Recall that USMCA Article 34.7 says:

3. As part of the Commission’s joint review, each Party shall confirm, in writing, through its head of government, if it wishes to extend the term of this Agreement for another 16-year period. If each Party confirms its desire to extend this Agreement, the term of this Agreement shall be automatically extended for another 16 years and the Commission shall conduct a joint review and consider extension of this Agreement term no later than at the end of the next six-year period.

(emphasis added)

The "through its head of government" language is interesting. The drafters could have put the head of government more at the center of the process of confirming. For example, the provision could have said "the head of government of each Party shall confirm in writing if the party wishes to extend the term of this Agreement for another 16-year period." But they used more indirect language instead, with the party confirming "through" its head of government.

"Through," as I think of it based on its use in memos, could mean that the sender is keeping the "through" person informed of developments, or looking for comments from the "through" person, or seeking the "through" person's approval. What if, in the context of the decision on whether to extend the agreement, Congress treated it like the first meaning, and passed a concurrent resolution saying something like "we confirm that the United States wishes to extend the term of the USMCA, and that this decision is to be communicated through the President"? Would that action constitute a U.S. "wish" or "desire," for the purposes of Article 34.7.3, to extend the agreement?

To be clear, I'm not saying that I think such an action is likely at the moment, in particular given the current Republican control of Congress. But note that paragraph 4 includes a similar provision that would apply later in the review process:

4. If, as part of a six-year review, a Party does not confirm its wish to extend the term of this Agreement for another 16-year period, the Commission shall meet to conduct a joint review every year for the remainder of the term of this Agreement. If one or more Parties did not confirm their desire to extend this Agreement for another 16-year term at the conclusion of a given joint review, at any time between the conclusion of that review and expiry of this Agreement, the Parties may automatically extend the term of this Agreement for another 16 years by confirming in writing, through their respective head of government, their wish to extend this Agreement for another 16-year period.

So, just for fun, let's say the USMCA does not get renewed in July, and then in November the Democrats win the midterms and take control of Congress. In January, could a Democratic-controlled Congress pass a resolution of the kind I described above, in an effort to extend the USMCA? It would certainly be an interesting exercise in relation to establishing the balance of Congressional-Executive power over trade policy, as the Trump administration is likely to push back! (Of course, there are plenty of Democrats who want changes to the USMCA, or don't like it in general, so it may not happen after the midterms either.)

As a final point here, let's look at whether the Congressional committee reports on the USMCA Implementation Act help clarify any of this (the Act itself does not include the "through its head of government" language). Here's a passage from the Senate Finance Committee report that discusses the joint review provision:

The Committee notes that stability in North American trade is critical to the health of our economy, and the Committee does not believe that this provision was necessary, particularly because, like all trade agreements, USMCA provides for withdrawal at any time with six months' notice. This provision does not change the constitutional structure of the United States with respect to the conduct of trade policy. Specifically, the Committee notes that Article 34.7.3 provides that each Party shall confirm in writing through its head of government whether it wishes to extend the term of USMCA. The provision thus only dictates how the communication regarding term extension should be made to the other Parties; it does not address how the decision itself is made within a Party. Further, the United States cannot withdraw from a congressionally approved trade agreement without the consent of Congress.

To me, the overall tone here suggests that the Senate believed Congress has an important say in the extension decision. And by distinguishing between the extension decision, on the one hand, and the communication of that decision to the other USMCA parties "through its head of government," on the other, the following sentence could be taken to mean that the Senate did not believe the head of government in the U.S. makes the decision alone: "The provision thus only dictates how the communication regarding term extension should be made to the other Parties; it does not address how the decision itself is made within a Party." Thus, arguably, while the communication comes through the President, nothing in the USMCA (or the implementing act) precludes Congress from making the extension decision. (And as noted above, the use of "through" may even give Congress the flexibility to do the communicating itself.)

The Science of Effective Cooperative Management of Common Resources

Research from multiple disciplines shows that a sustainable and effective cooperative agreement on common resources requires reciprocal commitments, which are monitored and with penalties for non-compliance. Evidence is from: (i) real-world experience of numerous communities that cooperatively and sustainably manage common resources without privatization or government regulation, in many cases over centuries (Ostrom, 1990); (ii) game theory (Fudenberg and Tirole, 1991); (iii) laboratory experiments (Fehr and Gächer, 2000); and (iv) a survey of international environmental agreements (Barrett, 2011).

Climate Club Rules for Carbon Dioxide (CO2) (Tarr, 2026)

We propose a climate club of governments in which each member will:

(i)               commit (with administrative plans and legislation) to net-zero CO₂ emissions in its own country by 2050 with intermediate goals at five-year intervals.  The climate club permits any WTO-consistent regulatory approach;

(ii)              in trade with non-members in products classified as carbon-intensive, impose high and progressive import tariffs and export taxes. Member countries will take effective domestic conservation measures in these sectors;

(iii)           impose a uniform tariff surcharge (ten percent maximum) on the imports of non-member countries, except for a members-agreed list of products that reduce GHGs or contribute to environmental sustainability; and

(iv)            impose a progressive tariff on members who fail to meet intermediate goals.

(v)             Accommodation for developing countries:

a.      Developed countries will voluntarily contribute to a Multilateral Fund (outside of the WTO) to assist developing country members of the climate club in their transformation to net-zero emissions. To access these funds, developing countries must be members of the climate club and must have per capita CO₂ emissions below an agreed threshold.

b.      Developing countries whose aggregate and per capita emissions are below agreed thresholds, will: be permitted to accede to the climate club with a net-zero goal of 2055; and for non-members and delinquent members, the tariffs of rules (iii) and (iv) may be adjusted down. For the largest emitters of CO₂, there would be neither accommodation of tariff penalties nor net-zero dates for membership.

c.      Only developed countries are called upon to subsidize breakthrough technologies.

Our climate club for CO₂ builds on a scientific consensus (Intergovernmental Panel on Climate Change, 2022) and the political consensus (Glasgow Climate Pact) of the need to reach net-zero CO₂ emissions. We propose similar clubs for methane and nitrous oxide but without the uniform tariff and we defer to the parties to the agreement for these gases to set the net-zero date for these emissions. We suggest an institutional structure based on the highly successful Montreal Protocol and defer to the Montreal Protocol for the reduction of emissions of hydrofluorocarbons.

Effectiveness of the Climate Clubs

The rules of our climate clubs are consistent with the science of effective cooperative agreements since they: (i) contain the reciprocal commitment of net-zero emissions for each country; (ii) they contain substantial penalties and a carrot, which are designed to impact the strategic decision of countries to join the climate club; and (iii) require monitoring. The member governments of our climate clubs make aggregate quantity commitments on their own GHG reductions on a path to net-zero emissions, not the regulations or measures employed. By focusing on aggregate emissions rather than the many measures designed to reduce aggregate emissions, our climate clubs bypass the overwhelming problem of agreeing on equivalents of different measures in international negotiations.

We propose a climate club that is initially a “coalition of the willing.” As more countries join, it becomes progressively more costly to remain out of the club. We are hopeful it would follow the model of the Montreal Protocol, which successfully addressed depletion of the ozone layer of the stratosphere; it was originally adopted by 46 nations but became the first universally ratified environmental treaty in United Nations history. We acknowledge that participation by the United States, or at least absence of its counter measures, may be crucial to success.

WTO-Compatibility

Our case for WTO-compliance is based on GATT Articles XX(b) and XX(g). Article XX(g) permits WTO members to immediately apply measures for the “conservation of exhaustible natural resources” even if the measures violate their WTO commitments, provided domestic measures are also taken. In EU—Palm Oil (Indonesia), the WTO Dispute Settlement Body adopted the Panel Report which declared that measures that limit GHG emissions are measures that contribute to the conservation of an exhaustible resource. Our climate clubs require domestic conservation measures especially where international trade measures are imposed.  The Dispute Settlement Body has ruled in multiple cases that for discrimination to not be “arbitrary or unjustifiable” under GATT Article XX, it must have a rational or reasonable relation to the policy objective. The measures of our climate club are focused on achieving the policy objective of net-zero emissions. Finally, in US—Shrimp, the Dispute Settlement Body ruled the measure must permit the import of goods from countries with alternate regulatory regimes that achieve the stated environmental objective.  Consequently, our climate clubs allow any regulatory approach. We acknowledge our climate clubs raise unsettled questions of WTO law, but we believe a WTO panel would uphold their legality. 

Economic Efficiency and Political Advantages

We view carbon pricing as enormously useful as a core component of national carbon policy. Economic efficiency implies, however, that emissions reductions per unit of costs are equalized across different measures (Tarr, 2025). Focusing exclusively on carbon pricing or any single emissions reduction measure in an international agreement, however, is an economic distortion since no incentives are provided for important complementary measures on emissions reduction. Experts believe that both carbon dioxide removal from the atmosphere and breakthrough technologies will be necessary to achieve net-zero emissions; it appears economically efficient to provide at least some support for these and other measures. Member countries of our climate clubs do not face any distorting incentive and may choose measures that are most appropriate to their conditions.

Regarding political support, compelling a specific regulatory approach to emissions reduction will likely induce resistance in many countries. For example, Bhutan is certified to have net-zero emissions but does not have domestic carbon pricing. To impose penalties on their exports due to lack of domestic carbon pricing is likely to generate resistance.

Other Climate Clubs

In his seminal paper, Nordhaus (2015) proposes a climate club of nations that addresses the free-rider problem by requiring members to impose a minimum carbon price and a uniform tariff on nonmembers. Nordhaus proposes an amendment to the WTO to accommodate this climate club. The two amendments that passed the WTO, however, show that an amendment is not a viable option: they required about twenty years to become law; and the amendment focused on goods trade allowed developing countries to opt-out of the obligations based on their capacity to implement. Climate objectives require all major emitters to reduce emissions, including developing countries like China and India.  

The European Union began implementing a carbon border adjustment tax (CBAM) in 2026 on the carbon embedded in carbon intensive imports. The CBAM has considerable political value in climate policy since it neutralizes the competitive advantage of carbon-intensive imports and it is estimated to reduce carbon leakage (Dechezleprêtre et al. 2025). The estimates of multiple economic models indicate, however, that carbon border tax measures, like the CBAM, are insufficient to offset the carbon leakage of the EU’s own carbon policies (Böhringer et al. 2012) and, crucially, are insufficient to induce carbon reduction measures globally (Tarr et al. 2023). A climate club which has more significant penalties is necessary to induce effective carbon reduction policies outside of the EU. 

Conclusion

Our climate clubs have important advantages. They:

(i)               have substantial penalties and a carrot to effectively encourage wide participation in net-zero emission policies;         

(ii)             are compatible with existing WTO laws and may be immediately implemented;

(iii)           avoid economic distortions and have political advantages.

 For a more in-depth analysis of these issues see Tarr (2025; 2026).

List of Works Cited

Barrett, S. (2011), “Rethinking Climate Change Governance and its Relationship to the World Trading System,” World Economy. 34 (11), 1863-1882.

Böhringer C.; E.J. Balistreri and T.F. Rutherford (2012), “The Role of Carbon Border Adjustment in Unilateral Climate Policy: Overview of an Energy Modeling Forum study (EMF 29),” Energy Economics, Vol. 14, Supplement 2, S97-S110.

Dechezleprêtre, A. et al., (2025), “Carbon Border Adjustments: The potential effects of the EU CBAM along the supply chain,” OECD Science, Technology and Industry Working Papers, No. 2025/02, OECD Publishing, Paris, https://doi.org/10.1787/e8c3d060-en.

Fehr, Ernst and Simon Gächer (2000) “Fairness and Retaliation: The Economics of Reciprocity,” The Journal of Economic Perspectives, Vol. 14(3), 159-181.

Fudenberg, D. and J. Tirole (1991), Game Theory, Cambridge, MA: MIT Press.

Intergovernmental Panel on Climate Change (IPCC) (2022). Technical Summary. (accessed March 30, 2023). https://www.ipcc.ch/report/ar6/wg2/downloads/report/IPCC_AR6_WGII_TechnicalSummary.pdf.

Nordhaus, W. (2015), “Climate clubs: Overcoming free riding in international climate policy,” The American Economic Review, Vol.105 (4), 1339–1370.

Ostrom, Elinor (1990), Governing the Commons: The Evolution of Institutions for Collective Action, Cambridge, UK: Cambridge University Press.

Tarr, David G. (2026), “A WTO-Compatible Climate Club that Solves the Free-Rider Problem in Global Climate Policy,”       

Tarr, David G. (2025), “A WTO-Compatible climate club that Solves the Free-Rider Problem in Global Climate Policy,”  SSRN paper 4906334. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4955677

Tarr, David G.; Dmitrii Kuznetsov; Indra Overland and Roman Vakulchuk (2023), “Why Carbon Border Adjustment Mechanisms will not Save the Planet, but a Climate Club and Subsidies for Transformative Green Energy may,” Energy Economics, Vol. 122, June, 1-14.

On the big picture points, the essay concludes with the following on the world trading system:

... There is no going back. The path forward is clear.

Is there really no going back? And is the path forward clear? To some extent, I would say the path forward depends on the results of the approach to U.S. trade policy that has been underway since the first Trump term. Will it achieve what the proponents think/say it will? That's going to matter for the debate over the path forward.

And, of course, we'll need to see how the next elections play out. The voters will weigh in, and the next group of leaders they choose could have very different views on these issues.

Ultimately, I don't think we will go back to the exact trade model of 2006 or 1996 or whenever, with its specific mix of protectionism and trade liberalization or its governance structure. But I do think we could end up with something more similar to a prior period than what we are experiencing now.

Turning to the concepts Lighthizer highlights, two of his key points of emphasis are "balance" and "sovereignty":

Trump’s agenda represents a necessary first step toward what should be Washington’s larger, more ambitious goal: replacing a defunct old trading system—predicated on illusions and vulnerable to abuse—with a new one built on the principles of balance, transparency, and sovereignty.

Let's start with balance. Here, a big issue – or it should be a big issue anyway, in my view! – is what to do about the long-standing U.S. federal budget deficits that are a contributor to the trade imbalances Lighthizer is worried about. Lighthizer says nothing about this, however, and instead focuses solely on what he thinks other countries are doing:

Yet by the 1980s, most countries had concluded that running a trade deficit was bad and running a trade surplus was good. A consistent trade surplus made a country richer by allowing it to buy assets abroad, including equity, debt, real estate, and technology. A consistent deficit, by contrast, made a country poorer by transferring ownership of its assets overseas in exchange for current consumption. Only the United States and some other anglophone countries failed to reach this judgment. By the early 1970s, the United States had gone from consistent trade surpluses to trade deficits. By the early 2000s, those deficits had become very large. And in recent years, they have become massive: from 2020 to 2024, the U.S. trade deficit in goods grew 40 percent, to $1.2 trillion.

Were countries in the 1980s trying to run trade surpluses because they thought "[a] consistent trade surplus made a country richer"? Let's dive a little deeper into this. Just to make the comparison simple, I'll focus on one specific country comparison: The U.S. and Germany.

First of all, I think there is widespread agreement – which shows up clearly in the data – that for most of the period in which the U.S. has been running large bilateral trade deficits with Germany, U.S. income levels were higher and rising faster than income levels in Germany. This seems like it should be a key point to be considered here. Would the U.S. having trade surpluses and lower incomes be preferable to having trade deficits and higher incomes? I'm not sure why it would. (Some of the data for Germany could be a little thrown off because of the impact of reunification, but you can see similar things with Japan, etc.).

Second, my sense – based in part on various conversations I've had with German friends and colleagues over the years – is that Germany doesn't care about running a trade surplus and isn't trying to achieve that. It does, however, care about have a sound fiscal policy with low budget deficits, and this fiscal policy has been a contributing factor in its trade balance. This brings us to a crucial part of the trade deficit issue that I mentioned above but that Lighthizer and others with his view tend to ignore: One of the reasons for the U.S. trade deficit is the high levels of public and private consumption/low levels of savings in the U.S., and a big part of that is the large U.S. federal budget deficits. As long as that continues – and there is no sign of it stopping as Trump and then Biden and then Trump again have driven up U.S. federal budget deficits to extremely high levels – we are likely to continue with relatively large U.S. trade deficits (I can imagine some minor shifts happening based on recent policy developments, but trade deficits are nevertheless likely to remain high). And I don't see U.S. fiscal policy changing any time soon.

Getting back to Lighthizer, along the same lines, he also says he wants to "lean on the broader principle of balanced trade":

The way to build a new trade order that achieves those objectives is to lean on the broader principle of balanced trade. This does not mean attempting to achieve balance in every bilateral trade relationship: in some cases, longer-term bilateral trade imbalances are beneficial to both sides. But every country should agree to maintain an overall balance in its international trade, not on an annual basis, since exigencies might make a deficit in any one year benign, but averaged over a reasonably short period—say, three years.

And he wants to penalize countries that run trade surpluses:

Participants would establish objective methods of officially determining each other’s exports and imports. Countries that achieved balance would be subject to a low-tariff regime by the other countries in the group. Those that breached the agreement by running surpluses over a period would face higher tariffs from the other members until they came into alignment and achieved balance. The least developed countries would be free to run deficits if they determined that this would assist their short-term development needs. Countries outside the new regime would be subject to much higher duties.

But again, this only looks at one side of the equation, and ignores the issue of countries with loose fiscal policies that contribute to their trade deficits. If Lighthizer is on board with the U.S. becoming more fiscally responsible, I think that would be great in and of itself, and it could have an impact on the trade deficits about which he is concerned. But he doesn't say anything about U.S. fiscal policy, and as noted the U.S. has been moving in the other direction here since Trump came into office.

Lighthizer also mentions the importance of "sovereignty," although he doesn't elaborate on his specific views on this point. Here, I'm not sure I've seen a trade policy that respects sovereignty less than what the Trump administration is doing at the moment. To be clear, the administration is trying hard to protect U.S. sovereignty. But it is trampling all over foreign sovereignty in the way it is pressing against domestic regulations abroad and trying to coerce other governments to follow U.S. security policies. Over the long term, I'm not sure such an approach can provide the foundation for a stable system. Governments might make short-term, formal concessions to the U.S. as part of a trade negotiation, but giving up the ability to regulate in the public interest is not likely to be sustainable in terms of their domestic politics.

In my view, what you need in the area of sovereignty (or policy space/regulatory autonomy, which are other terms used in this context) is to craft the trading system in a way that carefully balances international rules and domestic autonomy. What we've seen from the Trump administration so far, however, does not come close to that. There were difficult debates about these issues going on pre-Trump, but they have been mostly pushed aside. Ultimately, I think this aspect of the current approach to trade policy could go badly for U.S. producers and service providers, as their sales in foreign markets could be hurt in the long run by a backlash against U.S. companies. While some people in the U.S. have in mind a blunt prying open of foreign markets, it could turn out that those markets were opened in terms of formal access for U.S. goods and services, but the consumers there might now be inclined to look elsewhere.

Summing up, where is trade policy going? And for that matter, where is any policy area going? I don't know! It feels to me like the U.S. electorate has a lot of things to sort out. As polls consistently show, these voters don't necessarily care much about trade policy, but as they make broader choices about the direction of the country in the coming years, there will be implications for U.S. trade policy and U.S. participation in the world trading system. These choices are likely to have an impact on sovereignty, and perhaps a bit on trade balances too (although, as noted, for that issue macroeconomic factors are the most important). At this moment, though, it seems to me that where we are headed on trade policy is largely up for grabs, and in the coming years everyone will have an opportunity to make their case for which direction we should go.

In early March 2026, USTR initiated a new wave of Section 301 investigations, one of which focuses on the “acts, policies and practices” of sixteen economies that USTR alleges “appear to exhibit structural excess capacity and production in various manufacturing sectors.” However, exactly how “structural excess capacity” is to be diagnosed in a given country is unclear. 

In setting out the scope of its investigation, USTR applies multiple definitions of excess capacity across each of the economies in question. The presence of “excess capacity” in an economy is primarily based on whether it shows any of three signs: low manufacturing capacity utilization, a bilateral or global trade surplus, or a range of policy interventions that may lead to excess capacity. We briefly explain each of these definitions and why USTR’s obfuscation of the specific “act, policy, or practice” at issue undermines the administration’s ability to actually tackle the stated problem.

The Endogeneity Problem 

One definition USTR offers for excess capacity is “under-utilized industrial production capacity that is sustained through governmental interventions or policies incentivizing companies to maintain or grow their unused capacity inefficiently.” To this end, USTR cites the investigated economies’ manufacturing capacity utilization rates. USTR suggests that their “low” capacity utilization rates may provide evidence of anticompetitive policy interventions that inflate production capacity. However, several factors confound USTR’s understanding of capacity under-utilization. 

First, there is no clear benchmark for under-utilization across sectors. USTR warns of economies “below healthy utilization rates for many sectors of approximately 80 percent,” citing a policy target rate defined separately by the Trump administration for the steel sector, despite different industries persistently having different utilization rates. In addition, there is considerable variation across other factors that shape production outcomes, such as demand volatility and capital intensity. 

Second, USTR notes that U.S. manufacturing capacity has been under-utilized for years, yet continues to cite the investigated economies’ “low” capacity utilization rates as evidence of their structural excess capacity. As the figure below shows, American manufacturing capacity utilization has recently hovered around 75 percent, which is lower than most of the economies under investigation, as detailed in the table that follows.

USTR attempts to explain this apparent double standard in interpreting capacity utilization rates by portraying American under-utilization as a consequence of other nations’ overcapacity displacing U.S. domestic production, but in its initiation notice does not provide evidence demonstrating the one-sidedness of this channel. 

Furthermore, in the initiation notice, USTR neglects to cite specific examples of the “policies incentivizing companies to… grow their unused capacity inefficiently” in a majority of the economies under investigation, making it especially difficult to assess their claim that foreign and American capacity under-utilization is only a consequence of foreign government interference in the market. 

Incomplete capacity utilization may arise naturally in equilibrium. Firms’ relative capacity to one another helps to attract demand; firms are therefore unlikely to cut nominally-inefficient capacity to avoid losing their gains from relative capacity. Automation and technology, changes in industry composition, firm-level decisions to offshore production, as well as skills mismatches and labor shortages also impact capacity under-utilization. 

Trade Surpluses Are a Noisy Proxy

USTR further diagnoses excess capacity based on the presence of “large or persistent trade surpluses” which it argues reveal that an economy has “overproduction” problems due to “production capacity untethered from the incentives of domestic and global demand.” USTR warns of countries “producing more goods than they can consume or productively invest domestically,” which suggests that any foreign export, not only exports in net surplus, might reflect “excess capacity” under their view. If interpreted in this way, it is puzzling that USTR places so much emphasis on opening foreign markets to U.S. exports, which might indicate the presence of American excess capacity that other countries may want to correct for.

The larger point is that trade balances reveal more than domestic production surpluses or excess capacity. These balances reflect macroeconomic factors, such as savings and investment, in addition to a country’s comparative advantage. They are therefore a noisy proxy for investigating the policy interventions which USTR seeks to penalize. 

Furthermore, USTR flips between citing global or bilateral trade surpluses and citing sector-specific or overall goods surpluses depending on the economy. For example, while Japan has a global goods trade deficit, USTR cites its bilateral trade surplus with the United States as evidence of excess capacity; conversely, while Singapore has a bilateral trade deficit with the United States, USTR cites its global trade surplus as evidence of excess capacity. Moreover, USTR also points to Thailand and Japan’s global trade surpluses in specific sectors such as auto parts as sufficient evidence of excess capacity, despite the fact that both countries have global goods trade deficits. 

The United States may therefore itself exhibit excess capacity under such standards through its own bilateral and global surpluses in select services and energy products. If “structural excess capacity” can be reduced to any given trade balance metric, it becomes a definition that is untethered from a clear methodology, making it ripe for abuse. It also opens up the possibility  that U.S. trading partners could take actions to restrict imports of American services or energy products for similar reasons using vague definitions to justify those measures. 

When Every Action Leads to Excess Capacity

USTR enumerates several policy interventions that might foster excess capacity, including: (1) promoting production and export untethered from market drivers of supply, demand, and investment, including through subsidies; (2) suppressing domestic wages; (3) non-commercial activities of state-owned or - controlled enterprises;  (4) sustained market access barriers;  (5) lax or inadequate environmental or labor protection or social safety net; (6) subsidized lending; (7) financial repression and currency practices; and others. 

USTR’s analysis of policy interventions is crucial to the investigation. Section 301 of the Trade Act of 1974 only authorizes the president to take action if a foreign “act, policy, or practice… is unreasonable or discriminatory and burdens or restricts United States commerce.” Trade surpluses and capacity utilization rates are not acts, policies, or practices– they are outcomes that USTR is concerned about. USTR references seven theoretical interventions, but these will need to be further developed over the course of the investigation. Naming them, on their own, is insufficient in showing how the actions of each economy under investigation meets the test for action under Section 301. So far, USTR points to specific policy efforts that might lead to excess capacity for only a minority of the economies under investigation. 

Furthermore, the United States may effectively exhibit several of the listed policy interventions that foster excess capacity, as USTR offers little detail for how it defines each intervention. For example, right to work states could be seen as “suppressing domestic wages.” It could also be argued that investment commitments by U.S. trading partners to lower U.S. reciprocal tariff rates are untethered from market demand signals. The United States has also engaged in significant financial repression to liquidate government debt throughout the 20th century (with rate-lowering policies such as Quantitative Easing continuing this trend), and the Mar-a-lago Accord policies to weaken the dollar might also qualify as problematic “currency practices.” Similar to the problems arising from the broad and often opaque explanations of what is meant by the term economic security, USTR’s lack of precision in defining excess capacity could prove to be a liability. 

What Could Come Next

USTR's 301 investigation on excess capacity reflects its muddled view on the issue, made clear by the lack of a clear definition of the problem itself. Instead of providing data-driven evidence on the cause and effect of foreign policy interventions on the U.S. economy, so far, USTR cites anecdotal metrics to justify its preferred replacement for IEEPA tariffs. In initiating the investigation and requesting comments from stakeholders, USTR is perhaps also crowdsourcing data on overcapacity that it can refer to in its inevitable decision to raise tariffs at the end of the investigation process. More substantive details are needed in the final investigation.

While the administration seems determined to increase taxation of U.S. consumption through another round of tariffs, they should instead consider alternative ways to address the real concerns over manufacturing competitiveness, market dominance, and supply chain vulnerabilities, including through investing in stronger workforce development programs, facilitating high-skilled immigration, deepening trade agreements to strengthen supply chains, and working with like-minded countries to address production chokepoints. A more rigorous and strategic approach would not only do more to address the problem, but also generate support from many other countries facing similar challenges.

Milan Chander is a junior at Harvard College studying economics with a focus on international trade, development, and finance. He is a research associate at the Council on Foreign Relations, where he supports the work of Inu Manak on the political economy of trade.

Reading through the text from start to finish, the first relevant provision here is the "right to regulate" one:

ARTICLE 11.3
Right to regulate

The Parties reaffirm each Party's right to regulate within their territories in pursuit of legitimate public policy objectives, such as the protection of health, social services, public education, safety, the environment, including climate change, public morals, social or consumer protection, animal welfare, privacy and data protection, security of energy supply, the promotion and protection of cultural diversity and, in the case of Australia, the promotion and protection of the rights and interests of Australian First Nations peoples.

I'm not sure how much policy space these "right to regulate" provisions create. I don't want to say they have zero impact, as they could provide a bit of guidance in the direction of interpreting the obligations more narrowly or the exceptions more broadly. But I don't see them as a substitute for well-crafted exceptions.

Next up in the text we have the actual exceptions. In this regard, the digital trade chapter refers to the exceptions in other chapters:

ARTICLE 11.4
Exceptions

For greater certainty, nothing in this Chapter prevents a Party from adopting or maintaining a measure that meets the requirements of Article 23.1 (General exceptions), Article 23.2 (Security exceptions) or Article 9.z (Measures for prudential reasons – Investment Liberalisation and Trade in Services Chapter (Section E.3)).

The text of the Article 23 exceptions chapter is here. With regard to digital trade, the exceptions chapter first incorporates GATT Article XX and applies it to the digital trade chapter (among others):

ARTICLE 23.1
General exceptions

1. For the purposes of Chapter 2 (Trade in Goods), Chapter 4 (Customs and trade facilitation), Section B (Investment liberalisation) of Chapter 9 (Investment liberalisation and trade in services), Chapter 11 (Digital trade), Chapter 12 (Energy and resources) and Chapter 16 (State-owned enterprises), Article XX of GATT 1994, including its Notes and Supplementary Provisions, is incorporated into and made part of this Agreement, mutatis mutandis.

Then in the next paragraph, it adds some additional, but similar sounding, exceptions that also apply to the digital trade chapter:

2. Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on investment liberalization or trade in services, nothing in Chapter 9 (Investment liberalisation and trade in services), Chapter 11 (Digital trade), Chapter 12 (Energy and resources) and Chapter 16 (State-owned enterprises) shall be construed to prevent the adoption or enforcement by a Party of measures:

(a) necessary to protect public security or public morals or to maintain public order¹ ;

(b) necessary to protect human, animal or plant life or health; or

(c) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to:

(i) the prevention of deceptive and fraudulent practices or to deal with the effects of a default on contracts;

(ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts; or

(iii) safety.

Footnote 1 states: "The public security and public order exceptions may be invoked only where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society."

Finally, the security exceptions are set out in Article 23.2 and mirror pretty closely those in GATT Article XXI. (And the Article 9 exceptions are here).

These exceptions then apply to the following obligations on data flows:

ARTICLE 11.5
Cross-border data flows

1. The Parties are committed to ensuring cross-border data flows to facilitate trade in the digital economy. To that end, cross-border data flows shall not be restricted between the Parties:

(a) requiring the use of computing facilities or network elements in the Party's territory for processing, including by imposing the use of computing facilities or network elements that are certified or approved in the territory of Party;

(b) requiring the localisation of data in the Party's territory for storage or processing;

(c) prohibiting storage or processing in the territory of the other Party;

(d) making the cross-border transfer of data contingent upon use of computing facilities or network elements in the Party's territory or upon localisation requirements in the Party's territory; or

(e) requiring the approval prior to the transfer of data to the territory of the other Party.²

Note that there is a footnote to para. 1(e), which governs "requiring the approval prior to the transfer of data to the territory of the other Party." This footnote sets out additional exceptions – which come across to me as a bit easier to satisfy – that apply just for this sub-paragraph:

2 For greater certainty, point (e) of paragraph 1 does not prevent a Party from:

(a) subjecting the use of a specific transfer instrument or a particular cross-border transfer of data to approval on grounds relating to the protection of personal data and privacy, in accordance with Article 11.6 (Protection of personal information);

(b) requiring the certification or conformity assessment of information and communication technology products, services and processes, including Artificial Intelligence, before their commercialisation or use in its territory, to ensure compliance with laws and regulations consistent with this Agreement or for cybersecurity purposes, in accordance with Article 23.1 (General exceptions), Article 23.2 (Security exceptions), Article 9.z (Measures for prudential reasons – Investment Liberalisation and Trade in Services Chapter (Section E.3) or Article 11.6 (Protection of personal information);

(c) requiring that re-users of data protected by intellectual property rights or confidentiality obligations resulting from domestic laws and regulations consistent with this Agreement, respect such rights or obligations when transferring the data across borders, including with regard to access requests by courts and authorities of third countries, in compliance with Article 23.4 (Treatment of Information).

So what to make of all these obligations, exceptions, and whatever the "right to regulate" provision is? As a general point here, I want to say that I hope government officials negotiating these digital trade chapters, as well as any freestanding digital agreements, are aware of the ways their own government and other governments are regulating in these areas, and are thinking about how the international rules they are crafting might apply to the domestic regulations. Do they have the balance right with the language they are using in the international rules? I'm not sure they do, but it's difficult to evaluate this in the abstract. We are going to need some disputes and case law to know exactly what balance has been created. My instinct is that we could run into many of the same problems we have experienced previously with how the GATT and the GATS apply to domestic regulation of goods and services. But we'll have to wait and see.

Last month, U.S. Trade Rep. Jamieson Greer called the WTO "ineffective and dysfunctional," and I responded with an op-ed in which I argued that the WTO still works, highlighting trade remedies as an example of an area where the WTO is pretty much the only game in town if you are concerned with trade remedies being imposed on your exporters.

As an example of trade remedies being addressed at the WTO, Kazakhstan recently filed a WTO consultations request against an Indonesian anti-dumping measure. Could Indonesia and Kazakhstan work this issue out bilaterally? Anything is possible, but bilateral discussions rarely resolve disagreements over trade remedies. And even though there is a recently signed Indonesia-EAEU (including Kazakhstan) trade agreement, bilateral (and regional) agreements provide much more limited disciplines on the domestic use of trade remedies than exist under WTO rules. As a result, in practice, the WTO is place to go for trade remedies disputes.

Subjecting these measures to scrutiny at the WTO can be helpful in various ways: (1) to provide transparency on all the trade remedy measures being taken around the world, (2) to address concerns with the imposition of specific trade remedies, and (3) to talk about systemic issues that may arise. In addition to formal disputes such as the Kazakhstan-Indonesia one, WTO committees also play an important role in discussing these issues. (Of course, if we are talking about formal disputes, currently there is the problem of the non-functioning Appellate Body, but Indonesia and Kazakhstan could consider joining the MPIA.)

Finally, on a (somewhat) related point on scrutinizing trade remedies, I recently discovered that the UK Trade Remedies Authority has created what it calls a Post Investigation Trade Flow Monitor that tracks how trade flows have changed after the initiation and determination in its trade remedies investigations:

This dashboard summarises monthly UK imports data sourced from HMRC, Overseas Trade in Goods Statistics. It provides insights into goods imported into the UK that have been, or are currently subject to investigation by the TRA, allowing users to monitor trends and analyse data relevant to our specific cases.  

I just want to note that this is an amazing tool and every government should build something similar! I've often wondered about the impact of trade remedies on actual trade flows. Do imports keep coming in at similar levels as before, so the higher tariffs just raise revenue and increase costs for consumers? Or do imports fall, being replaced by domestic or other foreign products? My guess is that the impact varies quite a bit, but I'm really not sure. Anyway, it's great that the UK government is now providing some data on this, and, as mentioned, I would love to see other governments do the same.

In the 2026 Trade Policy Agenda report submitted by Greer to Congress last month, there is this passage on enforcement of U.S. trade agreements and U.S. trade laws:

Pursue Robust Enforcement of Agreements on Reciprocal Trade, Other Trade Agreements, and United States Trade Laws

In addition to striking new deals with our trading partners, USTR will pursue robust enforcement of all of our trade agreements and trade laws. In 2026, USTR will closely monitor implementation of existing ART commitments and those embodied in forthcoming ARTs, as well as other existing trade agreements, and enforce when necessary. ...

Here are some questions I have related to enforcement of the Agreements on Reciprocal Trade (ARTs) in particular:

• Will USTR notify the public and/or Congress when it is pursuing enforcement of specific obligations under the ARTs?
• Related to this, the ARTs have a provision on requesting consultations with the other party to the agreement. Will USTR notify the public and/or Congress when it has requested these consultations? Will these requests be made public?
• Will USTR document for the public and/or Congress the enforcement actions it has taken under the ARTs and the results thereof?

I raise these points because it will be difficult to evaluate the impact of the agreements without evidence relating to enforcement activity. Ideally, the public should know as much as possible about what has been happening here. At the least, though, I would think Congress would want to know, and this hearing is an opportunity to emphasize this.

While we are on the subject of questions for Greer, I would add the following to the list of things that members of Congress might ask:

• Could you provide updates on whether and to what extent the countries with which the Trump administration has negotiated ARTs have lowered tariffs or modified statutes, regulations, practices, or policies pursuant to the agreements?
• Have you seen an increase in exports to the ART countries relative to exports to other trading partners, and if so in which products/services?

He might not have full details on these questions off the top of his head, but they could be submitted in writing later as questions for the record.

And then finally, just for fun, here is one more question that members of Congress could ask him:

• Unlike WTO rules, the ARTs do not address anti-dumping/countervailing duties. What is the administration's strategy for dealing with AD/CVDs imposed by U.S. trading partners?

UPDATE:

The House Ways and Means Committee hearing on the 2026 Trade Policy Agenda has been scheduled for April 22; the Senate Finance Committee hearing is scheduled for April 23.

Here are a few more questions members of Congress might consider asking at these hearings:

• What is the statutory or Constitutional authority for the administration to enter into the Agreements on Reciprocal Trade or the other trade deals it is negotiating?
• In the context of the upcoming USMCA joint review, who gets to make the decision about whether the U.S. government wishes to extend the USMCA for another 16 year term (pursuant to USMCA Article 34.7.3)? Does Congress have the authority, in your view, to pass legislation that would commit the U.S. government to supporting an extension?
• Are the tariffs to be imposed pursuant to the ongoing Section 301 investigations likely to violate GATT Article I:1 (MFN) and Article II (tariff bindings)? If so, what GATT exceptions does USTR plan to invoke in order to justify the tariffs?

Last week, President Trump announced that the United States would be imposing new tariffs of 50 percent of the value of any product coming from any country that sells weapons or provides military aid to Iran.

Some commentators questioned what statutory authority the president would use as a legal basis for these tariffs since the president’s announcement was silent on that point. Kevin Hassett, Director of the National Economic Council at the White House, publicly argued that the president could impose these tariffs under the International Emergency Economic Powers Act (IEEPA) because the United States is “in a state of conflict [and] the IEEPA policy is exactly designed for that.” Even within the Trump administration that view did not appear to command a consensus, with U.S. Trade Representative Jamieson Greer noting that, while IEEPA can be used to impose embargoes, it can’t be used for tariffs after the Supreme Court’s February decision in Learning Resources.

The Supreme Court made clear that IEEPA does not authorize the president to impose tariffs or increase tariff rates. Moreover, the Court noted that IEEPA is a peacetime statute. It expressly reserved the question of whether the president might have the power, either under the Constitution and/or other statutes, to impose tariffs during a war.

Putting to one side the fact that Congress has issued no declaration of war nor authorized the use of force against Iran, what, under the Constitution, could the president do during a war? We have written about the complexities of the Constitution’s “foreign commerce power” in a forthcoming article. There, we note that, at the time of the nation’s Founding, and in the early years of the Republic, the Founders made clear that the president does not have any foreign commerce power of his own. Nothing in the Constitution or in the practice of lawmakers in the late eighteenth century suggests that the president can impose tariffs without congressional authorization, regardless of whether the nation is engaged in an armed conflict. The power to regulate commerce with foreign nations is a power held exclusively by Congress. Nothing about being at war changes that.

In the recent Learning Resources case, the government made several arguments in support of its claim that IEEPA authorizes tariffs. As relevant to war powers, the government argued that the president enjoys the constitutional power to impose tariffs during wartime. While conceding in Learning Resources that the United States was not at war, the government—borrowing from an amicus brief by Aditya Bamzai—contended that Congress had ultimately codified that authority in IEEPA as applied to peacetime emergencies.

The government’s argument did not, however, win the day. As the Chief Justice wrote:

According to the Government, those precedents acknowledge an inherent Presidential power to impose tariffs during armed conflict. And, the argument goes, Congress in TWEA [the Trading With the Enemy Act], and then in IEEPA, codified those precedents. But this argument fails at both steps. Insofar as the Government relies on our wartime cases themselves, they are facially inapposite. Regardless of what they might mean for the President’s inherent wartime authority, all agree that the President has no inherent peacetime authority to impose tariffs.

 Other justices also addressed these issues. In his concurrence, Justice Gorsuch commented in a footnote:

Whatever the full scope of the President’s Article II war powers may be (and the briefs before us reveal a healthy debate whether they include the power to impose tariffs), those powers are not implicated here.

And in his dissent, Justice Kavanaugh embraced the ideas advanced by the government. He wrote that:

U. S. history from the 1800s through IEEPA’s 1977 enactment illustrates how the statute came to incorporate the President’s long-recognized authority to impose tariffs during wartime. Long before the initial 1917 enactment of the Trading with the Enemy Act, which was IEEPA’s predecessor, the President possessed inherent wartime authority to prohibit commercial relations with enemy nations.

We disagree with Justice Kavanaugh’s claim when it comes to any “inherent wartime authority” the president might have to regulate foreign commerce. Justice Kavanaugh is right that, long before the enactment of TWEA, presidents imposed commercial restrictions on enemy nations, but they did so as authorized by Congress. A congressional declaration of war—essentially, a delegation to the president to prosecute a war—was thought also to grant the president the power to embargo commerce with the enemy.

The more difficult question arises with respect to countries with whom the United States was not at war but whose commercial policies implicate U.S. interests in war.

Here, President Trump seeks to impose tariffs not on products from Iran, which is already subject to sanctions, but on countries that engage in military trade with Iran. These so-called secondary tariffs have become a popular tool in recent months. Last year, the president sought to impose secondary tariffs on products from countries, such as India, importing Russian oil and on products from countries importing Venezuelan oil, for example. He relied on IEEPA to impose those tariffs, and after February's Supreme Court decision, he declared those additional duties to be no longer in effect. Justice Gorsuch, in his Learning Resources concurrence, spoke only of direct tariffs on enemy states, noting: “IEEPA is not a wartime statute, nor does the President claim we are at war with the countries whose goods are subject to the tariffs.” (And, to be sure, the TWEA expressly requires a congressional declaration of war before using the same language as IEEPA concerning "regulate . . . importation".)

But in the early years after the Founding, even where foreign commercial policy was critical to U.S. policy toward warring European nations, presidents did not act alone in imposing restrictions on foreign commerce with those nations. That is, presidents still regularly sought congressional authorization for embargoes of trade with countries against whom Congress had not issued a declaration of war.

For example, Washington’s 1793 Neutrality Proclamation did not itself create an embargo. As Sai Prakash and Michael Ramsey have explained, the Proclamation merely announced a policy binding only on those within the executive branch, one that could only be enforced against the general public to the extent that private actions violated existing criminal laws. It was not until Congress passed statutes in 1794 authorizing embargoes that the president enjoyed the authority to impose an embargo as such. And as we explain in our article, the presidential practice of seeking congressional authorization for embargoes continued through the Jefferson and Madison administrations, including during the War of 1812 with respect to European nations other than the United Kingdom.

As one of us explained in an amicus brief in Learning Resources, the examples marshaled by Professor Bamzai and relied on by the government and Justice Kavanaugh are not to the contrary, and in particular do not speak to the president’s ability to impose tariffs on imports from noncombatant nations into the United States. They rely on three examples of the president imposing monetary exactions during wartime. During the Mexican-American War and the Spanish-American War, the United States collected duties on imports into occupied foreign territories to offset the costs of the war and occupation. In a series of cases, the Supreme Court upheld these duties as lawful on the grounds that they were imposed on foreign, occupied territory during wartime. They were not imposed on imports into the United States proper. Indeed, in Fleming v. Page, the Supreme Court rejected the argument that paying duties to the United States in an occupied Mexican port, when such duties were collected solely pursuant to the president’s commander-in-chief power, could count as paying duties upon import into the United States. The president lacked the power to change U.S. customs laws, even if he had the power to collect duties in occupied territory. The third example involved President Lincoln’s decision to collect license fees on cotton from the Confederate states during the Civil War, pursuant to a congressional authorization to regulate commerce with the rebel states by way of licenses. How this example could support an inherent authority to impose tariffs against third countries during wartime is unclear. In short, when the president’s foreign affairs powers do overlap with Congress’s foreign commerce powers, Congress prevails.

So, while the Supreme Court in Learning Resources expressly left open the question whether the president might be able to impose tariffs pursuant to his constitutional warmaking powers, the historical record from the years immediately after the Constitution’s ratification suggests that the answer to that question is that he cannot.

Rough: The joint statement last August with the Europeans filling out the Turnberry agreement that the President struck with Commission President von der Leyen said that "the United States and the European Union commit to addressing unjustified digital trade barriers." Then came the European DMA investigation announcement into cloud computing, among other steps that led to a mid-December tweet viewed around the world from your office expressing some dissatisfaction with the EU and EU member states on "a continuing course of discriminatory and harassing lawsuits, taxes, fines and directives against U.S. service providers." Where do we stand now that we are sitting here in almost mid-April on digital trade between the U.S. and the EU?

Greer: I would say that this is a fragile issue. So in the Turnberry agreement, where it talks about, what was the wording again?

Rough: "The United States and the European Union commit to address unjustified digital trade barriers."

Greer: Unjustified digital trade barriers. So that means something different to me than it does to [the EU Ambassador] or to others in the Commission, which is a problem. This is a big issue. We have a situation where U.S. companies who are large tech companies, and that is the nature of how they have developed, who offer essentially free services, many of them to EU citizens at the retail level, and then offer a lot of productivity gains at the enterprise level to businesses in Europe. This is a huge productivity gain and welfare gain for Europe. They have introduced laws like the Digital Markets Act and other laws that don't even think about consumer welfare, they just make a prima facie decision that bigger is bad, and therefore we're going to take action. And it's a huge problem. It disproportionately affects U.S. companies.

There's a set of talking points that every European Ambassador comes in with, and they just say, "Well, this is not discriminatory, it applies to everybody equally." Yeah, but only if they make above a certain amount globally, etc, and have business models that happen to track U.S. company business models. So you know, we're not fooled by any of that. I keep telling these European officials, we're not fooled. You can give us these talking points, and we still won't be fooled. And so we're very concerned about this. We are having discussions with the European Commission, I would say, really, for the first time ever on DMA, we've always been stonewalled. ... Steve Forbes put out an op-ed today saying, Jamieson, just move forward with the Section 301. Do it now.

So there's a lot of pressure out there to take action. Obviously, our goal is to have an outcome where U.S. companies can operate without discrimination. They can operate as freely as European companies do here in the United States. And if American companies don't have that opportunity, then we will control European service providers in the United States.

I would like to hear more from Jamieson on how he sees the standard for non-discrimination. Is he saying that any disparate impact on U.S. tech companies is sufficient for a determination that regulations are discriminatory? If so, that's a very broad approach to international governance of domestic regulations, one that limits policy space/regulatory autonomy/sovereignty considerably. And if it were applied to, say, certain U.S. environmental laws and regulations it could have a significant impact on the ability to regulate.

Or is he saying that there is something in particular about the design and structure of the DMA (and other European tech regulations) that suggests the law favors European companies over their American competitors? If he would look for something more than just disparate impact in relation to the design and structure, what would he be looking for?

Or is it something else entirely? What exactly is the non-discrimination standard he has in mind?

Whatever he is saying, it is a significant departure from what we heard during the Biden administration from Katherine Tai, who emphasized the importance of understanding the intent of the foreign regulation ("we have to really be cognizant that measures that may look like they have a discriminatory effect may or may not be advanced with a discriminatory intent").

I'll have more to say on all this soon, but I'm just flagging it for now.

ADDED:

At an April 16 House budget hearing, Greer had the following exchange with Rep. Ben Cline (R-VA) on related issues:

Cline: The 2026 National Trade Estimate report identified Korea's digital trade policies, including KFTC's enforcement campaign and the Fairness Act, as significant barriers to U.S. companies. Research by the Competere Foundation estimates that Korea's policies could cost the U.S. economy 525 billion over the next decade, with American households losing nearly $4,000 each. What specific enforcement mechanisms is USTR using to hold Korea to its commitments under the Joint Fact Sheet? And as you know, the Korean government continues its transparent discrimination against U.S. digital companies. At what point does continued Korean defiance trigger formal trade actions?

Greer: As you know, we have a Joint Fact Sheet with Korea where they specifically agreed and committed not to use these types of laws or rules on a discriminatory basis. And so this is something where we're holding their feet to the fire. You know, we have tools, Section 301 is a tool that I've talked about today, and some of you have discussed. This is something we can use if we need to. Again, I've had conversations with my counterpart in Korea. I've spoken with the Prime Minister of Korea about this issue. I know there are a lot of views domestically about big tech companies and regulation and that kind of thing. What I want is a situation where Congress gets to decide how American tech companies are controlled and not foreign jurisdictions, so we are very attentive to any suggestion of discrimination by foreign countries against our companies.

Cline: We need to be leaning on them pretty hard. Their proposed fairness access sets market thresholds that Chinese platforms like Tiktok, Temu, and Alibaba fall below, effectively exempting them from the regulations entirely, while American companies are bearing the full weight of the fines and operational mandates. To put it in perspective, just a quick glimpse at the new 1260H list of Chinese military companies included some of these firms, like Alibaba. Does the administration view Korea's discriminatory treatment as a national security concern? And if so, is that concern being incorporated into how you're approaching enforcement?

Greer: So if they were to follow through with this and apply these laws in a discriminatory way, we would take action. Until now, they have been proposing to speak to us and negotiate with us, because we are concerned about this, and you know, we are prepared to take action if we need to, because it's not like there's some other company waiting to step into the wings, other than some of these Chinese companies you're talking about.

Cline: The EU is another area where we see discriminatory action being taken against U.S. companies. The Digital Markets Act, Digital Networks Act, Cloud and AI Development Act, digital services taxes, the EU Space Act, other policies, all of which disproportionately target US companies. How does your budget prioritize comprehensive action against this entire suite of discriminatory measures and what enforcement mechanisms will USTR deploy to protect American technology leadership against European regulatory overreach?

Greer: So we have an office dedicated to services and investment, and this is an office where we have been going through and inventorying all of these unfair and discriminatory laws and practices that you're talking about. If I'm to take action on these, again, I keep saying Section 301, every time I say section 301 you have to think, that's a policy person, that's one or two lawyers, that's a political person in the front office. Every time I say 301, that's more people, I'm happy to do it, but I do have to have the resources to hire those people.

But despite our best efforts, a "review and term extension" provision made its way in there as Article 34.7 of the USMCA. The way the provision works is that there is a 16 year term for the agreement, with a joint review by the three governments taking place 6 years after the July 1, 2020 entry into force. On the six year mark (July 1, 2026), the governments can make a decision on whether to extend the agreement for another 16 year term. If that extension does not happen, there will be annual reviews of the agreement, through which there will be subsequent opportunities for the three governments to decide to extend.

Now that the review and extension decision are almost upon us, we'll find out if Inu and I were right to be concerned. At this point, I will confess that I have very little idea what is going to happen. Even without everything else going on in the trade policy world, it would be a tough prediction to make, but combining the USMCA review with so much other trade policy chaos makes things particularly difficult.

Over at CSIS, Diego Marroquín Bitar and Bill Reinsch have mapped out six scenarios for what will happen with the USMCA extension decision:

I don't disagree with any of that, but I do want to highlight a bit of possible political strategizing here. It feels to me as though in both domestic politics and international affairs, everyone is waiting for the midterm elections. The thinking is that if the Democrats win one or both houses of Congress, it would significantly change the power President Trump has in U.S. politics, and perhaps make dealing with him a bit easier. With that in mind, I wonder if Canada and Mexico have an incentive not to go for the "painful extension" option. Instead, they could hold out until after the midterms, in the hopes that they would be in a better negotiating position. And if it turns out their position is not much better then, they could even try waiting until after the 2028 presidential election.

One risk with this strategy is that it could trigger a Trump withdrawal from the agreement. However, while we might see threats along those lines (which we have seen before), I'm skeptical there would be follow-through here. The stock market fall such an action would likely trigger is probably enough to prevent this.

I also want to mention that if I'm reading USMCA Article 34.7, paragraph 4 correctly, if the extension does not happen on July 1, it can be agreed to at any point thereafter:

If, as part of a six-year review, a Party does not confirm its wish to extend the term of this Agreement for another 16-year period, the Commission shall meet to conduct a joint review every year for the remainder of the term of this Agreement. If one or more Parties did not confirm their desire to extend this Agreement for another 16-year term at the conclusion of a given joint review, at any time between the conclusion of that review and expiry of this Agreement, the Parties may automatically extend the term of this Agreement for another 16 years by confirming in writing, through their respective head of government, their wish to extend this Agreement for another 16-year period.

(emphasis added)

I don't mean to make a definitive prediction that extension will take place at some random time under this part of the provision. However, I will note that if at some point a particular political leader decides a "win" would be useful, a decision to extend the USMCA could be made, even if we are outside the joint review window.

With the caveat that I have a low degree of confidence in my trade policy predictions these days, my current view is that it would be surprising if there were a decision to extend the USMCA on July 1 or soon thereafter. But given everything going on in international affairs, I can imagine some sort of package deal that comes together a few months or so later, bringing in a few non-trade issues as well. At the same time, I can also imagine we just slide into the annual review option for the next couple years. That may not be ideal, but it does leave plenty of time to make the extension decision prior to the agreement's expiration. (And if this decision is made after 2029, people could even think about using the review process to eliminate the expiration provision, and just have normal reviews instead.)

(As I was working on this post, U.S. Trade Rep. Jamieson Greer commented on the USMCA joint review as part of a think tank event yesterday:

Well, remember, the joint review, what happens on July 1? This is the question, right. On July 1, what has to happen is, the United States tells Canada and Mexico what we intend to do. Do we intend to just rubber stamp this thing and say, all right, renewed, everything's fine, let's hold hands and move on. Or do we say this is not sufficient, we have to have modifications to this agreement, we have to change it. And so we'll enter into a period, we'll be on the path to going out, which is actually a 10 year period, but we'll be in negotiations during that time and try to resolve something sooner rather than later. So my own sense is we want to resolve as much as we can. We've worked really closely with the Mexicans over the past year, they resolved a lot of issues. The Canadians, we have some issues with them that haven't been resolved yet. So I think, I don't want to get ahead of myself, because I have to tell Congress on June 1 what we're going to do. ... I think that we aren't probably going to be able to resolve all issues by July 1, but I think we are on track to resolve many of them and to move as quickly as we can.

So factor that into any predictions as well.)

ADDED

At a House Ways and Means Committee hearing on April 22, there was the following exchange on this issue between Rep. Darin LaHood (R-IL) and Greer:

LaHood: What's the next step in the process for [USMCA] renewal in the timeline?

Greer: So on July 1, each party to the agreement has to indicate whether they're going to do a renewal or whether they need to enter into a longer process of renegotiation, and then if renegotiation is unsuccessful, you eventually exit. I don't think we're in a position to rubber-stamp the deal. We now have six years of data, and we see problems. We also see good areas. We think ag. is a great place, so we want to maintain that, but we do have other areas we need to fix.

As a result of these developments, the moratorium has, for the moment, expired. Does that mean we are about to see a flood of TRIPS non-violation – or the even less well-known situation – complaints? As much fun as that would be in various ways, I doubt it, and I think the following may help explain why.

At the WTO General Council meeting in December, the moratorium was discussed by various governments, including two that appear to have particularly strong views. Colombia put the issue on the meeting agenda, and made its case for continuing the moratorium:

26.4. In our daily conversations with other WTO delegations, the intellectual property moratorium seems somewhat strange and overly technical, but the fact is that it is a recurring WTO decision that has significant effects on our economies and, in particular, on the health of our populations.

26.5. Allow me to explain the matter briefly. In general, disputes in the WTO involve a country's allegations that a country has violated an agreement or broken a commitment. But in some situations, a government can go to the Dispute Settlement Body even when an agreement has not been violated.

26.6. This is called a non-violation complaint. It is allowed if one government can show that it has been deprived of an expected benefit because of another government's action, or because of any other situation that exists. Non-violation complaints are possible for goods and services, but not in the field of intellectual property. At the time of the negotiation of the Marrakesh package, Members decided not to allow these non-violation disputes under the TRIPS Agreement. Why?

26.7. In what situations could non-violation complaints based on the TRIPS Agreement pose a problem? Various scenarios are conceivable and the Secretariat made a list of them 10 years ago, but one stands out: price controls on medicines.

26.8. All our countries have policies to control medicine prices – all of them. For example, as I remarked at a previous General Council meeting, one economically advanced country used price controls to slash the monthly cost of insulin for patients with diabetes from USD 400 to USD 35. We thought this was wonderful, because it clearly improved access and many patients with diabetes surely benefited.

26.9. One could claim that, even if patent protection is observed and even if the intellectual property protection system is in order and working properly, price controls nullify or impair the expected benefits from a patent.

26.10. It is as simple as that – an enormous risk that no-one has wanted to take since 1995. This discussion is taking place in the TRIPS Council and remains unresolved. It is very important for this decision to not allow non-violation complaints to be renewed in Cameroon and to be made permanent once and for all, as the risks to our economies and budgets are the same now as they were in 1995, and as they will be in the future.

For Colombia, allowing non-violation complaints under the TRIPS Agreement risks undermining established and widely used health policies such as price controls for medicines.

In response, the U.S. argued for letting the moratorium lapse and allowing non-violation and situation complaints in the TRIPS context:

26.13. The United States' position on this issue remains unchanged. We reiterate our support for allowing the current moratorium to expire so that Members may bring non-violation and situation complaints in the future, as appropriate.

26.14. The United States has provided detailed and extensive analysis in each of our statements under this item over the past several years. We have explained the legal basis for non-violation and situation complaints in the GATT and TRIPS Agreement texts, the extensive safeguards that exist to protect Members' rights and obligations under the TRIPS Agreement, and concrete descriptions regarding how such disputes would work in practice.

26.15. As we have detailed in past interventions, non-violation and situation claims have a long lineage in the WTO and in international trade. The availability of such claims under the WTO agreements is the rule; their non-application is the exception. The TRIPS Agreement moratorium is the exception.

26.16. We continue to believe that WTO Members are being deprived of an important tool to enforce their rights under the TRIPS Agreement, which is why we support the expiration of the current moratorium so that complaints of this type might be brought under the TRIPS Agreement.

26.17. While we remain of the view that the text of the WTO agreements provide Members with sufficient guidance on the application of non-violation and situation complaints under the TRIPS Agreement, the United States remains open to considering specific proposals from Members wishing to further examine the scope and modalities for complaints of these types.

In reaction to these arguments, I have a couple questions and comments.

First, what are the chances of a complainant winning a non-violation complaint under the TRIPS Agreement? Colombia mentions price controls on medicines as a measure that might be targeted, and if we apply the conventional non-violation elements, it seems to me that a complaint against these price controls might be tough to win. As the Japan - Film panel explained in discussing one of the key elements of a GATT non-violation claim:

10.76 ... in order for expectations of a benefit to be legitimate, the challenged measures must not have been reasonably anticipated at the time the tariff concession was negotiated. If the measures were anticipated, a Member could not have had a legitimate expectation of improved market access to the extent of the impairment caused by these measures.

My sense is that price controls on medicines are widely used, and therefore they shouldn't come as a surprise to other Members. Arguably, then, any price controls should have been anticipated. Could there be a particular type of price control that could not have been reasonably anticipated? It's possible, I guess, but I'm not sure what that would be.

Second, building on the first point to some extent, what purpose do non-violation complaints serve these days, either in the TRIPS Agreement or other contexts? In the early years of trade agreements, these agreements could have been seen as "incomplete," and the non-violation remedy may have been useful for circumstances in which a particular issue was not covered by the agreement. Today, by contrast, aren't the WTO agreements in general, as well as the TRIPS Agreement in particular, fairly "complete" in terms of their scope as a contract? Arguably, these agreements establish a comprehensive regime for what is permitted and what is not, and there is no need to supplement this regime with the non-violation remedy as a gap-filling tool.

In terms of specific examples of circumstances where the governments who support the non-violation remedy would like to see it applied under TRIPS, Colombia pointed to a Secretariat note from 10 years ago. I see this note from 2012, which may be what they meant (although there could be another note that I couldn't track down on WTO docs online). But even with these examples, at this point the scope and implications of such a remedy are fairly speculative, as we just don't have any practical experience with using it. It's very hard to say how a WTO panel would apply it.

As to what's coming next, my best guess is that we will see the moratorium extended at some point, providing a bit more certainty here. But even without the extension, I doubt we are likely to see any complaints. Note that the U.S., which is one of the biggest proponent of the remedy, hasn't filed any WTO complaints at all since 2019. On the other hand, U.S. Trade Rep. Jamieson Greer recently talked up the non-violation remedy, so maybe it could actually happen? I would bet against it though.

Law prof Daniel Gervais also has a post on the failure to extend the moratorium: "The TRIPS non-violation moratorium has expired: What happened in Yaoundé, and what comes next." For those looking for more background on these issues, you can check out the discussion at recent TRIPS Council meetings: November 2025; June 2025; March 2025; November/December 2024; July 2024; April 2024; October 2023/February 2024; June 2023; and March 2023. Other resources for people who want to dive deeper are:

• 1999 Secretariat Note: Non-Violation Complaints and the TRIPS Agreement
• 2000 U.S. communication: Scope and Modalities of Non-Violation Complaints under the TRIPS Agreement
• 2002 Secretariat Note: Non-Violation and Situation Complaints (Rev. 1, Rev. 2)
• 2002 communication from Argentina, Bolivia, Brazil, Colombia, Cuba, Ecuador, Egypt, India, Kenya, Malaysia, Pakistan, Peru, Sri Lanka and Venezuela: Non-Violation and Situation Nullification or Impairment under the TRIPS Agreement (Rev. 1)
• 2014 U.S. Communication: Non-Violation Complaints under the TRIPS Agreement

China, the EU (European Union), and the U.S. have in recent weeks all tabled in writing their views regarding the future of the WTO.[1] The end result should leave no one in doubt that coordination costs between the three dominant players in the trading sphere are very high (if not insurmountable altogether):

• China and the EU share a commitment to compulsory third-party adjudication;
• EU and US are roughly in the same wave-length as far as the future shaping of the MFN (most-favored-nation) clause is concerned: it should be conditional, the contingency being the extent of trade deficit of the granting nation, an attitude reminiscent of previous times, as reported in Bhagwati and Irwin (1987);
• China and US agree on none of the above. 

Why did I single out MFN and compulsory third-party adjudication? Well, arguably these are the two quintessential features of the multilateral edifice. One could imagine a WTO where antidumping is replaced by enforcement of domestic competition laws. It is hard to imagine a WTO without MFN. And what is the use of negotiating and signing the WTO if enforcement is not on the cards? 

A recent McKinsey report shows that in the last two years (2024, 2025) trade has grown faster than the world economy, even though trade between “geopolitically distant” players has been reduced, substantially so. Disagreements between U.S. and China have translated in reduced trade between them. So has trade between Ukraine and Russia, the EU and Russia etc. Trading nations have been engaging in a quest for security in supplies through either intense preferential integration with like-minded players, or recourse to industrial policy, or both.[2] 

To be fair, the world economy has shown remarkable resilience, were one to take into account the multiple hits it has suffered: AI (artificial intelligence)-related shipments have increased considerably; China has managed to find new markets (since the U.S. market has been closed in part to its exports); U.S. has increased its volume of imports from other South East Asian countries; and finally, because President Trump does trade policy for “optics, not for outcomes”, as Baldwin (2026) put it. A number of announced tariff-restricting measures were either not implemented, or simply abandoned.

But for how long?

What matters most for this discussion, is that the world economy has shown resilience, despite the absence of a provision on economic security in the WTO framework. And if the current trend were to be confirmed, then trade risks evolving away from a multilateral dimension. Economic security is the revealed preference of the world trading community, and this by construction implies trade should be conducted with countries that represent no threat to the attainment of this objective. The WTO, as is, makes no room for that. 

The link between trade and power was known before the advent of the multilateral system. First Hirschman (1945), and then Viner (1948) warned that trade openness is welfare-enhancing but comes with vulnerabilities.[3] The ITO (International Trade Organization) did include a Chapter (Chapter V) dealing with Restrictive Business Practices (RBPs) which could be used in cases of refusal to sell and other market-segmenting measures which could be costly from a trade-perspective, but could increase the power of the implementing actor. The ITO never saw the light of day. During the GATT-era (General Agreement on Tariffs and Trade), the predecessor of the WTO, the absence of provisions on economic security proved to be no issue, as those with bargaining powers did not abuse. After all, the GATT was a trade-cum-security agreement. It was in no one’s interest to weaken the alliance. The WTO did not buy insurance policy against the risk of linking trade to power, either. It was negotiated at a moment in history where all believed we were moving into a unipolar world. “Weaponization” of trade was simply not in the cards anymore.[4]

And now? Well, Evenett et al. (2025) have provided sufficient data to demonstrate that economic security tops the agenda as justification for industrial policy worldwide. 

Can WTO Address What it Must?

Personally, I was not swayed by the (lack of) outcome in MC14. I was not expecting anything anyway, so I would not call it a “failure”. It was the natural consequence of an ongoing “waning” of the multilateral framework. In part, this is due to the fact that the WTO is not in sync with today’s anxieties of trading nations, which find a safe haven in FTAs (free-trade areas), and not in the WTO anymore. For the WTO to become relevant again, this trend must be corrected. 

Trading nations will not give up on economic security. The “trust” between some of the leading trading nations has been severely damaged. Trust is hard to build and easy to break. The “negativity bias” suggests that (risk-averse) nations will find it hard to behave paying no heed to what they have gone through in recent years. There is a definite need to bring in “economic security” within the four corners of the WTO.[5] But how? Should we try to define it? There is a risk that when doing so, one might end up equating economic security to autarky, and thus issue a death knell on trade openness. 

In Palacios and Mavroidis (2026), we advance a modest proposal on how to make economic security a negotiable instrument, inspired by the attitude of the GATT framers who instead of defining “protection” reduced it to one negotiable instrument. But to do even that, the political impetus is necessary. In the absence of a hegemon, who will push for similar solutions? Carvalho, Monte and Ornelas (2026) have persuasively argued that in the world we currently live in, where there are three dominant players (instead of one hegemon), a return to a rules-based system is unlikely. Practice so far confirms. The best bet for rules-based regimes at this stage, is that offered by FTAs. The wider they are, the better. In the meantime, there is value in preserving the WTO even as a “talk club” with little enforcement powers while awaiting better days ahead.

References

Baldwin, Richard. 2026. Why Didn’t Trump Tariffs Wreck the World Trade System, Richard Baldwin Substack, available at https://rbaldwin.substack.com/p/why-didnt-trumpian-tariffs-wreck

Bhagwati, Jagdish, and Douglas A. Irwin. 1987. The Return of the Reciprocitarians: US Trade Policy Today, The World Economy, 10: 109-130.

Carvalho, Cecilia, Daniel Monte, and Emanuel Ornelas. 2026. Equilibrium Trade Regimes: Power- vs. Rules-Based, Mimeo. Sao Paulo School of Economics.

Evenett, Simon, A. Jakubik, J. Kim, F. Martín, S. Pienknagura, M. Ruta, S.Baquie, Y. Huang, and R. Machado Parente. 2025. Industrial Policy Since the Great Financial Crisis, IMF Working Paper 2025/222.

Gertz, Geoff. 2025. Guest Post: The Case for Bringing Economic Security Priorities into U.S. Trade Agreements, Part I, available at https://ielp.worldtradelaw.net/2025/11/guest-post-the-case-for-bringing-economic-security-priorities-into-u-s-trade-agreements-part-i/

Gertz, Geoff. 2025a. Guest Post: The Case for Bringing Economic Security Priorities into U.S. Trade Agreements, Part II, available at https://ielp.worldtradelaw.net/2025/12/guest-post-the-case-for-bringing-economic-security-priorities-into-u-s-trade-agreements-part-ii/

Hirschman, Albert O. 1945. National Power and the Structure of Foreign Trade, California University Press: Berkeley, California.

Lester, Simon. 2025. Economic Security in Trade Agreements: My Response to Geoff Gertz, available at https://ielp.worldtradelaw.net/2025/12/economic-security-in-trade-agreements-my-response-to-geoff-gertz/

McKinsey. 2026. Geopolitics and the Geometry of Global Trade, McKinsey Global Institute: New York City, New York, available at https://www.mckinsey.com/mgi/our-research/geopolitics-and-the-geometry-of-global-trade-2026-update

McLaren, John. 1997. Size, Sunk Costs, and Judge Bowker's Objection to Free Trade, American Economic Review, 87: 400- 420.

Palacios, Mario, and Petros C. Mavroidis. 2026. Reviving the WTO, A Sectoral Agreement on Semiconductors to Promote Economic Security, Elgar Publishing: Cheltenham, United Kingdom (forthcoming)

Rotunno, Lorenzo, and Michele Ruta. 2025. Trade Partners’ Responses to US Tariffs, IMF Working Paper WP/25/147, IMF: Washington, D.C., available at https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025147.pdf

Viner, Jacob. 1948. Power versus Plenty as Objectives of Foreign Policy in the Seventeenth and Eighteenth Centuries, World Politics, 1: 1-29.

[1] WTO Docs. WT/GC/W/989 of February 18, 2026 (China); WT/GC/W/984 of December 15, 2025 (US); and WT/GC/W/986 of January 21, 2026 (EU). The U.S. came back with a second paper (WT/GC/W/998 of March 23, 2026).

[2] Rotunno and Ruta (2025).

[3] For a recent exposé, see the excellent contribution of McLaren (1997).

[4] We discuss this point in detail in Palacios and Mavroidis (2026).

[5] Gertz (2025) and (2025a) and Lester (2025) offer an excellent basis for debating this point.

Article 24.5
Initiation of panel procedures

...

5. The Trade Committee may decide to entrust an external body to provide assistance to panels established under this Chapter, including administrative and legal support. Such decision shall address the conditions of the entrustment, including the costs arising from the entrustment. Where applicable, any panel request shall also be delivered to the external body.

What do they have in mind here in terms of this "external body"? The WTO Secretariat, which many people over the years have suggested could assist with FTA disputes? The Permanent Court of Arbitration, which handled the UK-EU sandeel fishing dispute? Could someone create a new entity that would serve this purpose?

I looked around a bit to see if there have been similar provisions in other trade agreements. This is not necessarily a comprehensive list, but I found several examples.

First, the EU-NZ FTA has the most similar language, as it, too, refers to "providing administrative and legal support":

Article 26.4
Initiation of panel procedures

...

2. The request for the establishment of a panel (hereinafter referred to as "panel request") shall be made by means of a written request delivered to the other Party, and to any external body entrusted pursuant to paragraph 4, if applicable. ...

...

4. The Trade Committee may decide to entrust an external body with assisting panels under this Chapter, including providing administrative and legal support. The Trade Committee's decision shall also address the costs arising from such entrustment.

In addition, there are several agreements that talk only about support for "administrative tasks":

EU - Japan Economic Partnership Agreement (which I blogged about in 2018):

Article 21.25
Administration of the dispute settlement procedure

1. Each Party shall:

(a) designate an office which shall be responsible for the administration of the dispute settlement procedure under this Chapter;

(b) be responsible for the operation and costs of its designated office; and

(c) notify the other Party in writing of the office's location and contact information no later than three months after the date of entry into force of this Agreement.

2. Notwithstanding paragraph 1, the Parties may agree to jointly entrust an external body with providing support for certain administrative tasks for the dispute settlement procedure under this Chapter.

UK-NZ FTA:

Article 31.17
Administration of the Dispute Settlement Procedure

1. Each Party shall:

(a) designate an office that shall be the Party’s point of contact, and which shall be responsible for providing administrative assistance to panels established under Article 31.6 (Establishment of a Panel); and

(b) notify the other Party of the location of its designated office by the date of entry into force of this Agreement.

2. Notwithstanding paragraph 1, the Parties may agree to jointly entrust an external body with providing support for certain administrative tasks for the dispute settlement procedure under this Chapter.

UK-Australia FTA:

Article 30.21
Administration of the Dispute Settlement Procedure

1. The Parties may agree to jointly entrust an external body with providing support for certain administrative tasks for the dispute settlement procedure under this Chapter.

2. The expenses of the external body shall be borne by the Parties in equal share, unless the Parties agree otherwise.

It seems clear that some government officials think this idea is worth exploring, as it is has been raised in trade negotiations and made it through to some final texts, and the specific language used has been evolving. Implementing it will be complicated, though, and it remains to be seen if something along these lines can be made operational.

As the European Union's Carbon Border Adjustment Mechanism (CBAM) enters its definitive phase, India confronts a fundamental challenge to differentiated responsibility under the Paris Agreement. With default values imposing 30% markups by 2028 and verification requirements disproportionately burdening developing producers, CBAM tests whether unilateral measures can override the principle that developed nations bear greater responsibility for atmospheric carbon depletion.

On 1 January 2026, the European Union's (EU) Carbon Border Adjustment Mechanism (CBAM) transitioned to enforcement, triggering financial obligations for importers to purchase certificates reflecting embedded emissions. For India, whose steel exports to Europe account for more than 60% of the sector's total exports, CBAM raises questions about whether unilateral measures can impose uniform carbon pricing without considering the differentiated responsibilities outlined in the Paris Agreement. Between 2020 and 2024, India formally objected 29 times at the World Trade Organisation (WTO), articulating that CBAM violates WTO non-discrimination provisions and climate justice principles.

Default Value Penalties as Structural Barriers

Under the implementing acts adopted on 17 December 2025, importers without facility-specific verified emissions data must apply country-specific default values with punitive markups: 10% in 2026, 20% in 2027, and 30% from 2028. For Indian steel, the default emission intensity is 4.32 tonnes CO₂ per tonne. With a 30% markup, this becomes 5.616 tonnes CO₂ per tonne. At projected 2026 EU Emissions Trading System (ETS) prices of €83-92 per tonne CO₂, default values impose certificate costs of €466-517 per tonne. Producers providing verified data reflecting the national average of 2.5 tonnes of CO₂ face costs of only €79 to €88 per tonne after benchmark adjustments are applied. Default values impose costs nearly six times higher.

For India's secondary steel sector, which accounts for 40% of national production and is dominated by Micro, Small, and Medium Enterprises (MSMEs), verification presents insurmountable barriers. These facilities lack continuous emission monitoring and cannot afford ISO 14065-compliant verification. National Accreditation Bodies are already at high capacity and unlikely to begin mass accreditation of third-country verifiers. MSMEs cannot afford verification, yet they face default values that render exports commercially unviable without it. CBAM assumes sophisticated monitoring infrastructure characteristic of developed economies, without transition mechanisms for countries building such capacity.

WTO Compatibility and Shrimp-Turtle Constraints

CBAM's WTO legality hinges on Article XX of the General Agreement on Tariffs and Trade (GATT) environmental exceptions. Prima facie, CBAM violates Article II (tariff bindings). Whether it also violates Article III:4 (national treatment) is contested: scholars disagree on whether production process distinctions can differentiate otherwise physically identical products. The Article XX chapeau analysis is dispositive regardless. The EU invokes Article XX(g), which permits measures relating to the conservation of exhaustible natural resources, subject to the chapeau requirement that such measures not constitute arbitrary or unjustifiable discrimination between countries where the same conditions prevail.

The Appellate Body's Shrimp-Turtle jurisprudence provides controlling precedent. India, Malaysia, Pakistan, and Thailand challenged a US ban on shrimp imports from countries not certified as requiring turtle excluder devices that meet US standards. The Appellate Body held that the measure failed because it provided Caribbean countries with technical assistance and a three-year phase-in, whereas it gave Asian complainants only four months. Critically, Article XX does not permit measures that impose a rigid and unbending standard, forcing trading partners to adopt essentially the same comprehensive regulatory regime.

CBAM exhibits parallel defects. First, benchmarks derived from the 10% most efficient EU installations require third countries to match best-in-class European production. Second, CBAM provides no differentiated treatment based on development status or technological capacity. Third, default-value penalties discriminate against countries lacking verification infrastructure, mirroring the differential phase-in discrimination in the Shrimp-Turtle case.

The chapeau's same conditions language is dispositive. Legal scholars argue that the Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC) constitute relevant conditions that justify differential treatment. India's historical emissions account for 3.4% of the cumulative global CO₂ emissions, compared to the EU's 22%. India's per capita emissions are 1.9 tonnes of CO₂ annually, compared to 7 tonnes in the EU. These facts establish materially different conditions permitting differential treatment under the chapeau's express terms.

CBDR-RC as Structural Constraint

Common but differentiated responsibilities and respective capabilities, as enshrined in the United Nations Framework Convention on Climate Change (UNFCCC) Article 3.1 and the Paris Agreement Article 2.2, stipulate that parties should protect the climate system... based on equity, with developed country Parties taking the lead. CBDR-RC operates as a structural constraint on multilateral action. Under the Paris Agreement, it permits differentiated nationally determined contributions, justifies the financial obligations of developed countries under Article 9 for climate finance, and informs the assessment criteria for the Global Stocktake.

CBAM reflects a different logic: uniform carbon pricing benchmarked to European standards, with no categorical exemptions for development status and no revenue recycling. The Organisation for Economic Co-operation and Development (OECD) estimates that CBAM would reduce global emissions by only 0.54%, raising proportionality questions: whether minimal environmental gains justify measures that transfer revenue from developing to developed country treasuries, while undermining multilateral cooperation.

India's Carbon Credit Trading Scheme: Cooperation or Coercion?

Under the EU-India Strategic Agenda, adopted in September 2025, the EU committed to deducting the carbon prices effectively paid in India from CBAM financial adjustments, offering potential for cooperation. India's CCTS establishes an intensity-based baseline-and-credit system covering nine sectors. Expected to commence mid-2026, it will cover over 700 million tonnes CO₂ equivalent. The EU Commission's December 2025 review acknowledged that carbon prices effectively paid under different compliance schemes can be deducted. However, whether India's system qualifies for such deductions remains a matter of contention.

Fundamental incompatibilities remain. CCTS operates as an intensity-based system, whereas the EU ETS imposes absolute caps with auctioned allowances. Whether Carbon Credit Certificates constitute effectively paid carbon prices requires complex equivalency determinations. India's accelerated development of CCTS responds explicitly to CBAM pressure, raising questions about whether this represents voluntary action or coerced convergence. If CBAM compels the adoption of EU-style carbon pricing, it may violate the Shrimp-Turtle prohibition on conditioning market access on the adoption of an essentially the same regulatory regime.

Conclusion: Toward Justice-Oriented Border Adjustments

The India-CBAM dispute reveals whether climate-trade architecture can accommodate differentiated responsibility or fracture into competing blocs that impose asymmetric burdens. Justice-oriented reform necessitates structural changes that extend beyond technical adjustments. First, default value markups must recognise capacity constraints through differential schedules based on World Bank income classifications. Second, revenue recycling mechanisms must channel CBAM revenues to source countries for monitoring infrastructure and decarbonisation investments, transforming CBAM from an extractive penalty to cooperative financing. Third, multilateral governance must replace unilateral design through WTO plurilateral agreements establishing shared methodologies and mutual recognition.

The December 2025 definitive phase marks a turning point, not a conclusion. India must pursue both the operationalisation of CCTS and international advocacy for CBAM reforms, in line with its Paris commitments. The EU faces the question of whether CBAM can evolve from a unilateral instrument into a platform for North-South collaboration. The integrity of multilateral climate governance may depend on resolving whether environmental ambition can coexist with trade justice, or whether border measures will fracture the consensus that differentiated responsibility must guide global responses to atmospheric carbon depletion.

Since then, the U.S.-EU trade deal has stumbled a bit, slipping on some icy patches and having to recover. I haven't followed all the twists and turns, but I see that the European Parliament took a vote last week on the legislation to implement it in EU law, giving strong approval albeit with some conditions attached. There are still hurdles that might emerge, but it seems as though there is a good chance the deal will be finalized and implemented.

What interests me for the purposes of this post is that as part of the implementing legislation, Parliament added some language in a recital that formalizes the concerns about security in relation to the Ukraine war:

(1f) In view of Russia’s war of aggression against Ukraine, as well as other conflicts in the Union’s neighbourhood that undermine the security of the Union and its citizens, it is imperative for the Union to maintain and further strengthen its partnership with a key ally at a time when such relations are of critical importance. In that exceptional context, the Union is required to adopt extraordinary and temporary measures, duly justified under Article XXI of the GATT (Security Exceptions). However, such unilateral measures should not set a precedent and should remain strictly exceptional, proportionate and time-limited, reflecting their specific nature as actions justified on security grounds.

The Ukraine security part is not too surprising, but I'm not sure what to make of the reference to GATT Article XXI. If it is just about confirming what European leaders have in mind as the political justification for this deal (along the lines of the quotes in my earlier posts), I can see the logic, although I'm not sure why it needs to be included in the recital. However, if it is intended as an effort to provide a legal justification for the EU measures under GATT Article XXI, this seems like a dangerous road to go down.

First of all, with regard to WTO law, it would be a challenge to convince a WTO panel to agree with Parliament that these measures are "duly justified under Article XXI." I don't want to get too bogged down in the case law in this short post, but here's a quick assessment of the relevant provisions. Under the legislation, the EU is treating other Members less favorably than the U.S., which would lead to a GATT Article I:1 MFN violation. If the EU were to invoke Article XXI as a defense, it would have to show that the legislation is an "action which it considers necessary for the protection of its essential security interests" under the Article XXI(b) introductory clause; and that it falls under the "taken in time of war or other emergency in international relations" requirement in Article XXI(b)(iii). One consideration here will be whether the EU legislation can be sufficiently connected to the security concern being cited. On this point, at para. 7.138, the Russia - Traffic in Transit panel said: "as concerns the application of Article XXI(b)(iii), this obligation is crystallized in demanding that the measures at issue meet a minimum requirement of plausibility in relation to the proffered essential security interests, i.e. that they are not implausible as measures protective of these interests." Is this EU legislation plausibly protective of the EU's security interests related to Ukraine? Does it actually "maintain and further strengthen its partnership with a key ally"? I watched a bit of the plenary debate in the Parliament, and many of the MEPs did not come across as very confident on these points.

Second, in terms of the systemic impact, it seems to me that taking this approach to Article XXI in these circumstances pushes the boundaries of how this provision is applied. I know the Parliament says "such unilateral measures should not set a precedent," but I'm not sure a disclaimer of this sort will be effective, as the political precedent for a broader approach to invoking Article XXI will have been set. What this means in practice is that future EU actions are more likely to rely on Article XXI, and that other governments may see this as a signal that they, too, have a greater scope to rely on Article XXI to justify violations.

With regard to the next steps, a Parliament press release on the vote says "MEPs are now ready to start negotiations with EU governments on the final shape of the legislation" (referring to the trilogue negotiations involving Parliament, the Member States represented in the Council, and the Commission). It would be a good idea for everyone involved, at both the EU and Member State level, to think about the implications of a formal assertion that the legislation is justified under Article XXI, in terms of both potential litigation against this legislation and the signal it sends to the rest of the WTO membership about how Article XXI can and should be used.