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This
week’s column begins with a new development but ends with a familiar
message about the importance of institutions and U.S. leadership. The
new development is that, as expected, the United States lost another dispute resolution case, this time with Canada and Mexico over automobile rules of origin.
That
dispute was over how to interpret the rules on measuring the regional
content of parts and components as they are incorporated into a vehicle.
Canada and Mexico argued that negotiators had agreed on rules that
followed the NAFTA precedent permitting “roll-up,” meaning that parts
that met the regional content standard for parts were considered wholly
regional for purposes of meeting the final vehicle content standard,
even if their actual regional content was less than 100 percent. The
United States interpreted the rules as not permitting
roll-up.
The
dispute resolution panel found that the negotiators had, in fact,
agreed on the roll-up rules as claimed by Canada and Mexico. More
interesting, they also found that the United States had agreed with that
interpretation both before and after the agreement was signed. It was
only later that the United States unilaterally changed its
interpretation.
The
good news is the United States’ reaction, which was more restrained
than its reaction to the two World Trade Organization (WTO) cases it
lost last year on steel and aluminum tariffs and Hong Kong labeling. In
those, the United States, which had made a national security argument to
the panels, angrily rejected the panel decisions as infringing on U.S.
sovereignty and compromising its security. While the United States did
not say explicitly that it would appeal those cases, it was clear that
the administration does not intend to
comply.
The
automobile case is different. The United States did not make a national
security argument, and there is no appeal process in the United
States-Mexico Canada Agreement (USMCA). (The appeal process in the WTO
is broken, but members still have the right to appeal “into the void,”
which effectively stalls final resolution of a panel’s decision.) The
U.S. response was to express disappointment in the decision, although in
a milder tone than the other two cases, and to indicate it would begin
negotiations with Canada and Mexico on a resolution of the dispute,
which is what the agreement
requires.
This
is good news because it signals the United States is not going to
undermine the agreement, as it has done with the WTO. All in all, it
would have been better if the United States had just said it would
comply and then had proceeded to change its interpretation of the rules
(which would not require congressional action).
Compliance
is important because it reinforces the rules-based trading system. It
also reinforces the United States’ leadership role in that system.
Nobody likes to lose—we certainly saw that in the 2020 election—but when
dispute settlement is employed, somebody has to, and right now our
number has come up.
Arbitration
and dispute resolution procedures were developed to get away from the
law of the jungle and to give countries a way to settle their
differences without going to war. In the wake of World War II, the
United States was instrumental in developing the postwar institutions
and rules designed to make sure that war never happened again. The
initial conference on that was at Bretton Woods, New Hampshire, in 1944.
Out of it grew the International Monetary Fund, the World Bank, and the
General Agreement on Tariffs and Trade, which became the
WTO.
The
world continues, unfortunately, to have regional conflicts and violence
within countries, but a global conflict has not recurred, and the
institutions and rules that began in 1944 have played an important role
in that. And the United States has played a leadership role in
maintaining that system. In doing so, we have learned, painfully, that
leadership sometimes requires taking one for the team. If the rules and
institutions are to survive, leaders need to set the example in
complying with them, if only to preserve their credibility when they
call out others for violating them. Losing
is important because it is a test of character, whether of the
individual or the nation.
Sadly,
right now the United States is failing that test and demonstrating an
uncharacteristic weakness of character. Our actions have undermined the
WTO and made restoration of its full dispute settlement process more
difficult to accomplish. If we do not comply fully and quickly with the
automobile decision, we will do the same with the USMCA.
The
counterargument is that compliance is not in the economic interest of
our workers. I don’t think that’s true over the long term, but even if
it were, it must be weighed against the cost of unilaterally undermining
the institutions that have preserved the trading system, a system that
has provided exceptional economic and political benefits to the United
States. Right now it looks like the United States is myopically making
decisions in its short-term political and economic interest, but they
are at the expense of our long-term economic interests and our position
of global
leadership. We are failing the test of character that losing represents,
and we will come to regret it.
William
Reinsch holds the Scholl Chair in International Business at the Center
for Strategic and International Studies in Washington, D.C. |