European Union, and the opening of the Chunnel connecting the United Kingdom and France.

Boom, globalization was off to the races.

But the idea that 1994 heralded a new economic era is a strained interpretation of events. Put more bluntly, it’s false. Globalization — the process of increasing international economic integration—has been underway for centuries, if not millennia. (The first evidence of long‐​distance trade dates back to 3000 BCE) Sometimes it has ebbed (the outbreak of the world wars) and other times it has flowed (the Age of Discovery and the Industrial Age) but the direction has long been toward more expanded linkages. Indeed, each of the items cited by Andrews weren’t revolutionary events but further evolutions of events long underway.

The European Union, for example, was the successor to the European Community, which in turn traces its origins to the European Coal and Steel Community. The World Trade Organization, meanwhile, was preceded by the General Agreement on Tariffs and Trade (GATT), which had successfully reduced tariffs around the world through a series of negotiating rounds spanning many decades. Before the Channel Tunnel’s opening, commerce between the UK and its European neighbors took place via shipping and airplanes (and still does). And prior to NAFTA, there was the US‐​Canada Free Trade Agreement signed in 1988. Globalization has long been apace.

Andrews also errs in other elements of her narrative about globalization’s forward march. While she holds neoconservatives responsible for Republicans’ 1990s‐​era departure from their traditional pro‐​tariff stance and Ronald Reagan’s “nuanced and pragmatic” trade policies, she ignores that NAFTA was in many ways the realization of a vision first outlined by Reagan.

In Reagan’s 1979 announcement of his candidacy for president, he called for a “North American accord” — incorporated into the 1980 GOP platform — to develop closer ties among the United States, Canada, and Mexico. While the exact contours of this proposal were not spelled out, Reagan mentioned in his speech his dream of a future in which “a map of the world might show the North American continent as one in which the people’s commerce of its three strong countries flow more freely across their present borders than they do today.”

There’s also the small matter that the US‐​Canada free trade agreement that served as NAFTA’s foundation was signed by Reagan in 1988. Hardly a neoconservative, Reagan was arguably NAFTA’s intellectual godfather.

This miscasting of history, however, is a relatively minor detail. More notable is the thin nature of Andrews’ NAFTA criticism, which consists as much of promises unfulfilled as actual harms inflicted. She claims, for example, that Mexicans imported their goods from Asia instead of the US (in fact, US exports to Mexico more than doubled from 1994–2000), and points out that a bilateral trade balance that had been in US surplus swung to a deficit (an irrelevant measure of economic success). NAFTA’s immediate wake also saw an “explosion” of illegal immigration, “much” of which Andrews says — baselessly — the trade deal was “directly responsible for.”

On Mexico’s side of the ledger, meanwhile, she dings the agreement for rising obesity levels in the country, two million campesinos (rural farmers) losing their employment as US corn flooded in and then looking for work across the border, and a rising tide of progressive social policy including abortion, marriage equality, and permitting same‐​sex couples to adopt (which this author happens to support).

The idea that seismic economic or societal shifts would result from a free trade agreement, however, should be met with considerable skepticism.

Regarding the surge in illegal immigration, for example, it’s worth considering other contemporaneous events. In addition to NAFTA, 1994 also saw the so‐​called “Tequila Crisis” that plunged Mexico into recession (NAFTA helped facilitate the subsequent recovery). On the US side, the go‐​go economy of the late 1990s saw unemployment drop below 5 percent from May 1997 through August 2001. That immigration increased under such circumstances should surprise no one.

More relevant when evaluating a free trade agreement are economic outcomes — and from that perspective, NAFTA looks pretty good. From the date of the agreement to the present day, per‐​capita GDP has nearly doubled in Mexico and almost tripled in the United States, and US manufacturing output, median wages, and median household income have all experienced healthy gains. To be clear, it’s a mistake to single‐​handedly credit NAFTA with such outcomes — correlation isn’t causation. But the same principle applies to NAFTA’s critics, who often blame the agreement for any and all economic problems since 1994.

Interestingly, even Andrews concedes that the number of jobs lost to Mexico was “relatively small.” But, keeping with her overarching narrative, she nonetheless holds NAFTA culpable for its alleged unleashing of forces that allowed globalization to run riot, contributing to various economic ills, including the loss of 5 million manufacturing jobs from 1995–2015.

But NAFTA’s claimed role is ahistorical, and blame placed on globalization for manufacturing job losses is mistaken. The decline in US manufacturing jobs — something that has been taking place since 1979 — is more a story of technology (robots, computers, and the like) and changing US consumer tastes than it is about trade. We know this because while the number of manufacturing jobs has declined, output has risen. Manufacturing jobs have declined abroad too, even in China. More recent US manufacturing job gains, meanwhile, have been accompanied by stagnant industrial productivity. Most lost manufacturing jobs were claimed by automation and economic development, not Mexico and China.

So what is NAFTA’s real record? Literature on the subject paints a consistent picture: the agreement significantly expanded trilateral trade but had only a modest — and beneficial — economic impact. A 2012 OECD literature review of NAFTA studies generally found small but positive results, as did a 2013 US International Trade Commission (USITC) review. GDP, productivity, and wages increased by modest amounts — economic welfare increased. Another 2014 paper examining NAFTA’s effects produced similar results. Given NAFTA’s scope and the long‐​established gains of free trade, that’s about what one should expect.

It also bears mentioning that some of the agreement’s benefits are not easily quantifiable. The trade deal, for example, means that Americans now have easier access to out‐​of‐​season fruits and vegetables that can be grown in Mexico’s favorable climes. Since the late 1990s the amount of fresh vegetables imported into the United States — primarily from Mexico and Canada — has nearly doubled.

NAFTA has also played a role in bolstering the resilience of the US auto industry at a time of rising global competition, especially from Asia. The elimination of duties between the United States and Mexico has provided additional export opportunities for both US automakers and auto parts producers as well as a more competitive source of crucial inputs. The result: a more competitive North American auto industry, with the United States at its center. Indeed, it is for this reason that the Center for Automotive Research warned in 2017 that Detroit would be hard hit by a US withdrawal from NAFTA.

Admittedly, the removal of trade barriers does produce some disruption, particularly for workers previously insulated from import competition. But some context is in order. The dynamic US economy destroys and creates millions of jobs each year due to technology, trade (both international and interstate), innovation, and other factors. According to a 2014 Peterson Institute for International Economics analysis, however, only 5 percent of the job losses were attributable to trade with Mexico. An economy without job loss, whatever the reason, is an economy locked in stagnation and suffering.

If the United States has been harmed by NAFTA, it is perhaps found in the misplaced attention it receives. Energy devoted to the trade deal’s alleged harm is attention deflected from actual policy missteps. That’s useful to politicians and others for whom NAFTA (and other trade issues) provide a useful distraction from actual sources of economic damage such as overwrought environmental regulations, ballooning infrastructure costs, and protectionist policies that undermine US competitiveness such as tariffs on imported metals and the Jones Act.

Focusing on such realistic threats might roil powerful special interests, so blame is instead assigned to NAFTA and foreign competition.

NAFTA has, overall, produced limited but small benefits for the United States, and 30 years on should be regarded as a modest policy success. Its participants have, on net, benefitted from the deal. Three decades on, its critics should finally sheathe their rhetorical swords and move on to actual economic challenges facing the country.

Colin Grabow is a research fellow at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies where his research focuses on domestic forms of trade protectionism such as the Jones Act and the U.S. sugar program.

To read the full article as it appears on the Cato Institute’s website, click here.

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At the 20^th African Growth and Opportunity Act (AGOA) annual forum in Johannesburg last week, the United States (US) government and Congress, African trade ministers and business representatives, organised labour and civil society agreed it should be reauthorised before expiring in 2025.

When AGOA was last renewed in 2015, it seemed that might be the last renewal, and that this concession should be replaced by a conventional reciprocal free trade agreement (FTA) or several FTAs. AGOA gives eligible sub-Saharan African countries duty-free access to the US market for most products without having to reciprocate. A decade later, no such FTAs are in prospect, not least because the US has gone off free trade.

So, faced with the alternative of no preferential access for Africa after 2025, both sides of the Atlantic seem committed to extending AGOA. The only questions are the period of renewal, and how to ensure more African countries can benefit.

Constance Hamilton, Assistant US Trade Representative for Africa, said before the forum that AGOA ‘has not met the expectations we had in 2000,’ when it was founded. Though some countries have benefitted, AGOA hasn’t been a ‘game changer for the continent’ in boosting its overall economy and regional integration.

So the forum discussed ways to bring in more countries – this after the number was reduced from 35 to 31. Niger and Gabon will be ejected from 1 January 2024 because of coups, and Uganda and Central African Republic for undemocratic behaviour.

However, the priority is renewal. Participating African countries’ trade ministers called for an extension of at least 10 years, and retention of all current beneficiary countries to preserve value chains and support Africa’s industrialisation efforts.

The forum heard that apart from the benefits to Africa, AGOA also supported 155 000 US jobs. The US also backed the programme’s renewal through statements or video messages by President Joe Biden, Secretary of State Antony Blinken and several congressional leaders of both parties. That bipartisan support is vital as reauthorisation would happen in Congress.

And just after the forum closed, Democratic Party Senator Chris Coons – an influential friend of Africa on the foreign relations committee – released a draft bill to renew AGOA until 2041. ‘This long-term extension would provide businesses with the predictability needed to invest in Sub-Saharan Africa at a time when many firms are looking to diversify their supply chains and reduce dependence on China,’ Coons said.

His bill proposed several changes to expand AGOA’s usage, reflecting many issues discussed at the forum. For instance, to extend the programme and integrate it with the African Continental Free Trade Area (AfCFTA), Coons’ bill would modify AGOA’s rules of origin to allow inputs from North African AfCFTA members.

His bill would also keep more countries in AGOA by only ‘graduating’ them out when they have maintained high-income status for five consecutive years. This would avoid removing some countries and letting them back in if their economies fluctuated around the high-income threshold – as Mauritius recently did. The draft bill also proposes that the current annual eligibility reviews of all 49 sub-Saharan African states happen only every three years.

However, Coons’ bill has a sharp sting in the tail. It intends to eject South Africa from AGOA by calling for an immediate ‘out-of-cycle’ review of the country’s eligibility. The move reflects resentment on both sides of the aisle in Congress about Pretoria’s warm relations with Russia, Hamas and its sponsor Iran.

Stephen Lande, President of international business advisers Manchester Trade, supported the bill – but as the first step to renew and then enhance AGOA. He told ISS Today that South Africa’s Trade, Industry and Competition Minister Ebrahim Patel made the same proposal at the end of the forum. Prompt renewal would avoid a decline in orders in AGOA’s most successful sector (garments assembled from Far East fabrics), since it takes about two years to complete an order.

But Lande said the changes in Coons’ bill wouldn’t correct some of AGOA’s major challenges. He proposes giving the US administration more discretion in deciding which countries should be removed, instead of being forced to remove those that fall foul of the bill’s conditionalities. At present, more than 10 of the 49 countries are not eligible for AGOA benefits.

‘The Administration should be able to weigh the advantages of removing a country versus the collateral damage. For instance, allowing a dictator to scapegoat the US for his own failings, or letting China in, or harming the very groups AGOA is designed to assist (women in the sewing trade who have been harmed by AGOA suspensions in Madagascar and Ethiopia), or disrupting supply chains.’

Lande said he would also ease the rules of origin, which now require 35% value added in the AGOA member country for the product to qualify. He noted that with components becoming more expensive relative to labour, the 35% threshold was unrealistic. Lande said he would allow duty-free imports of processed cocoa products that currently incur punitive tariffs as they contain dairy products and sugar.

He would designate all AfCFTA members as members of AGOA if they were otherwise eligible – and not just include them for cumulation of inputs as Coons proposes. This would embrace North African countries that aren’t currently part of AGOA.

All these proposals would deepen and extend AGOA benefits. However, Lande’s proposal to give the US administration more discretion to consider other strategic factors, like deciding whether or not to expel African states for bad behaviour, would provoke difficult ethical debates.

Is it better to incentivise democracy by expelling countries for undemocratic behaviour – at the cost of greater African economic advancement and integration? Or to prioritise economic development, believing this will eventually boost democracy? A perennial imponderable.

To read the full article, click here.

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So Trump pressured Mexico and Canada to replace their mutual pact with one more to his liking. After a couple of years of negotiations, he got what he wanted. Out was the North American Free Trade Agreement. In was the U.S.-Mexico-Canada Agreement.

The USMCA, which Trump hailed as “the fairest, most balanced and beneficial trade agreement we have ever signed,” will reach its third anniversary Saturday.

The trade pact hasn’t proved to be the economic bonanza Trump boasted it would be. It couldn’t have been, given that trade makes up less than a third of America’s $26 trillion economy.

Yet while the the deal’s overall impact has been slight, it has nevertheless been helping workers on the ground. It’s just that the beneficiaries have so far been mostly in Mexico. Novel provisions of the pact have enhanced the ability of long-exploited Mexican workers to form unions and secure better wages and working conditions.

Trade officials and experts predict, though, that the benefits will also flow, in time, to U.S. workers, who no longer must compete with severely underpaid Mexican laborers without real bargaining power.

“U.S. workers win when workers in other countries have the same rights,’’ said Cathy Feingold, director of the AFL-CIO’s international department.

Thea Lee, a deputy undersecretary at the U.S. Labor Department, suggested that the pact and Mexico’s reforms haven’t been around long enough to yield measurable help to American workers yet. “We’re going to see the positive results first for Mexican workers because Mexico is undergoing a massive, comprehensive, ambitious labor market reform,” she said.

In some ways, the USMCA as a whole has fallen short of Trump’s promises.

Take the trade deficit with Mexico. Despite Trump’s insistence that the USMCA would pull more manufacturing back to the United States, the gap between what America sells and what it buys from Mexico keeps widening: It has surged from the $64 billion gap in 2016 that so irritated Trump to a record $139 billion last year.

The former president also predicted that exports of U.S. auto parts to Mexico would rise by $23 billion. They have increased since 2020 — but only by about $8 billion.

“I don’t expect that we’re ever going to be able to say that (the USMCA) accomplished very much,’’ said Alan Dierdorff, a professor emeritus of economics and public policy at the University of Michigan. “I don’t think it hurt much. But I don’t think it helped much.’’

Trump said the pact would create 76,000 auto industry jobs. Since January 2020, vehicle and parts manufacturers have actually added nearly 90,000 jobs. And North American commerce has flourished. America’s trade with Canada and Mexico — exports plus imports — reached a record $1.78 trillion last year. That was up 27% from 2019 and was above a 20% gain in trade with China over the same period.

But it’s hard to tease out which economic gains can be credited to the USMCA and which happened for a variety of unrelated reasons. That is especially true in light of the unusual economic tumult of the past three years: A devastating pandemic, followed by severe labor shortages and supply chain backlogs and a resurgence of rampant inflation.

Also complicating any effort to calculate the USMCA’s impact is President Joe Biden’s own aggressive efforts to rejuvenate American industry with trillions of dollars in infrastructure spending and subsidies.

For all of Trump’s bombast, the USMCA actually left in place much of the pact it replaced. NAFTA erased most of the import taxes that the United States, Mexico and Canada imposed on each other’s goods. It created a duty-free regional bloc meant to compete with the European Union and China. That structure remains mostly in place.

“It’s still pretty much the same as NAFTA,” Dierdorff said.

Still, some substantive changes have occurred. When NAFTA took effect in 1994, for instance, the internet, e-commerce and smartphones weren’t part of everyday business. The new pact updated North American trade rules for the digital age.

The USMCA, for instance, bars the United States, Mexico and Canada from hitting each other with import taxes on music, software, games and other products sold electronically; allows the cross-border use of electronic signatures and authentication; and protects companies from having to disclose in-house source codes and algorithms.

Given how it modernized North American trade, the “USMCA is a marked improvement,’’ said Neil Herrington, the U.S. Chamber of Commerce’s senior vice president for the Americas.

Perhaps the most consequential changes the pact wrought were designed to reverse one of NAFTA’s unhappy byproducts for Americans: The old deal incentivized companies to close factories in the United States, ship production to lower-wage Mexico, then export goods back into the United States — duty free.

The USMCA sought to make it harder for autos and auto parts to enjoy tariff-free treatment. To qualify, 75% of a car and its parts had to come from North America, up from 62.5% under NAFTA. That meant more content had to come from higher-wage North American workers, not imported cheaply from China or elsewhere. And at least 40% of vehicles would have to originate in places where workers earn at least $16 an hour — that is, the United States and Canada, not Mexico.

But those so-called automotive rules of origin stumbled out of the gate. Enforcement was delayed as customs officials faced supply chain backlogs at the height of the COVID crisis.

“Border officials were worried about clearing cargo in ports and getting rid of congestion,’’ said Daniel Ujczo, senior counsel at the law firm Thompson Hine in Columbus, Ohio. “They didn’t have a ton of time to deal with USMCA.’’’

Even after the auto rules took effect, the United States was slapped down for the way it tried to enforce them. A USMCA trade court, in a case brought by Mexico and Canada, found that Washington was applying the rules more strictly than was allowed.

The United States has achieved more success in using the deal to pressure Mexican employers to comply with their country’s labor reforms. Workers there can now vote freely and fairly on joining unions, approving contracts and choosing union leaders. In the past, pro-company unions in Mexico signed contracts behind workers’ backs. Strikes were rare, wages stayed low and union leaders got rich.

The USMCA armed the United States, Mexican workers and union activists with a new weapon: The “Rapid Response Labor Mechanism.” This allows the U.S. government to crack down on individual factories in Mexico — by, for example, suspending tariff exemptions for their products – if they violate Mexican labor law.

“We took a lot of the key parts of (Mexico’s) labor reform, and we baked them directly into the trade agreement,’’ said Josh Kagan, assistant U.S. trade representative for labor affairs. “We’re holding Mexico to actually implement this labor reform they’ve undertaken.’’

So far, the United States has used the mechanism 11 times to demand corrections of labor law violations. Mexico has so far cooperated, by sending law enforcement and labor inspectors to guard ballot boxes in new votes that independent unions have mostly won.

Under pressure from a U.S. complaint, Mexican officials and observers oversaw a union vote in which the old union was thrown out. The new union won the right to negotiate — and an 8.5% wage increase, plus bonuses.

“If workers had tried a similar organizing effort before, “they would have fired us immediately,” said Manuel Carpio, who works at a General Motors plant in Silao, in the state of Guanajuato.

Still, it isn’t a perfect process, said Julia Quiñonez, who organized an independent union at a U.S.-owned auto parts plant, VU Manufacturing, in the city of Piedras Negras, Coahuila, across from Eagle Pass, Texas. The old union joined with the company to try to bar the new union. The two sides are still struggling.

“We have heard about other cases where the companies have respected the process and agreed to corrective plans,” Quiñonez said. “But the VU case has been plagued by a lot of deceit, corruption and frustration.’’

One problem, Quiñonez said, is that cases tend to be kicked back to the same Mexican courts and authorities that should have enforced the law in the first place.

“The obstacles we are facing are the normal resistance you might expect in a system that has been operating for at least 80 years,” she said.

The worker provisions in the USMCA were strengthened in negotiations between Trump’s trade team and congressional Democrats. Working on those talks was Katherine Tai, then the chief trade counsel on the House Ways and Means Committee and now Biden’s top trade negotiator.

The Biden administration says it views the worker provisions in the USMCA as a model for future trade deals that seek to benefit workers, not just companies that want to expand their exports.

“I don’t think anybody knew how the Rapid Response Mechanism process would play out,’’ the Labor Department’s Lee said. “But people have found that it’s working as anticipated and as hoped.’’

To read the full article, please click here.

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It is an honor for me to give the 2023 John D. Greenwald Memorial Lecture. Although I never had the pleasure of meeting John, as someone who has been involved in American trade policy for the last 15 years I feel his legacy. In government, John was instrumental in developing international trade rules through his role at USTR and then as the first head of Import Administration at Commerce in the 1980s. In private practice he developed a reputation as one of Washington’s great trade lawyers. I suspect that if John were still with us he would have a lot to say about the state of American trade policy. Unfortunately for you my remarks will be neither as insightful nor as witty as his would have been, but you’re stuck with me this morning and I’ll do my best.

When I was at the White House in 2021 and 2022, I saw the Biden Harris Administration’s trade policy from the trenches. We spent time talking about U.S. tariffs on China, though I bet some of you have noticed the Administration has yet to make any final decisions on that. We put together agendas for the U.S.-E.U. Trade and Technology Council. I battled the Europeans over aspects of Europe’s Digital Markets Act and Digital Services Act. And towards the end of my time in government, I took plenty of incoming from America’s allies about the industrial policy provisions of the Inflation Reduction Act.

One of the luxuries of being back in the private sector is the freedom to think about trade not just from the trenches, but at a strategic level. So, I will use my time with you this morning to offer a set of broader thoughts about the state of American trade policy today. And then I’ll offer some recommendations for where U.S. trade policy might go from here.

A BIT OF HISTORY

In the decades since the Second World War, the U.S. has seen major developments in trade policy principally during periods when there has been both a clear geopolitical and a clear economic logic to trade deals. For example, in the immediate aftermath of WWII, the period that created the GATT, there was a geopolitical imperative to rebuild the West and strengthen allied economic ties for the looming Cold War. And there was an economic imperative to prevent a return to the protectionism widely seen as an exacerbating factor in the Great Depression.

Similarly, in the 1990s, following the collapse of the Berlin Wall, Democrats and Republicans alike bought into a geopolitical view that establishing a global trading regime would help bring former adversaries like Russia and China into the fold, potentially even promoting political liberalization. The prevailing economic consensus here in Washington, meanwhile, held that greater trade liberalization would benefit U.S. consumers by driving down costs, benefit innovation by forcing companies to be disciplined by the global market, and benefit workers by opening foreign markets to high value goods and services. And thus we saw a decade that produced NAFTA, the WTO, and China’s entry into the global trading order.

In the years following 9/11, geopolitical logic drove deals that had little economic significance, because they were with small economies, but which were important to American diplomacy, particularly in the Middle East—FTAs with Bahrain, Jordan, Morocco, and Oman. A desire to shore up American relations with democratic states in Latin America combined with an economic desire to open markets to U.S. products, meanwhile, drove trade dealmaking in Latin America. At the same time, during this era, from an economic perspective the U.S. used trade deals to continue pursuing the economic goals that had risen to influence domestically in the 1980s and 1990s—open markets, opposition to subsidies, and light touch regulations.

Now, to say that these were productive periods for U.S. trade policy is not to say that trade was politically easy: I remember Ross Perot’s 1992 campaign diatribe about NAFTA triggering a “giant sucking sound” of U.S. jobs fleeing to Mexico. The final House vote to grant China PNTR status in was 237-197, a comfortable but hardly overwhelming majority. But across the 1940s, the 1990s, and the 2000s, there was a comparatively broad consensus in the U.S. foreign policy establishment about the geopolitical logic of trade and a comparatively broad consensus among the economic policy establishment about the economic logic of trade.

THE CHALLENGES FACING TRADE POLICY TODAY

I suspect that few of you in this room think that we are in a similarly productive period for American trade policy today. Since the domestic political collapse of the Trans-Pacific Partnership in 2016 and 2017, and the collapse in both the U.S. and Brussels for the mooted U.S.-E.U. “Trans-Atlantic Trade and Investment Partnership” agreement, Washington has turned sharply against trade deals and in certain respects against trade liberalization at all.

It is easy to attribute the current challenges in U.S. trade policy to politics on both sides of the partisan aisle. But while politics is important, I think that changing political views are fundamentally driven by deeper underlying shifts in substantive ideas of both geopolitics and economics that need to be unpacked and incorporated into American and international trade policy.

The first shift is set of changes in domestic economic policy preferences. Simply put, a growing bipartisan cohort in Washington rejects the type of economic model that served as the basis for American trade policies since at least the late 1980s. As former NEC Director Brian Deese argued last year, and as National Security Advisor Jake Sullivan argued last month, this Administration—and a growing share of Americans—is reembracing industrial policy to drive a manufacturing and middle-class employment revival here in America. And certain of the policy tools we are deploying to drive this industrial policy cut against rules we have agreed to since the 1990s.

Take the CHIPS Act and the Inflation Reduction Act. These acts channel hundreds of billions of dollars into domestic manufacturing in ways that, particularly with respect to the IRA, simply violate commitments the U.S. made in the WTO and in various FTAs. There is growing interest among both Democrats and Republicans in industrial policy measures to further support critical minerals mining and processing and, potentially, to support pharmaceutical and medical manufacturing in the U.S. I do not profess to know the end point of this embrace of American industrial policy—and candidly, while I welcome it, I also worry about overreach. But clearly if U.S. trade negotiators are going to board planes at Dulles to go haggle over new deals, we need to figure out a negotiating mandate with respect to industrial policy and subsidies different from the ones we embraced over the past few decades.

Moreover, subsidies are hardly the only policy area where domestic economic policy preferences are in flux.
Look at digital and technology issues. Since the rise of the internet in the 1990s, the U.S. had a clear domestic digital and technology agenda that we sought to multilateralize across trade agreements. We promoted a free, open, and interoperable internet and we advocated against data localization and other restrictive measures internationally. We provided liability protections for tech platforms pursuant to Section 230 of the Communications Decency Act of 1996 and, in trade deals, advocated that foreign governments adopt similar laws. We generally fought for light-touch antitrust laws and enforcement, both domestically, and internationally.

Today, our domestic views on have changed. There is a broad domestic rejection of Section 230 immunity as it stands today, even if no one seems to know quite what should replace it. Current U.S. policy towards TikTok and other Chinese apps, data security measures that the CFIUS committee frequently requires in mitigation agreements, and other tech policy developments show that the U.S. no longer adheres to longstanding views about the truly free flow of data across borders. Antitrust regulators feel a growing appetite for aggressive enforcement of antitrust law. Trade policy proposals on the digital and tech sector will have to take these shifts in domestic policy preferences into account.

I could also describe shifts I see underway in domestic preferences of other areas of economic policy. My point is not to drone on with a litany of the shifts we see in Americans’ domestic economic preferences, but rather to simply suggest that trade policy will have to take these changes into account if we are going to get back into the business of comprehensive trade agreements.

The second strategic shift that trade policy needs to accommodate is the reemergence of great power geopolitics in international relations. Between China’s geopolitical rise and growing global aspirations and the global revisionism of Moscow, the geopolitical unipolarity assumptions of the 1990s have been upended.

The reemergence of geopolitics poses a conceptual challenge to key aspects of the global trading order, particularly to the WTO as a global baseline for global trade. To be direct, there are few American policymakers who today would argue that the structure of U.S. tariffs on China should be substantially identical to the structure of U.S. tariffs on, say, Germany, or another allied but non-FTA country. But of course a foundational premise of the WTO is that the U.S. would treat China and Germany equally when it comes to tariffs and to certain other measures.

I don’t profess to know whether Congress will revoke China’s PNTR status, a topic that seems increasingly up for debate. And I don’t know how the Biden Administration will eventually adjust specific tariffs on China as it finishes its required four-year review of the Section 301 tariffs that Trump first imposed in 2018. But however those debates land, I am quite confident that so long as the U.S. identifies China as our leading geopolitical competitor, we will not return to a world in which the U.S. puts China and its NATO allies on the same trade footing.

Admittedly, the European Union and other G7 partner countries have been wary of tariffs on China. But the G7 too has moved away from the concept of MFN trade policies when it comes to Russia, which, while formally still a member of the WTO, seems unlikely to again get accorded MFN treatment by the West for many years. And listening to friends in Europe, I wonder if the ground is shifting there as well with respect to at least some tariffs on China.

This resurrection of geopolitics has driven the third major shift, which is the securitization of trading relationships. U.S. and G7 policymakers today focus as much on the security aspects of trade as they do on economic efficiencies.

For example, we see a strong desire by both policymakers and businesses to “derisk” supply chains. We no longer trust geopolitical competitors to be reliable suppliers of essential goods. We want to see an increase in domestic production, but we also emphasize “friendshoring” as a way of building resilience and shoring up geopolitical alliances. While policymaking has yet to fully identify the policy tools that will effect friendshoring, friendshoring is going to be an ongoing priority not only in Washington, but across western capitols.

The securitization of trading relationships, much like our domestic rethink on technology policy, will also force a re-think on the digital trade agenda. We need a set of rules that protects many of the core values we have long pursued in digital trade but also recognizes a broader range of legitimate national security concerns regarding data.

Finally, we see that the securitization of trading relationships has led to a vast increase in the use of sanctions and export controls—a development that is evident to anyone who practices international trade law today.

Sanctions and trade embargoes of course have a long history–dating to at least the Peloponnesian war in the 5th century BC. But between the end of the Cold War and about 2014, sanctions, export controls, and national security tariffs were largely an afterthought in the global trading system. Sure, companies doing business with places like Iran and North Korea had to comply with embargoes and other sanctions. Companies exporting weapons and certain dual-use items had to comply with U.S. and multilateral export controls regimes. But the vast majority of trade with the vast majority of the global economy took place blissfully free from the national security regulations that can govern trade.

Today the landscape is quite different. The U.S. and our G7 partners have curtailed large swaths of trade with Russia. U.S. export controls on China have significant effects on the U.S.-China technological relationship. CFIUS scrutinizes an ever-larger number of investments in the U.S., not just from China or the Middle East, but even from countries like Japan and the Netherlands. If press accounts are accurate, the U.S. is soon to announce restrictions on outbound U.S. investments in China, a type of capital control the U.S. has not historically enacted outside the context of military conflicts or comprehensive sanctions. For U.S. trade policy to have meaning, it needs to grapple with these tools, rather than simply including blanket national security exceptions that increasingly threaten to swallow the rule.

THE PATH FROM HERE:

So, against this backdrop, what is the path for U.S. trade policy? There is no shortage of initiatives in various stages of development. The Administration has been pursuing the Indo-Pacific Economic Framework. The U.S.-E.U. Trade and Technology Council is a forum to discuss disputes and to seek alignment on regulatory approaches towards issues like AI. There are trade and investment discussions with Taiwan.

There are still occasional discussions of trade agreements with the U.K. and Kenya, though I can imagine anything is imminent. There are trade association and think tank proposals for digital trade agreements. And as Kathleen Claussen, now of this law school, showed in an important article last year, there has been a proliferation of more than 1,000 trade executive agreements that do not require congressional action, many of which are targeted to a handful of specific products or issue areas, that have been effective at facilitating U.S. trade in discrete areas.

In my view, if we want to put some points on the board—to actually develop and implement specific trade agreements and specific trade policies that serve U.S. economic and geopolitical interests—in the near term we should probably de-prioritize big initiatives and instead think small.

In a year when domestic economic preferences are in flux, views of the geopolitical order remain unsettled, and the U.S. is heading towards a 2024 election, the practical reality is that we are going to have a difficult time negotiating meaningful, binding, major trade agreements. For example, I am wholly unsurprised that the proposed digital chapter in IPEF has come in for sharp criticism both domestically and with our IPEF partners. Until we know what we want domestically with respect to tech and data policy, it is going to be a challenge to write international rules of the road.

This is why I think we should start by focusing on targeted specific initiatives and then build from there.

For example, I am bullish on the proposed critical minerals agreements that the Administration is pursuing. These are a good example of targeted agreements that have the characteristics needed for success. For the U.S. to manage the green transition, we need access to minerals and processing capacity abroad. And we want countries we buy from to adhere to high environmental and labor standards, and we want to ensure that the minerals themselves are not under Chinese control. We, the U.S., also now have something minerals exporting countries and other friendly countries in the clean energy supply chain want: access to Inflation Reduction Act subsidies. Basic negotiating theory suggests we should be able to figure out a deal here.

The recently announced U.S.-Taiwan Initiative on 21st Century Trade is also a useful milestone. Yes, if you read the text, it principally deals with customs matters and hortatory commitments regarding good regulatory practices. But it includes useful, practical steps to promote trade with a key geostrategic partner, and creates a foundation for broader negotiations over the long-term.

The U.S. E.U. Trade and Technology Council’s recent focus on AI is similarly welcome. Even if U.S. policy preferences on many digital and tech issues is in flux, AI presents a rare opportunity: it is an issue that both will dramatically impact economic and domestic life across the U.S., Europe, and other G7+ partners, but which has emerged so quickly that national views on what to do have yet to harden. This presents a window to work collectively on AI regulations that, realistically, will matter more for our economies and our democracies many traditional trade agenda items.

I also think the U.S. should pursue agreements with allies and partners to increase transparency regarding industrial policy. We are not the only jurisdiction to re-embrace industrial policy—many of our G7 partners are embracing it as well. I worry that absent close coordination, this risks an uneconomical subsidy race that pays off well for companies but will be inefficient at achieving economic and supply chain resilience goals. Developing an information sharing mechanism with public accountability can help head off a subsidy race to the bottom.

Let me now turn to a question that I know is on many of your minds: what should the U.S. do with its tariffs on China?

For many years the U.S. took the strategic approach that economic engagement with Beijing could serve as a tool to foster economic and potentially even political liberalization in China. Between the 1990s and the mid 2010s, Presidents from Bill Clinton to Barack Obama tried to use the inducement of economic engagement to persuade China to adopt a set of economic reforms. When inducement didn’t work, the Trump Administration tried to use the threat of cutting off economic ties to cudgel China into making changes.

Today, this the strategic approach of using economic inducements and threats to promote change in China has reached the end of the road. China isn’t going to change. And our economic engagement needs to reflect that China is going to be China.

I do not know what the Administration plans to do at the end of its current four-year review of the Section 301 tariffs. But my recommendation is that the Administration rebalance the tariffs so that individual tariff lines are in the U.S. interest. We should hike tariffs where we continue to have strategic dependencies on China in order to reduce our dependencies for critical goods. And we should reduce tariffs on products that are non-strategic, and on certain intermediate goods where the tariffs have actually undercut U.S. competitiveness in the global market. In a world where China is not going to change, we should actively manage the trading relationship to ensure that it is in our interest.

Now let me turn to some recommendations for the mid-term.

Here, I’d actually start by developing a set of supply chain focused agreements that would go well beyond the “talk-and-coordinate” commitments that appear to be the core of the IPEF’s supply chain chapter.

As has been widely noted, much of the trade we are trying to get out of China is not actually going to come back to the U.S.— it is going to migrate to other partners. We’re already seeing this with Vietnam, a country that has no trade agreement with the U.S. but which exported the equivalent of about a quarter of its GDP to the United States last year. At a policy level the United States has generally welcomed cooperative work on critical supply chains.

There is much we could do in a critical supply chain agreement that focused on a set of mutually agreed critical sectors. We could certainly start with a commitment not to hike tariffs on goods in these sectors, and move, with Congressional authorization, to cutting them. By focusing on a handful of discrete critical sectors we can sidestep the domestic policy and political debates that, as I discussed earlier, will pose significant headwinds to comprehensive deals over the next few years. We could commit to making certain domestic incentives available on a mutually beneficial basis.

Targeted regulatory actions are another area ripe for a supply chain agreement. In sectors like semiconductors, or the green energy transition, we could jointly commit to expedited, though still high standard, permitting processes for major projects.

From a U.S. perspective, we should also think creatively about bringing to bear tools not traditionally integrated into trade talks. For example, assuming we want Congress to chop on a supply chain deal, we could incentivize the U.S. Development Finance Corporation to provide trade infrastructure financing to create better trade infrastructure among trade country partners. Certain projects abroad could be made eligible for DPA Title III funding, which is currently available only in the U.S. and Canada, but which Congress is considering extending to a handful of other allies. We could create a CFIUS white list of companies based in critical sectors and either eliminate or expedite CFIUS screening for cross-border investments in these sectors.

I also recommend a mid-term focus on digital trade issues. I have been skeptical of digital trade agreements before the end of 2024, despite supporting the concept, because I don’t think we have enough domestic clarity on a negotiating mandate for a deal to be both meaningful and successful. But I also think that given the importance of digital issues, over the mid-term we just going to have to figure out what we want and go out to build the rules. Industry and civil society should come together this year and next to develop a set of recommendations to government on how to think about cross border data flows in a geopolitically diverse world where trade is more securitized, and then build support for that across the G7. We will likely already have the Japanese on board as long as we call it Data Free Flow with Trust.

Finally, the mid-term agenda should include an aggressive push both on carbon border adjustment mechanisms and on green subsidies. CBAMs are coming. Politically, back in 2020, the President committed to a CBAM on his campaign. Even some Republicans are eyeing CBAMs as a way putting global pressure on China, which is today by far the world’s largest emitter. Europe is moving forward with a CBAM and will feel increasing domestic pressure to subsidize the green transition in Europe lest is lose vital manufacturing to lower energy cost and high carbon-intensity regions. Economically, if we don’t embrace CBAMs we will not succeed in our global goal of reducing emissions and we will risk undercutting our own manufacturing investments. I am hardly the expert on CBAMs and understand their complexity. But I think they have to be a major focus of U.S. trade policy over the next several years.

If I look out over a longer time horizon, what do I think the future looks like? I’ll readily admit that my track record of long-term prognostication is poor. But I want to highlight two areas that clearly need attention.

First, the WTO. On the current trajectory the WTO is heading towards a future where it becomes somewhat irrelevant to global trade. If we want to reverse this trend, we are going to need to get beyond the current discussion regarding tactical problems, like re-starting a functioning appellate body, important as those issues are. Instead, we need a candid and direct discussion of what we want the future to hold for the WTO. As I said earlier, it is my view that the United States is simply not going to accept WTO rules that require us to treat China and Germany on the same footing when it comes to trade. It is also my view that the U.S. is unlikely to accept a set of rules would fundamentally constrain our shift back towards a period of industrial policy. How do we reconcile these shifts in U.S. views with the rules we agreed to in the 1990s?

I see two potential outcomes. One the one hand, we could reach some kind of global détente where the U.S. and China, or perhaps G7 on one side and China on the other, mutually agree that WTO rules won’t actually govern trade between us, but that the WTO system will govern trade with third countries. Or on the other hand, perhaps we will return to more of a GATT-style arrangement where we have separate but still quite broad trading blocks. Either way, absent some fundamental reassessment, I see a long, slow sunset for the WTO.

With respect to FTAs, we similarly need to have a discussion about what they should look like. In particular, we need domestic soul searching about what we want out of trade agreements beyond geopolitical alliances. We need an economic theory of the case. For example, do we want to encourage our allies and partners to increase their own domestic industrial policy subsidies, and would we be willing to give partner country companies access to ours? In his recent speech at Brookings, National Security Advisor Sullivan talked about the need to allocate capital in ways that focus on the quality of growth, not just the quantity of growth and to drive a new international economic policy agenda. I agree entirely with the thrust of Sullivan’s argument. But we are going to need time to turn his call into proposed trade rules, and then go out and negotiate them.

Moreover, for a trade agreement to work, it can’t just be about what the U.S. wants. One of the perennial complaints I hear from U.S. allies and partners about IPEF is that without greater access to the U.S. market countries have no incentive to make policy concessions to us. This is, I think, a fair criticism. If we aren’t going to include much traditional market access measures in a trade deal, and we want our partners to make tough policy choices of their own, we need to think up some other benefits to put on the table.

A few ideas for consideration. As I mentioned earlier, we could link certain kinds of development assistance more directly to trade deals, at least with respect to developing country partners. A few foreign countries have taken steps to begin to include visa and immigration related measures in trade agreements, an idea that the U.S. could explore. If we are wary of providing market access to countries that are unlikely to meet our overall standards for the environment and labor, perhaps we could figure out ways to offer lower tariffs on imports from specific factories or trade zones that are verified to meet such standards.

We should also start to develop disciplines for national security tools that would limit their use against trade partner countries—something that I expect is of increasing value to our allies. Beyond some sort of trade partner CFIUS white list, we could make commitments to refrain from using sanctions and export controls against a trade deal partner absent prior consultations to seek a negotiated resolution to whatever potential national security concern would trigger their imposition. This might be particularly valuable to partner countries worried about the long-term direction of U.S. politics and foreign policy. For those who are skeptical that the U.S. would ever consider disciplining its list of national security tools, I note that last year, in an Annex to the G7 Leaders Statement, the G7 articulated a set of commitments about its use of sanctions and export controls against Russia that could form the basis for international discussions among close allies and partners.

CONCLUSION

I realize that I have now covered a lot of ground and likely exceeded your patience for my remarks. I’ll dispense with a lengthy conclusion and offer just a brief close before turning to questions.

I am actually quite optimistic about American trade policy. If I look back at previous productive eras in trade policy, such as the late 1940s, the 1960s, or the 1990s, they typically followed times when U.S. went through an intense period of domestic economic reflection and global geopolitical change. I think that today we are in a similar period of domestic economic reflection and global geopolitical change. Certainly, the geopolitical environment is right for another period of productive trade policymaking. What we need now is to have a set of quiet conversations and to get organized about what we want the economic substance of a trade agenda to be. After we do that, I’m confident that our trade negotiators will do what they have long done—go out and write a new set of rules for the world.

Thank you very much. And with that, I’d welcome a couple of questions.

To read full memorial lecture, see below.

Harrell Greenwald Memorial Lecture June 13 PDF

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