USMCA Review, G7 Summit, and the EU-U.S. Trade Deal

A

I'm Scott.

B

I'm Bill and we're the Trade Guys.

C

You're listening to the Trade Guys, a podcast produced by CSIS where we talk about trade in terms that everyone can understand. I'm Alex Kisling and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys. Thanks for listening to the Trade Guys. On today's episode, we dig into the latest on the USMCA review, break down the outcomes from the G7 summit, and look at the European Parliament's approval of the EU US Trade deal. All that and more on today's episode of the Trade Guys. All right, Trey. Guys, we're keeping up with our new weekly tradition by turning it over to Bill at the news desk for a couple of news flashes. Bill, this week we've got developments from the Supreme Court and a development on the tariff refunds front. What's going on?

B

Well, yes, two pieces of sort of legal news today that be of interest to people that are either getting refunds or would like to get refunds. The first is that the Supreme Court declined to take up an old case involving Trump's China tariffs from his first term. And this has not been in the news for a couple of years because it was on appeal and has been sitting around for a while. Basically, a bunch of people appealed his 301 tariffs from his first term against China on the grounds that he, he made additions. He put some in place, and then a year later he put some more in place. If you recall, There was List 1, List 2, List 3, List 4A and 4B, and these were imposed over a period of 15 months, different collections of categories. And the argument which was made was a simple one, which was the president gets one shot at this, one bite of the apple, he can't come back in and change things later on without initiating a whole new investigation. That argument lost, I think, at every level, judicially. So it was no surprise when the Supreme Court declined to take it up. But it is relevant today because it suggests that all the courts are giving a fairly broad reading to Section 301 and the authority it gives the president. Because what they clearly had to decide was whether the president had fairly broad authority to adjust or change, modify the tariffs and the courts down the line decided or up the line decided that he did. So that may come into play when the inevitable new Section 301 lawsuits are filed after July 24, when the Section 122 tariffs expire. On the direct refund front, there's a new lawsuit. I Mean, there's lots of new lawsuits, but one in particular has caught everybody's attention because it relates to something that the trade guys actually predicted several months ago, which was that there's a difference between, not always, but sometimes there's a difference between the importer of record and the entity that actually pays the tariff. In the sense that the importer of record is the person who's liable and he's the person that pays the tariff. But if he's an intermediate who simply is passing the good, reselling the goods or passing the goods on to somebody else and assessing them the tariff, the fact is that the IOR is not really paying, the person downstream is paying, and the IRO ior, the porter of record, is just a conduit of the money going back to the government. The lawsuit makes the point that CBP has set up a system where it's the importers of record who get the money. And these guys now, the other people are now coming in saying, wait a minute, these guys are getting the money, but they charged us and we should be getting the money and not them. It's an interesting lawsuit, just was filed, so it's going to be a while before it works out. What it leads to if they win is a very complicated situation because at that point it means that CBP will have to go back and figure out who actually paid the tariff. And that means going back to the importers of record, I guess, and asking them what happened, you know, did you pay or did you pass it on to somebody else? That'll be really complicated. And we already are talking about the millions of entries that are out there, so stay tuned for that. The only thing I would say about it is that the trade guys saw it coming and predicted this would happen. We'll see how the courts go with it. It pretty clearly is, you know, it's an issue. And if the idea is the people who paid the money ought to get the money back, then these guys ought to win the lawsuit. But it's by no means clear that that's going to happen.

A

Turning this case into a fact intensive matter is going to run up the legal bills like crazy. And which you also predicted, I think at one point. But this gets really messy if every importer, every person with a claim winds up having to create a, a big record of what all happened and have it subject to, subject to dispute and resolved. Fact intensive cases are always difficult, but you make this into one. Because of the millions of entries.

B

I was politely reprimanded by our good friend John Magnus, who listens to the podcast and reads my column, because I said in the pre recently, I think last week or the week before, that the Supreme Court screwed this up by not sorting all this out in advance. And his comment to me, which was the correct legal point, is that they didn't have any obligations sorted out in advance because the issue of remedy hadn't been completely litigated or decided. And the writ of certiori that the Supreme Court granted to take the case didn't mention remedy at all. And then he went on to point out what I had also pointed out, which is the court rarely gets into areas if it doesn't have to. He's right about that. And so I was probably going too far and saying that the court screwed up, but the consequence of them not doing it is it's going to come back and bite them. You know, all this stuff is going to end up back with them and they're going to have to deal with the issue of remedy eventually because all these suits are going to get appealed by one side or the other. So it all ends back up in the court's lap and they'll have to deal with it. They could have saved a lot of time and money if they'd taken the extra step in the beginning.

A

Yeah, but this is America. Lawyers have got to eat, too. Come on.

B

Yeah, I know. So John wins on a technicality. It's a good point, but I think my larger point is right.

A

It's a good point.

C

Well, Bill, I promise to never reprimand you politely or otherwise, but thanks for the news flashes as always. I'm sure we'll have more next week. But let's get into our first big topic of the week, and that's USMCA. While in France for the G7 summit this past week, President Trump commented on the deal's future, saying, quote, I would rather not have the agreement, but I may sign it. And we may do better as a country if we don't have an agreement. So this is, of course, ahead of the July 1 USMCA review deadline. And Scott, with that context, what's the latest and where are we headed?

A

You knew USMACA was going to create drama. We just weren't sure how and appears to be doing so in the U.S. canada, part of that negotiation. And I would just say at the outset, very important trading relationship between the United States and Canada. Important for both parties. But it's always got its subtleties and its complexities. Part of it is, obviously it's a huge economic relationship just because of our proximity and the ways the years in which we've specialized as economies to do different things. But it also has a huge geopolitical overlaid on everything that happens diplomatically between the US And Canada. Obviously they're a longtime ally, they're one of the five eyes. Just the territorial closeness and this long, largely undefended border gives rise to a lot of geopolitical issues that get wrapped up in the economic issues. And I think that is some of what's happening here. There's a third vector to this which if you've worked with Canadians or paid attention to Canada, unlike most Americans, you would know this, which is Canadian domestic politics often resolved around what to do with the US if you go all the way back to confederation, the biggest difference between the Liberals and the Conservatives was how to handle the U.S. and over the years, occasionally they'll switch sides. Oddly, they did after the US Canada Free Trade Agreement, which was negotiated by a conservative, Brian Mulroney. But the United States figures large in Canadian domestic politics, much more so than the Canada figures in U.S. politics. We kind of ignore them. It's like America's hat or, you know, we think, you know, they're nice and their beer comes in 12 ounce bottles and it's all good, but we don't really pay a lot of attention to. They pay a lot of attention to us. And so I think that adds to the drama that's going on now. It sounds to me like, you know, Trump is right out of his art of the deal of saying he doesn't really need this or not want to kind of downplaying the notion of it. But there have been some real tensions that certainly went back to the previous Prime Minister. I think Justin Trudeau and Donald Trump rubbed each other the wrong way most of the time they were in office together. And this Prime Minister Carney is also has a tendency to create friction with President Trump and vice versa.

C

Yeah, right.

A

Of course, at this point, we don't know whether any of this is going to be controlling in the debate. Obviously the geopolitics will come into it. The decision that Prime Minister Carney made to allow Chinese quota a certain number of Chinese automobiles into Canada to resolve another dispute on seed oils to our agricultural access in general. The fact that and whether or not it can be circumvented is I think a big concern for the US that hasn't been fully dealt with. It is certainly an issue that's come up. Chinese vehicles in North America has come up a lot in the Mexican US negotiations, they're looking for ways through rules to get rid of it. But then we have that Canada imports a bunch. Now, it's possible that the domestic politics on that will make Canada able to minimize it, because it looks to me like the big winner of that quota of Chinese automobiles into Canada at lower tariffs is Tesla, because Tesla has vehicles that are made in China, they have a Shanghai plant, and they have a dealer network in existence. Not that BYD or some other Chinese automaker couldn't set up a dealer network quickly if they chose to. But they're in the market now, and so Tesla may well fill up that whole quota. I don't know enough about the specifics, but that's possible. So. So the politics will stay interesting. But I think this is a moment for US commercial interests to get to work with Canada. There was a. There was a Canadian ambassador to the US during the 1980s, a professional diplomat named Alan Gottlieb. And Gottlieb was ambassador to the us, both under Pierre Trudeau and Grandma. And really responsible as much as anyone for building the commercial consensus between the U.S. and Canada to go ahead with the U.S. canada FTA at the end of the 80s. And he created another border coalition with members of Congress. They created a big network of data about Canadian investment in the us, US investment in Canada, and the closeness of the commercial relationship. I think it's time to dig that out. And there's a great diplomat, and it showed a way to get the interests of both parties before their legislatures in a way that was always quite constructive. So I think it's probably what's needed now more than anything else. Let the spats between the leaders go on. That's fine. It's going to happen. At least with our guy, it happens all the time. But I think the commercial interests can take a page out of Ambassador Gottlieb's playbook.

C

Bill, how did you interpret the President's remarks over the past week? I mean, is there a chance that this thing unravels, or is this just kind of a negotiating tactic and bluster?

B

Well, we've been predicting drama, and the drama has arrived finally. Late. I think everything's been late. I had expected that they would genuinely try to wrap this up one way or the other by July 1, which is what the agreement says they're supposed to do. And the fact that they've scheduled at least one negotiation with Mexico on July 20, it suggests that they don't intend to wrap it up on July 1st. So everything is moving at a slower pace than anticipated, including the drama. But Trump has said twice in the last two weeks, one at some event in the United States two weeks ago, and then again at the G7 summit when this subject came up and he's not sure he's going to renew the agreement, that we don't need it. Mexico and Canada don't make anything that we need and we might be better off without it. I think it's exactly what Scott said. It's the classic Trump playbook, trying to leverage the negotiations. His political advisors are not stupid and they must have told him that actually doing that three months before an election would be a political disaster. The effect of pulling out on all three economies would be enormous. It's a fair point that it might be worse for Canada and Mexico than for the United States, but it would still be a huge impact here. It would disrupt the markets. It would particularly disrupt the markets that he cares about, which are the equity market and the bond market. So I don't think he'll do it. I think it's a threat. I think everybody knows it's a threat. I expect more threats. What has surprised me a little bit has been the slow pace of the negotiation. The Canadians were here once. They said they had a good meeting, but the formal process of having a round which the Mexicans have engaged in has not happened yet with Canada. And I'm not sure what's going on with the Mexicans. We are recording this. On June 18th, there was a Mexican round. They were here in D.C. the 16th and 17th, ostensibly to discuss agriculture. And so far I've been unable to find out anything about if anything happened. So my guess is that if anything happened, it was either very little or some sort of interim thing. So I think we're in waiting mode. It probably means that on July 1, when they're supposed to have a meeting to make a decision about renewal, it looks like they will probably decide that they're not going to renew at that point, which will then, under the agreement, trigger this 10 year review process. I think they'll continue talking and I don't at all rule out the possibility of including an agreement in September or October before our election. So Trump can rule it out, his next great accomplishment and how we've settled the freight relationship for the future and how it's like the Iran deal. It's a brilliant deal. That helps the United States immensely, which may or may not be true, but we know that's what he'll say. It's sort of on track, but it's on A slower track than we all thought. And it's not going to be July 1st. This is going to keep us busy talking in July, August and September. No, I would just add a digression for a minute. Scott's comments on Canada were interesting. I would just note that it's an issue that Canadians think about. He's right. A lot more than Americans think about the relationship. There's a very interesting sort of Canadian television series called Murdoch Mysteries, which involves a detective in the Toronto police force. Now it's in its 20th plus season. It's been going on forever with mostly the same cast, and in the process, it's moved from about the year 1890 up to about, oh, I don't know, 1914 or 1915. I don't know quite where they are right now. But what has surprised me is the number of plot sessions that have been devoted to either worries about an American invasion or American spying in Canada. And the plot is all these. There's a Canadian spy who's actually quite amusing, but there are American spies that are very clearly up to no good. There are regular fears that the Americans are going to invade through Buffalo, basically coming north that way. And it's a detective show. This is sort of peripheral, but there seems to be this ongoing and this is historical. You know, this goes back 1880s, 1890s, 1900s, concern that the Americans really might do that at some point. So this is something that I think is real in Canada and not just a fantasy.

A

Oh. And it's been there for a long time. Montreal was a hotbed of spies during the Revolutionary War and for Benedict Arnold, hung out. All right. And so there's a. There's a lot that goes way back. And then, of course, after the end of the Civil War, with this large standing army in the United States. What was the campaign slogan? 54, 40 or fight. They wanted to raise the border from the 49th parallel to the 54 degrees. 40 minutes, 54, 40 year fight. And that was clearly an invasion message. So, yeah, there's a lot of it there that is still real. It's part of the culture.

B

We vacationed there last year and last fall we went to the part of Quebec that is immediately north of Vermont and New York, this little slice, little triangle that is south of Montreal and north of Lake Champlain, and didn't encounter troop movements.

A

That's because they're secret, Bill.

B

Well, we didn't encounter any spies either. We did go to the post office that literally sits on the border. Half of it is in the United states and half of it is in Canada, which was an interesting experience. For decades, the front door was in the United States and Canadians just walk to the front door. Now there are bollards and things that make it. You can't drive back and forth at that point. I guess you could jump over these things. But the Canadians were inventive and they basically turned a fire escape in the back into a Canadian entrance. So now you can go in from either side, you can freely cross the border. There's nobody inside the library on patrol. I believe the rule is that you have to go out the same door you came in because otherwise you might be committing some kind of offense. At least if you go out the front door having come in from Canada. But no armed guards, no artillery. So peace reigns, at least for the time being.

C

Look at the value we give our listeners. Not only do we cover trade, we cover TV recommendations, history lessons, vacation destination plans. Yeah, recommendations. This is. Well, that was a winding journey. It's led us to our next topic, which is.

B

Yeah, it was a fascinating place. It was just this ordinary library, you know, with a line down there middle.

C

Well, to stick with the theme and to do my usual selfish plug here for CSIS work, we yesterday we hosted a conference on U.S. canada border security with Secretary of Homeland Security on the US Side and the Minister of Public Safety on the Canadian side. It was a really fascinating discussion about the challenges of securing a 5,500 mile border which is the longest border between two countries in the world. So the folks are inclined. That's on CSIS's YouTube page. So go take a look at it. So it's great, but we must move on, and we're going to move on to Europe and the G7 summit, which happened over the past week in France. And around that summit, President Macron put global economic imbalances at the top of the agenda. The argument being that China produces too much, the US Consumes too much, and Europe invests too little. So, Bill, let's go to you. What in your view actually came out of the G7 summit?

B

Well, once again, I think people were waiting for the drama because Trump has been known to leave early. Either insult everybody or leave early or do both at the same time. The last one was in Canada. He left that one a day early and blew off a number of the meetings that had been scheduled. And he famously left the other Canadian one in his first term flew off and refused to sign the joint statement at that point. This time around, none of that happened. He seemed to be happy Maybe he was looking forward to his dinner at Versailles with Macron the day after the conference. But, you know, the US signed the agreement. As far as I know, he didn't insult anybody, at least not publicly. He didn't leave. The joint statement was predictable. They're worried about supply chains, they're worried about choke points and vulnerabilities, and they agreed to work harder to resolve them and to identify them and deal with them. They're concerned about non market economy trade practices. Were talking there about China, even though they don't mention the term, and they expressed concern about nations that are pursuing overcapacity and other non market activities without, as I said, fingering one particular country. So it was predictable. What was noteworthy, I think, was what Alex alluded to, which was that President Macron has emerged as, I think, probably one of the leading China hawks in Europe. I mean, China hawks in Europe are not quite the same as China hawks in the United States. It's a more polite conversation in Europe. Macron has come out strongest for measures on the part of the EU to deal with the influx of imports, Chinese imports into Europe, most notably cars, both EVs and fossil fuel powered cars, but mostly EVs, but not only cars. Europe has developed a tool to deal with this kind of thing and deal with economic coercion. It has yet to employ exists, it's been approved, but it hasn't been used. And the debate now in Europe is whether now is the time to employ it. And I think Macron is clearly arguing that they need to do more lest their manufacturing sector be swamped and basically in specific areas obliterated by Chinese imports. The Germans are always behind the curve on this issue. In the previous German administration and in the Merkel administration before that, in the Scholz and Merkel administrations dragged their feet, particularly because German manufacturers have such a large investment in China, particularly the automakers, and they were very worried about retaliation prospects. Chancellor Mertz has been publicly taking a harder line on China and I think did so more than Scholz when he was in China on his last visit. But they haven't really closed on specific actions. And I think the German companies epitomize the quandary of European manufacturers, which they have significant investments in China and they depend on the Chinese for parts and components, and they depend on the Chinese for their exports. And so they're reluctant to take action even though they see what's happening that they're getting in the auto industry, they're getting buried by Chinese exports to Europe, but they're Reluctant to act. It's a dilemma and Macron has identified it. They still haven't figured out how to respond.

C

Scott, what'd you see out of the G7?

A

Well, first of all, they're basically back to their roots. The G7 started as a library group back in 1973. Secretary of the treasury was George Shultz, who convened four of his developed economy finance ministers colleagues. I think the first five were the United States, West Germany, France, the UK And Japan. President Nixon gave them access to the White House library. They started off as the library group, but it was just a way for finance ministers of industrial economies to manage issues as they arose and do it on a face to face manner. So seeing him back focusing on economic issues, I think is true to the group's history, and it is, I think French were the hosts, but President Macron raised the key issue. But Bill's right about the difficulty. And you know, if you're in the auto business, China is the largest vehicle sales market in the world, 37 million cars a year, maybe closer to 40. Now the United States, North America is the second largest at 20, so half that. So it's a market that you've got to care about, and you've got to care about both exports to China and imports from China, and you want your exports to be treated fairly. And it's hard to do that when you're punitive toward imports from China. So it's one of those things. It's going to be, it's going to be a difficult issue to work out. It's not the pure export led growth that a lot of industries worry about, but it's a good illustration of the delicacy of, of managing these tensions that arise out of just different economic strategies.

C

Well, thank you, guys. I know that the President extended his trip. He was loving it because he got that invitation for dinner at Versailles and think he was supposed to come earlier and he loves Versailles, so he decided to stick around.

A

Well, in the meantime, the European Parliament approved the agreement that was reached by the United States and Europe.

C

Yeah, yeah.

A

At Trump's castle. It has to go back to member states or member nations for final ratification. But it does look like that's going to proceed. There was a veiled threat that it had to be done by July 4th.

C

July 4th, right.

A

There'll be consequences.

C

Well, I want to, I want to stick with that. Just quickly as our final topic, Scott, what did the EU just agree to?

A

Well, they basically agreed to cut tariffs to zero on industrial products from the US which is Pretty broad list was this was the, the original offer that President Trump made to European Commission head Van der Lagen. And European goods will basically be have the baseline 15% tariff. Universal tariff, which I think probably is now down to, is basically the agreement that was reached back in June of last year. I think that's good for American access. We'll see what happens. On agriculture, that's always the tricky one because tariffs aren't really the problem. It's a regulation. And the way agricultural products are treated versus the U.S. the safety protocols are often quite different and makes it very difficult, even at zero tariffs, to get agricultural products accepted into Europe. So we'll see how ratification goes. But it's at least good news that something that both parties agree to is delivered. So that's always nice to see.

C

Just process wise, it's pretty much a done deal at this point. Or is there any chance of a hiccup?

A

Yes, member states do need to ratify, but of course they were in the process the whole way through. Once the European Parliament votes, it's an important step, but it's mostly a formality.

C

Yeah. And Bill, I hate to put. Go ahead.

B

What the parliament voted on was the product of a negotiation between the commission, the parliament and the member state representatives.

A

Right.

B

They are presumably on board and their, their approval should be pro forma. But you never know. We'll see. There might be a rogue prime minister out there someplace.

C

And Bill, I hate to put it this way, but for those who have not been paying attention to this closely, who's the winner, who's the loser here? Is it pretty equal at the end of the day or what's view?

B

Well, I think Europe widely regarded it as an unequal treaty in which they go to zero and we go to 15 and that that is imbalanced. But they also ultimately the legislators came to the conclusion that it was the best they could do. And so I think there is considerable resentment in Europe about this and it has created some revisiting of the argument. Why is Trump treating his friends worse than his enemies? There's some merit to that. These are not great agreements for the other parties. They did put in some provisions that we've talked about before that are sort of snapbacks, basically, meaning if the United States doesn't do what it says it would do, namely if it ends up raising tariffs above 15% or if it doesn't, what the Europeans are expecting them to lower their steel aluminum tariffs from 50% downwards. If they don't do those things, Europe is reserving the Right. To get out of its commitments as well. And that may create some fireworks in the future. I was expecting more grumbling from the United States about those provisions than there has been, which is good news. And they may simply swallow them and move on. But there's a test coming up, you know, because the EU has been a target in both of the 301 investigations, the forced labor one and the overcapacity one, which has not come out yet. And the forced Labor1, the EU ended up with a 10% tariff because they were sort of in that group. It was either 10 or 12 and a half. And they were in the group of 10 and 10%. And the European response was that was okay because that was not inconsistent with the Turnberry agreement, which is the castle in Scotland where the golf course is, because it's less than 15. The question will come up then, what happens when the overcapacity investigations are concluded? And once again, as we've been expecting, everybody is guilty. So the EU will be guilty again. And so what's the penalty the next time around? They've just been hit with 10. If they're hit with more than five, then in their judgment, the United States is going to be in breach of its agreement. Then we'll allow them to unravel in short order the commitments that they've made. So this is not an abstraction. It's going to be on the table fairly soon, because I think that USTR wants to get those investigations out and in force also before July 24, so they can deal with them before the current 10% tariffs expire. So I think this is going to be back in the news fairly soon, unless by some miracle the United States finds that the Europeans are innocent. That would be warranted.

A

Could happen. Probably won't, but it could happen.

B

That would be justified, but unusual.

C

All right, Trey, guys, we're going to leave it there for today. Be back with everyone next week. Thanks, as always, for joining us, and we'll see you then.

A

All right, thank you.

B

Thank you.

C

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