Trade Agreements and U.S. Concerns of Discrimination

Trade agreements are essentially bargains. President Trump appears to advocate that the United States should also benefit from bargains made by other countries. If nations perceive that Washington might later claim the best deals without bearing the cost, they have every justification to offer less favorable terms initially. This principle links seemingly unrelated issues involving Brazil and Canada.

In both scenarios, Washington contends that some countries offer preferential treatment to specific trading partners, which the United States views as discriminatory. Starting with Brazil, the nation has ‘partial scope’ trade agreements with Mexico and India individually and through Mercosur. These agreements lower tariffs on selected products, allowing Mexican and Indian exporters to pay lower Brazilian tariffs compared to American competitors. These ‘unfair, preferential tariffs’ became part of the U.S. Trade Representative’s Section 301 investigation against Brazil. The U.S. argues that Mexico benefits from preferences on over 1,000 tariff lines, with India receiving hundreds more.

Partial-scope agreements present challenges within the trading system. Congress has long questioned their compliance with the World Trade Organization’s requirement for free trade areas to cover ‘substantially all trade.’ The U.S. goes further by claiming American exporters face disadvantages due to others securing better treatment.

Considering Canada’s scenario, Canada maintains its own trade agreements. Under the Canada-European Union Comprehensive and Economic Trade Agreement, Europe secured preferential access for cheese. The United States reached a different dairy arrangement through the United States-Mexico-Canada Agreement (USMCA). In invoking Section 338 of the Tariff Act of 1930 against Canada, Washington refers to the preferential treatment for European cheese as evidence of discrimination against American trade.

Mona Paulsen highlights that even the creators of Section 338 recognized the restriction that the U.S. cannot indefinitely claim any preference another nation negotiates. The recently collapsed negotiations between the U.S. and Canada reportedly faltered, partly due to America’s demands regarding Canada’s future trade agreements.

Combining the scenarios with Brazil and Canada reveals a pattern. The U.S. employs Sections 301 and 338 as if they were most favored nation clauses, which trading partners never agreed to. Investment lawyers will recognize the concept, as bilateral investment treaties often incorporate most favored nation provisions ensuring American investors receive treatment no less favorable than third-country investors. Subsequently, an American investor may claim improved treatment offered to European or Japanese investors.

This might resemble free riding, but the involved country agreed to these terms. The most favored nation obligation was included in the original deal, allowing the nation to demand compensation or negotiate exceptions. This is not the case here. Brazil provides a tariff preference to Mexico, and Washington labels this a disadvantage under Section 301. Canada grants preferential access for European cheese, and Washington deems this discriminatory under Section 338. Enforcement then comes in the form of tariff threats. Hence, it represents retroactive most favored nation without consent, coupled with free riding on concessions others have negotiated.

Europe did not gain Canadian cheese access freely; they negotiated the Comprehensive Economic Trade Agreement and reciprocated with Canadian concessions. Similarly, Mexico’s benefits in Brazil stem from a reciprocal commercial deal. If Washington demands equal treatment solely because American exporters are disadvantaged, it gains the advantage without paying the agreed price.

The postwar system always balanced nondiscrimination with preferential trade. The solution emerged as follows: Most favored nation is the default, but qualifying free trade agreements can offer heightened preferences as members accept deeper reciprocal commitments. The United States has profited greatly from this exemption. Mexican goods enjoy USMCA preferences not extended to goods from Brazil. Washington doesn’t automatically offer these benefits to nations claiming less favorable treatment.

If Washington wants the optimal treatment Canada may later offer another country, the solution is straightforward: negotiate for it. What Washington shouldn’t do is leverage unilateral tariff statutes to achieve what wasn’t secured at the negotiation table.

This issue highlights a credibility dilemma alongside the free-rider issue. Why negotiate for tariff schedules, exceptions, and regulations if Sections 301 and 338 can alter those agreements afterward?

The problem is particularly severe if Washington now aims to influence Canada’s upcoming trade deals. This notion isn’t entirely new but extends existing ideas. The USMCA already obligates Canada to inform before entering negotiations with a non-market economy and allows any party to terminate with six months’ notice. The August demand reached further; moving from claiming the advantages of other countries’ bargains to regulating which agreements they form.

This situation is not merely speculative. Washington’s Malaysia agreement requires consultation concerning any future agreement that might jeopardize American interests, though these interests are not clearly defined.

For years, the United States advised countries that preferential access should be earned at the negotiation table. Trump’s doctrine differs: When someone else secures a better deal, America might demand the same, or impose tariffs until compliance occurs.

This approach diverges from conventional most favored nation principles and deviates from reciprocity. It constitutes a most favored nation clause unendorsed by partners, enforced through tariff threats.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at Georgetown University’s Walsh School of Foreign Service. Barry Appleton serves as interim director of the Balsillie Legal Advisory Centre at the Balsillie School of International Affairs and Co-Director of the Center for International Law at New York Law School.