In One Sentence

• The Office of the U.S. Trade Representative (USTR) told Congress that the U.S.-Mexico-Canada Agreement (USMCA) should be adjusted to address concerns about Chinese investment and labor practices in Mexico’s automobile sector. 
• USTR also said that the U.S. will continue to grant USMCA tariff relief only to automobiles that source a higher percentage of their core components in North America, a practice that runs counter to a January 2023 USMCA dispute settlement panel ruling.
• In public comments to the Commerce Department, industry representatives have complained about the administration’s “barrage of requests for information” regarding supply chain matters, and highlighted the need for “greater coordination across the federal government.”
• Speaking at the U.S. Chamber of Commerce’s Critical Minerals Summit, analysts and former officials criticized Washignton’s attempt to outcompete China on conventional battery materials as “a race to the bottom on cost.”
• They support, rather, strict trade enforcement to shut out goods made with forced labor but argued that U.S. companies should be allowed to “innovate our way out” by investing in “next-generation” battery products that can “leapfrog the status quo.”

Mark the Essentials

• The United States disagrees with Canada and Mexico on USMCA’s rules of origin requirements for automobile imports. Under the U.S.’ interpretation, automobiles are eligible for USMCA tariff relief only if a higher threshold of “core components”—primarily engines, advanced batteries and transmission—are sourced in North America. The United States’ interpretation would increase North American content requirements by 10-20% compared to Mexican and Canadian practices—an interpretation that a USMCA dispute panel struck down in January 2023.
• The State Department, the Office of the U.S. Trade Representative (USTR) and the Commerce Department have announced plans to establish a new Economic Diplomacy Action Group to “advance U.S. economic priorities, including supply chain resilience,” “create opportunities for American businesses globally,” and “attract foreign investment into the United States in sectors vital to U.S. national security.” According to Secretary of State Blinken, the Economic Diplomacy Action Group will aim to ensure high labor and environmental standards in global trade.
• Speaking on USTR’s withdrawal of U.S. support for digital trade proposals at the WTO, USTR Katherine Tai called for the recognition that decisions at the trade negotiation table have “significant and consequential” implications for U.S. domestic policies and argued that trade negotiators and trade policy should “complement our system but not to supercede it.”
• Ambassador Tai also called on trade policymakers and practitioners to avoid “deal fever” and focus more on a trade agreements’ “effect” on matters related to “economic opportunity” and “political participation.”  

Keeping an Eye On…

• What happens in UMSCA dispute settlement doesn’t stay in USMCA dispute settlement. Twenty-four years ago, the operation of NAFTA’s (USMCA’s forerunner) dispute settlement function came to a standstill when the United States, staring at a loss in a case filed by Mexico against U.S. restrictions on sugar, blocked the formation of an arbitral panel—in effect, paralyzing the procedure. Sugar, like steel, happens to be a politically super-sensitive sector which, in Washington’s view, cannot be left to the discretion of a third-party arbitrator. Up until then, three NAFTA dispute settlement panels had been seated and cases litigated, including two where the United States was the respondent. The non-appointment of arbitrators in this fourth sugar case broke the back of the dispute settlement procedure; it essentially ceased to function thereafter. And this NAFTA-tested panel blocking strategy became the inspiration for the U.S.’s wrecking ball approach a decade-and-a-half later to tear down the WTO’s Appellate Body (there had been too many adverse steel-related rulings for Washington’s comfort). Fast forward to 2019 on the NAFTA/USMCA front. To prevent a repeat of the dispute settlement impasse, the Protocol of Amendment to the USMCA’s dispute settlement chapter made it a point to ensure that if a respondent party fails to designate its roster of panelists within a defined time-frame in a contentious case, then the complainant party is at liberty to fill these spots. Essentially, if one party wants a dispute settlement roster set up to hear a complaint, it would get that roster set up. So, is the problem solved? And an elegant future solution, too, to the WTO Appellate Body impasse? Well, on panel blocking, probably yes. On adhering, more broadly, to dispute settlement rulings, no. In its report to Congress earlier this month on the operation of the automotive goods trade provisions in the revised USMCA, USTR essentially let it be quietly known that it does not intend to comply with an adverse ruling in an automotive rules of origin case brought by Mexico before a USMCA panel in January 2022. Unable to block the panel’s seating, the Biden administration now insists that its interpretation of auto trade rules of origin must prevail over the arbitrator’s interpretation. And perhaps at a later date, the U.S. will probably trade off this loss politically against a loss by Mexico in a future dispute settlement case. So much for the integrity of third-party rulings, then. And which further begs the question: Is there any purpose expending time, money and effort in trying to sort through the panel blocking impasse at the WTO? Even if a USMCA-styled remedy does come to pass, is it of any use if the Appellate Body’s rulings are blithely disregarded thereafter? Going forward, maybe the 53 parties (as of June 2024) to the Multi-Party Interim Arbitration Arrangement (MPIA) that was set up in 2020 should drop the ‘interim’ from its title and make it the permanent alternative appeals forum for WTO dispute settlement cases. With the EU, China, Japan, Canada, Australia, Brazil and Mexico already subscribing to the forum, and with South Korea, the United Kingdom (now that it has a Labour government), and the ASEAN countries hopefully incentivized to opt into the process, the MPIA could once again restore the integrity of third party dispute settlement among a nucleus of key and interested WTO member states that matter to the multilateral trading system.

Expanded Reading

• Mining sector readies push for new federal office, Politico, July 8, 2024
• Mexico, China partnership ‘win-win’ for both: former ambassador, Global Times, July 7, 2024
• Canada Enacts Digital-Services Tax Amid Risks of U.S. Trade Retaliation, The Wall Street Journal, July 4, 2024
• Automotive sector benefited from USMCA amid pivot toward zero-emission, hybrid vehicles: USTR, Fastmarkets, July 3, 2024
• USTR Releases Second Biennial Report on the Operation of the USMCA with Respect to Trade in Automotive Goods, U.S. Trade Representative, July 1, 2024
• Prospect of low-priced Chinese EVs reaching US from Mexico poses threat to automakers, AP, June 27, 2024
• Fixing the Information Crisis Before It’s Too Late (For Democracy), Open Markets, June 27, 2024
• United States Establishes Economic Diplomacy Action Group to Bolster U.S. Competitiveness, U.S. Department of State, June 24, 2024