Section 338 provides executive tariff powers to enforce a policy of equal treatment for the commerce of the United States in foreign markets. The President is authorised to employ duties when he or she determines, as a matter of fact, that another country has discriminated against the United States’ commerce compared with the commerce of any other country. The law empowers the President to reset unequal competitive conditions. What constitutes an unreasonable limitation, or has the effect of discrimination, is left largely to the President.

Building on Simon’s last post, I want to explain how the design of the President’s discretionary power within this law marked a critical turn in U.S. trade policy – a turn towards unconditional MFN, underscoring reciprocity after the First World War. However, the rationale for and demand for a law like Section 338, which was formulated before a multilateral trading system was in place, does not fit comfortably in a world of multilateral MFN governed by the GATT/WTO. In the oddest turn of events, the United States is using Section 338 to demand unconditional MFN from the world while simultaneously urging WTO Members to reform the WTO to allow for selective discrimination or conditional MFN.

Section 338: Presidential Powers and Determinations of Discrimination

Section 338 is quite lengthy, but the relevant part concerning additional duties is the following text at paragraph (a):

The President when he finds that the public interest will be served shall by proclamation specify and declare new or additional duties as hereinafter provided upon articles wholly or in part the growth or product of, or imported in a vessel of, any foreign country whenever he shall find as a fact that such country—

(1) Imposes, directly or indirectly, upon the disposition in or transportation in transit through or reexportation from such country of any article wholly or in part the growth or product of the United States any unreasonable charge, exaction, regulation, or limitation which is not equally enforced upon the like articles of every foreign country; or

(2) Discriminates in fact against the commerce of the United States, directly or indirectly, by law or administrative regulation or practice, by or in respect to any customs, tonnage, or port duty, fee, charge, exaction, classification, regulation, condition, restriction, or prohibition, in such manner as to place the commerce of the United States at a disadvantage compared with the commerce of any foreign country.

The President must use section 338 power clearly and precisely; at a minimum, this should require clarity in the object of, and scrutiny for, comparison. The President must make a fact-based determination that there have been unreasonable limitations or discriminations placed upon US commerce that disadvantage it as compared to the commerce of another country. The language of section 338 specifically directs the President to make a determination; it is when ‘he shall find as a fact’ that a trading partner imposes ‘any unreasonable charge, exaction, regulation, or limitation which is not equally enforced upon the like articles of every foreign country’ or ‘discriminates in fact against the commerce of the United States’ such that US commerce is placed ‘at a disadvantage compared with the commerce of any foreign country.’ As such, it is wholly insufficient for the President to bypass this fact-based inquiry and simply call out ‘other countries’ without engaging with fact-finding.

At the same time, the law does not impose evidentiary standards upon the President. Instead, the Tariff Commission, a technical, bipartisan, expert group (established in 1916), would supply Congress and the President with investigations and reports concerning trade relations. Sections 332 to 338 lay out this process concerning today’s International Trade Commission (since 1975).

It’s worth a separate post to consider whether the Trump administration can cite specific cases of discrimination in three sectors and then impose more sweeping duties to pressure Canadian concessions. As I will explain below, Section 338 was seen as an MFN power intended to equalise conditions. If so, there remains a broader, more complex question about whether the duties, per subparagraph (d) of Section 338, should be limited to strictly ‘offset commercial disadvantages’ based on evidence of discrimination. A brief analogy here might be the GATT nullification or impairment language.

The 1922 Precursor to the 1930 Section 338 Powers

Section 338 has its origins in Section 317 of the Tariff Act of 1922.[1] The powers granted in Section 338, as initially conceived, were subject to fiery Congressional debates. I have been working on a book project that includes an examination of the United States’ position on MFN in 1922, as the switch to unconditional MFN occurred in tandem with these discretionary Presidential powers. 

From 1921 to 1922, Congress spent months discussing the constitutionality, scope, and execution of a new tariff bill. In drafting the tariff law, the Senate and House debated various aspects including: delegating legislative power to the executive branch, how the President would make determinations, what constituted discrimination, what constituted a foreign country, the scope of defensive powers, and how it conflicted with reciprocal treaties.

In one discussion on possible guardrails to untethered power, the following quote from a senator encapsulates the tension:

If the time has arrived when we cannot trust the President of the United States to use his very best judgment in a matter of such extreme importance [as tariff rate setting] to the happiness and contentment of every class of citizens of the country, then God help the future of the Republic.[2]

Congress attempted to impose some limits to the President’s powers, as intense criticisms mounted. One senator cautioned that the 1922 bill would establish a power capable of abuse, one which the framers of the Republic intended to deny.[3] In the Baltimore Sun, an editorial dismissed the ‘indefinite propositions’ that would allow presidential power ‘capable of making or breaking particular industries.’[4] And that the bill would set up ‘a political machine under which no business affected, directly or indirectly, by tariff rates will fare to be out of the favor of the administration.’[5] The Baltimore Sun editorial made clear the proposal was ‘capable of grave abuse’ and was ‘bureaucacy run mad.’[6] Perhaps one of the most damning responses from a senator was the following:

You are putting in the hands of one man the greatest power for political corruption and political advantage that has ever been conferred since the beginning of the Government.[7]

How would the President be a fact finder?

In 1922, senators believed that the President’s powers acknowledged ‘proper restrictions’ and discussed a ‘rule laid down which will stand the test of the courts to change the rates within reasonable limitations so that they may be adjusted to changed conditions.’[8] That said, one senator explained that the President should only exercise such power based on investigation and recommendations from an ‘expert authority.’[9] This meant that Congress should do more than debate an intention to seek agency support, but set a legal requirement to do so. Even when Senator Smoot (of the subsequent Smoot-Hawley tariff) debated the role of the Tariff Commission as part of the President’s powers in 1922, he confirmed, ‘the President of course would go immediately to the Tariff Commission,’ as well as other relevant departments. To which his fellow senator replied, ‘Then there ought not to be any objection to providing that there should be this investigation by this body of experts and a public report.’[10]

Having enumerated the powers of the Tariff Commission (as it was at the time) in the law, and recognising the vital resource for investigations into disadvantages in competition, President Harding signed an Executive Order on October 7, 1922 (#3746) which confirmed:

It is ordered, that all requests, applications, or petitions for action or relief under the provisions of Section 315, 316, and 317 of Title III of the Tariff Act approved September 21 1922 [the predecessor to the Tariff Act of 1930], shall be filed with or referred to the United States Tariff Commission for consideration and for such investigation as shall be in accordance with law and the public interest, under rules and regulations to be prescribed by such Commission.’

The takeaway is that while the President retained flexibility, there was a plan for support from the Tariff Commission. Though the original intention was to take the politics out of tariffs in exceptional circumstances, the Commission would be at least some part of the picture. The Sixth Annual Report of the Tariff Commission further set out the rules of procedure for the Commission regarding section 317 of the 1922 Tariff Act, concerning protection of foreign trade against discrimination. The Commission reiterated the organising principle of equality of treatment, and confirmed that Congress had rejected a concessional method of tariff bargaining. Instead, section 317 afforded flexibility to the President to combat discrimination based on findings of fact as to effects upon U.S. commerce.

What was the relationship between Section 317 and the MFN clause?

In 1922, when Congress debated the scope of Section 317, senators debated the intersection of reciprocity treaties with MFN clauses and the new executive powers. Two issues to flag. First, if other countries entered into preferential arrangements, could the President find this to be discriminatory against U.S. commerce, even if the United States had its own preferential arrangements? Second, if the United States had signed MFN-based treaties, then what was the reason for the additional powers to target discrimination? Inevitably, both issues were blurred in debates, raising intense questions about the appropriate U.S. commercial policy in the postwar world. One senator quipped, ‘I had supposed, Mr President, that after the horrible war through which we have passed we were going to try to cultivate amicable relations with our neighbors and friends and not go around carrying a chip on our shoulders constantly.’[11]

That these issues were identified and yet appear unresolved in debates suggests some short-sightedness on the behalf of the architects. Even those senators largely in support of tariff law reform took issue with the potential of imposing penalty duties on other countries for entering into reciprocal arrangements that expanded trade as between themselves. There was extensive debate that while such conditioned reciprocal preferences may fall outside MFN clauses, they may still be subject to offset duties under section 317.[12] Put another way, while preferences may not constitute discrimination in law, it might, under section 317, constitute discrimination in fact.[13] Wallace McClure's assessment was that the insertion of the words 'in fact' in the law may 'have been intended to deprive the word "discriminates" of any legal connotation that might cling to it' (84). Moreover, the term ‘foreign country’ included ‘any empire, country, dominion, colony, or protectorate.’ In 1922, the Commission took note that the ‘colonies of the different powers, both as export markets, and as sources of raw materials’ had grown in importance to the United States, and that many discriminatory export duties were ‘found almost exclusively in colonies’ (6).

Some senators highlighted the double standards, considering the United States had its own preferences, such as with Cuba.[14] The lead architects of the law attempted to assure the critics that if there was no discrimination, it would not fall under the rule.[15] Yet, for those keen to maintain sweeping powers, the scope of the term ‘discrimination’ did not seem to cause worry. For them, the provision sent a ‘notice to the world that America intends to be treated equally with all other countries.’[16] The term ‘discrimination’ as constituting a disadvantage to U.S. commerce remained sweeping.

Unilateral, unconditional MFN against Multilateral MFN

Whether in 1922 or 1930, Congress enacted the executive tariff powers before the development of the multilateral trading system. As such, in a world without a multilateralising MFN, the United States sought to enforce the principle of equality of treatment as between its commerce and that of all other countries. The only way to do so was to acknowledge some outer limits, concerning potential exclusive privileges and preferential arrangements, such as the case of Cuba. The choice to press for breadth of scope over precision reflected the postwar uncertainty and inevitable protectionist interests of Congress at the time. If there were hypocrisies and potential issues in the law, this seemed a small price to pay. It did not seem to matter if the discrimination was justifiable or not, what mattered was the effects – and here flexible powers were entrusted with the President. ‘Taking the tariffs out of politics,’ it was believed, would contribute to the United States preserving its negotiated agreements.[17] If this sounds familiar, it is because this remains the great value of MFN at the WTO.

Moving forward in time, the relationship between MFN and reciprocity altered with the completion of the GATT. Indeed, the Trump administration’s use of Section 338 appears to stand in contravention of Article XXIV of GATT 1994, and all Members’ commitments to negotiating free-trade areas. Canada may therefore negotiate closer trade relations with the United States and the European Union separately while committing to the conditions maintained by Article XXIV. Yet, under section 338, the United States has asserted that the President possesses a power that pierces through the Canada-European agreement in an effort to equalise conditions on cheeses. In a way, the United States’ use of section 338 mirrors foreign investors’ efforts to use MFN clauses to import greater substantive protections from one investment treaty to another. The United States appears to be using its domestic law to reset preferences to its advantage.

Yet one of the most striking parts of the 1920s congressional debate was that the architects seemed to reject the possibility that the section 317 powers (the section 338 equivalent) would conflict with the MFN clauses in reciprocal treaties. Using section 338 now would. While the United States has already questioned the utility of unconditional MFN for the, at least immediate, future, it likewise exposes itself to another challenge – policing a world of preferences. But partners should beware that, if left unchallenged, the use of section 338 could require all governments to continuously pay for reciprocity. Another immediate consequence would be that all non-US agreements, whether formal or not, could become evidence of discrimination. The most ironic end to this story is that if the United States wants equal advantages, then the solution would be more MFN, not less.

[1] The sections are similar. One important modification is that section 338 applies to articles imported in vessels of foreign countries as discrimination against the commerce of the US. See Tariff Commission Annual Report no. 14 (1930), p. 2.

[2] August 10, 1922, C.R. 62-11-11186.

[3] August 11, 1922, C.R. 62-11-11223.

[4] C.R. 62-11-11197. Citing the Baltimore Sun of July 9 1922, Taxation by Executive Fiat.

[5] C.R. 62-11-11197. Citing the Baltimore Sun of July 9 1922, Taxation by Executive Fiat.

[6] C.R. 62-11-11207.

[7] C.R. 62-11-11207.

[8] C.R. 62-11-11193.

[9] C.R. 62-11-11193.

[10] C.R. 62-11-11193.

[11]C.R. 62-11- 11244.

[12] C.R. 62-11-11246.

[13] C.R. 62-11-11246.

[14] C.R. 62-11-11245.

[15] C.R. 62-11-11245.

[16] C.R. 62-11-11246.

[17] C.R. 62-11-11251.

First, the White House tells us that "[t]he tariffs will take effect 30 days after signing" the proclamations, but I'm skeptical that will actually happen. My best guess is that the administration is using them more as negotiating leverage in the talks underway right now as part of the 6-year review of the USMCA. In my view, what we may see is a series of 30-day (or so) extensions that keep the Section 338 tariffs hanging over the U.S.-Canada trade relationship for a while. (Will that approach have an impact on Canadian negotiators? I have doubts, but nonetheless it seems consistent with how the Trump administration approaches trade negotiations.)

Second, if the tariffs were to be imposed, I think it would be difficult to bring a successful challenge in U.S. court. As trade lawyers John Veroneau and Catherine Gibson explained a while back:

Section 338 permits the president to impose “new or additional duties” on countries that have discriminated against commerce of the United States. Section 338 authority is triggered when the president finds that a foreign country has either (1) imposed an “unreasonable charge, exaction, regulation, or limitation” on U.S. products which is “not equally enforced upon the like articles of every foreign country”; or (2) “[d]iscriminate[d] in fact” against U.S. commerce “in respect to customs, tonnage, or port duty, fee, charge, exaction, classification, regulation, condition, restriction or prohibition” so as to “disadvantage” U.S. commerce as compared to the commerce of any foreign country.

The three Presidential tariff proclamations (motor vehicles, alcoholic beverages, dairy) lay out the case for how exactly Canada has been engaging in "discrimination or an unreasonable and unequal imposition" on U.S. commerce, and the Trump administration is right: Canada has been doing so. Of course, Canada has defenses to this discrimination. For motor vehicles and alcoholic beverages, the defense is that it is retaliating against U.S. tariffs; and on dairy, the defense is that the discrimination in favor of EU producers, which have better terms under CETA than U.S. producers have under the USMCA, is allowed under GATT Article XXIV. But looking at the Section 338 statute, I don't see that a justification for discrimination is permitted. If discrimination exists, the President can impose tariffs under Section 338. (Section 338 is part of the Tariff Act of 1930, and I suppose it's possible there may be some drafting history out there on what exactly people had in mind by "discrimination." I'll leave that for the legal historians to illuminate.)

One other aspect of a possible lawsuit that people may point to is the requirement of an ITC investigation. On this issue, a CRS report notes that:

... Section 338 charges the ITC with “ascertain[ing]” and informing the President of relevant instances of discrimination:

"It shall be the duty of the [ITC] to ascertain and at all times to be informed whether any of the discriminations against the commerce of the United States enumerated in . . . this section are practiced by any country; and if and when such discriminatory acts are disclosed, it shall be the duty of the commission to bring the matter to the attention of the President, together with recommendations.271"

This provision, together with Section 338’s placement in Part II of the Tariff Act of 1930 (concerning the ITC), may raise a question as to whether the ITC must find that discrimination has occurred before the President may impose tariffs.272 By authorizing the President to impose tariffs “whenever he shall find as a fact” that discrimination has occurred,273 however, Section 388 [sic] does not appear to condition the President’s authority on such a finding by the ITC.

I agree with what CRS seems to have in mind: The opening language of the statute ("The President when he finds that the public interest will be served shall by proclamation specify and declare new or additional duties as hereinafter provided upon articles wholly or in part the growth or product of, or imported in a vessel of, any foreign country whenever he shall find as a fact that such country ... ") arguably makes Presidential fact-finding sufficient here.

As a final point, Veroneau and Gibson state: "We cannot explain why Section 338 disappeared from public view after 1949 even though it has remained in the statute books." One answer may be that, practically speaking, Section 338 was superseded by the inclusion of the non-discrimination principle in trade agreements, starting with the GATT in 1948. While there may have been gaps in trade agreement coverage for other issues, non-discrimination was well covered, so there was no need to use Section 338 for this. And then when people had concerns about the effectiveness of the GATT, they came up with Section 301 of the Trade Act of 1974 to deal with these issues. So, maybe there were just better known options, and people focused on what they knew.

The paper begins by identifying the "current challenges" with the "commercial activities of State enterprises":

2.3. When not properly regulated, State-owned and State-invested enterprises active in commercial markets may distort competition. The weight of State enterprises in the global economy is increasing: in 2023, among the 500 largest firms in the world, over 200 were State-controlled, up from 50 in the year 2000.

2.4. They can unbalance the playing field thanks to State interventions such as regulatory advantages or access to privileged information. Their dominant market positions, often reinforced by legal monopolies or historic incumbency, can also stifle innovation and deter private investment, while cross-subsidisation between commercial and non-commercial activities skews further competition.

2.5. Such distortions not only disadvantage other (privately-managed) competitors but can also lead to inefficiencies, reduced consumer choice, and misallocation of resources in the broader economy. The same is true for private entities entrusted or directed by the State, especially those acting as providers of preferential funding or of raw materials and inputs used in the production process. Raw materials and other inputs provided on non-market terms cause market distortions in the final product, making it cheaper than it would be absent these distortions. They also cause distortions in the markets of the raw materials, whose access to foreign competitors becomes constrained or whose international prices increase as a result.

It then considers the "gaps and shortcomings in WTO rules" on these issues:

2.6. This concern is only partially addressed by the WTO. State Trading Enterprises¹ are governed by GATT Article XVII, which subjects this specific set of State enterprises to disciplines on commercial considerations, non-discrimination and transparency. There is no specific WTO agreement addressing the potentially distortive conduct of other State enterprises in the marketplace, beyond the rules on provision of subsidies in the Agreement on Subsidies and Countervailing Measures (ASCM) which apply to public bodies and to private bodies entrusted or directed by the State.

2.7. Several WTO Members have taken specific commitments on State intervention and State enterprises in their WTO Accession Protocols.² These commitments vary in substance. Some include commitments to privatise certain State enterprises, or to require State enterprises to make purchases and sales solely in line with commercial considerations and refrain from discriminating, for instance, in access to infrastructure, and prohibit non-commercial mandates such as employment guarantees. Others are limited to general commitments to limiting State enterprises' privileges and promoting private sector competition.

2.8. However, these commitments are currently not actively monitored or enforced. This should be corrected.

2.9. Next to WTO accession protocols, many more WTO Members, including the EU, are bound by commitments on State enterprises in around 100 Free Trade Agreements, with a variety of definitions and disciplines. The EU's FTAs typically include obligations to commercial considerations and non-discrimination, establish core principles of competitive neutrality as concerns ownership, and are complemented by transparency obligations. Other regional trade agreements such as CPTTP and USMCA also include disciplines to limit the trade distortive impacts of State enterprises.

2.10. Taking together the WTO accession commitments and the Free Trade Agreements, it can be seen that a large number of WTO Members already share a set of international disciplines regulating the behaviour of State enterprises. While the scope of these disciplines varies, they share the goal of preventing State enterprises from distorting competition through unfair State support, non-commercial behaviour, discrimination, regulatory advantages and lack of transparency.

2.11. In other words, for many WTO Members commercial considerations and non-discrimination are already a widely shared international norm for the behaviour of State enterprises in the marketplace.
------------------------------------------------------------
_{1 Working definition agreed by Members: "Governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports."
2 Afghanistan, Cambodia, Cape Verde, China, Comoros, Kazakhstan, Laos, Liberia, Montenegro, Mongolia, Nepal, Russia, Tajikistan, Ukraine, Vietnam.}

Thus, according to the EU, it is a problem that there are no general WTO obligations in this area, with the only current rules being those in a few Members' accession commitments and in FTAs.

With regard to a "possible way forward," the EU offers the following suggestions:

2.12. This set of existing commitments should be reviewed and, as appropriate, consolidated at the WTO, so as to ensure a more systematic monitoring (drawing inspiration from the monitoring of STEs carried out by the Working Party on State Trading Enterprises), reporting, and more uniform application. This would be separate from the ASCM, as the issue at stake does not limit itself to subsidies.

2.13. A first step towards consolidation of these rules would be a mapping exercise that could be coordinated by the facilitator for level playing field issues. The resulting overview could then serve as a basis for developing a model schedule of commitments for acceding Members, as well as further targeted and consolidated rules for existing Members. The new set of WTO rules would address the identified gaps as regards the conduct of State enterprises in the marketplace by establishing obligations on commercial considerations, non-discrimination and transparency, in line with the shared international norms already found in Free Trade Agreements and WTO accession protocols.

In my view, the EU proposal here is a good one. I've always thought it was odd that there are general GATT obligations that apply to state-trading enterprises, but nothing similar for state-owned or state-invested enterprises. This gap in the rules should be closed.

As the EU suggests, it would be useful in this context to look at what some governments have already agreed to on state-owned and state-invested enterprises as part of their accession commitments. In footnote 2 above, the EU points to the following governments that have made these commitments: Afghanistan, Cambodia, Cape Verde, China, Comoros, Kazakhstan, Laos, Liberia, Montenegro, Mongolia, Nepal, Russia, Tajikistan, Ukraine, Vietnam. Let's look at China for an example of the commitments.

Paras. 43 through 49 of China's Accession Working Party Report cover "State-Owned and State-Invested Enterprises." Para. 46 says the following:

46. The representative of China further confirmed that China would ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability, and that the enterprises of other WTO Members would have an adequate opportunity to compete for sales to and purchases from these enterprises on non-discriminatory terms and conditions. In addition, the Government of China would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement. The Working Party took note of these commitments.

The para. 46 commitments (along with those in paras. 47 and 49) are made enforceable through para. 342 of the Working Party Report and para. 1.2 of the Accession Protocol.

On their face, these Chinese commitments seem like a sensible approach to the issue. No doubt the wording could be updated and tweaked a bit, but it's a good start.

However, as the EU paper notes, the accession commitments in this area "are currently not actively monitored or enforced." I'm not sure why the monitoring and enforcement hasn't been done to date, but I agree with the EU that "[t]his should be corrected." It would be useful to have a better sense of how these commitments work in practice, and attempts at enforcement would help with that.

With regard to extending these commitments to other governments by creating a general WTO obligation along these lines, an obvious question is: What are the chances of success for negotiating such an extension? When market-distorting practices are discussed in the WTO context, there is often a concern that China won't agree to additional disciplines on its behavior, which will be an impediment to completing any negotiations. But here, China is already subject to the discipline of its own commitments, so Chinese objections shouldn't be an issue. In fact, China should want to have these "WTO-Plus" obligations extended to others so as to level the playing field. That doesn't mean reaching agreement will be easy, of course, as getting agreement from all the other Members that use some version of state enterprises will be a challenge. But it does remove one big stumbling block.

At the outset, I want to say something about the title. In my view, America was not, in fact, "being played" by what the piece refers to as the "global economic system." You can argue that the system had some flaws in it, and I can certainly point to many things I didn't like. But the system was largely something U.S. policymakers wanted. If Bessent and the Trump administration don't like it, that's fine, and they have an opportunity at the moment to make some changes. But for the most part, the system that exists is an American-built system, and portraying the arrangement as other governments somehow taking advantage of America misunderstands how we got to where we are. I doubt many of these other governments believe they were the ones with the advantage, and they all have grievances of their own.

Turning to the substance of the piece, El-Erian puts forward "the five core principles that now underpin the administration’s doctrine of economic statecraft":

• "National economic capacity is critical to economic security."
• "Trade and investment openness must be strictly reciprocated."
• "The United States must proactively set standards for emerging technologies."
• "The global dominance of the U.S. financial system must be actively protected and leveraged as an instrument of statecraft."
• "All of this must be aimed at visibly improving the welfare of American households."

Let's look at each one.

The first principle sounds like he's calling for some degree of autarky, but what degree exactly is unclear. Unlike most countries, the United States is probably big enough to produce just about all the goods and services Americans need, but it's important to keep in mind that the more you promote "national economic capacity" in a way that contravenes market principles, the higher the economic costs will be. To be clear, "economic security" is obviously important, and there are areas of the domestic economy where we want to make sure there are national actors even if there are high costs to doing so. But you need to define clearly what you mean by economic security, as it can easily be extended beyond recognition. I think that if you approach the scope of economic security on the basis of evidence and reason, it will likely end up covering much less ground than some people are pushing for at the moment (e.g., imports from allies would not be considered a threat to economic security).

On reciprocal trade and investment openness, I'm not sure this is actually what the Trump administration folks have in mind. They may say this sometimes, but I don't think it's what they actually mean. Instead, what the administration seem to want is balanced trade flows. The problem with this objective is that the actual cause of the U.S. trade deficit (i.e., the unbalanced trade flows) is macroeconomic factors, and a trade regime based on reciprocally open trade and investment rules is not likely to achieve their goals in relation to trade balance. Thus, I don't think it's correct to say that reciprocal openness is their focus. For them, it's not about degree of openness but about trade flow outcomes.

On standards, proactive setting for emerging technologies doesn't seem to be happening much right now. At some point Congress will probably need to step in and craft something, but I'm not sure when that will happen. (Yes, the industry could self-regulate, but that possibility seems a bit far-fetched at the moment.)

On the financial system, global dominance has been U.S. policy for a while now. Some people in the Trump orbit have pushed back against this and complained about the impact on the value of the U.S. dollar. I'm not sure the administration is going to be able to reconcile the competing views within its ranks, though, and I feel like we are going to stay about where we are now.

In terms of the welfare of American households, later in the piece El-Erian undermines the point as he explains how the new direction in policy will be bad for this welfare, saying: "... the era of ultracheap imported goods will continue to give way to one with less emphasis on cost and more on supply chain resilience. Consumers, including already stressed low-income households, will face some higher prices as the decades-long prioritization of pure economic efficiency is scaled back in favor of protecting vulnerable domestic industrial segments, bringing back priority processes such as chip fabrication, building backup supply chains and protecting jobs." I think it's clear at this point that Americans don't like higher prices, so this may not go well.

Beyond the administration's economic statecraft doctrine, El-Erian has some thoughts on the post-Trump future of these policies:

The more likely outcome will be the broader weaponization of tariffs, investment and payment systems against economic rivals. This will be accompanied by a more forceful industrial policy, increased use of export restrictions and mounting pressure on third parties, including the threat of secondary sanctions.

It’s a phenomenon that will be evident in peacetime, not just during wars. It will deepen in America in the years to come and inevitably spread to other countries as they adjust. ...

The "deepen in America in the years to come" point is probably right in the short-term, but as the evidence comes in on how the "weaponization" and "industrial policy" are going, I think some reconsideration is likely. My sense is that many governments have decided to live with the weaponization because it is coming from Trump, and they know he will be gone from power in the coming years, so best just to wait it out. If the same approach continued after Trump, though, they are likely to shift away from alignment with the U.S., and people in Washington aren't going to be happy with that.

As to industrial policy, will it last in the U.S.? That may depend in part on the results of the current efforts. And will industrial policy spread to other countries? I can imagine you might see other countries deciding, for example, that they need to develop their own sovereign AI, but again that's not going to be something Washington wants to see.

El-Erian also jumps on the bandwagon of people arguing that "geoeconomics" has replaced "economic efficiency" as the foundation of international economic policy, saying the following:

The transition from an era driven by economic efficiency to one defined by geoeconomics and economic statecraft is no longer theoretical. It is the new operating system for the global economy and its markets. ...

I think some people underestimate the degree to which "geoeconomics and economic statecraft" were part of the prior system, even if those terms weren't used as often, and they also overstate the role of "economic efficiency" back then. Pivotal trade events such as the creation of NAFTA and the U.S. push for China to enter the WTO were, to a great extent, about geoeconomics and economic statecraft. Sure, the economic efficiency folks played a role here too, and contributed arguments to these outcomes. But it never felt to me like they were the driving force. Without the geoeconomics and economic statecraft aspects, I'm skeptical either NAFTA or Chinese WTO accession would have happened.

In terms of what the future holds for the "operating system for the global economy and its markets," I'm not sure I have a better sense than the average blog reader as to what is coming in U.S. economic and foreign policy in 2029. Having said that, I do think there's a tendency for people to (1) get caught up in new policy fads and lingo and (2) extrapolate them into the future. I understand that whatever is happening today can feel like something permanent, but I think it's important to look beyond the current narratives and consider the range of possibilities that might emerge in both politics and economics as we move towards the next era. Most people probably expect the non-trade policy headlines to change in 2029, and I suspect that is likely with trade policy too.

First, Miran is talking about "optimal tariffs," rather than ordinary protective tariffs, anti-dumping tariffs, etc., so I'll mention a general critique of this idea that I've articulated before on this blog. It's probably not worth repeating everything, but here's the conclusion of my most recent post on the subject:

Over the years, when this subject has come up, I've asked people to point me to a tariff out there in the real world that they think constitutes an "optimal tariff," in the sense of affecting the terms of trade so as to make the country better off. No one has taken me up on it yet, which leaves me skeptical that the term has any practical relevance. But given that, as noted, the term kind of sounds like it just means "really good and effective tariff," we may not have heard the last of it from tariff proponents.

Read the whole post if you are interested, but to sum up my view, optimal tariffs are an interesting theoretical phenomenon that gets discussed in economics textbooks, but as noted in the quote above, as far as I can tell there is no evidence of a real world optimal tariff on a specific product or products that has increased "overall national welfare" (as Miran puts it).

Second, a key element of Miran's argument is that he says recent Trump administration tariffs prove that retaliation by trading partners will be much less than expected, demonstrating that previous arguments about how retaliation would undermine the benefits of optimal tariffs were incorrect. In response, I'll note that it is true that under the Trump administration's approach to trade policy, in combination with its approach to foreign policy, there has been little retaliation (so far, although this may not be a sustainable state of affairs). And some governments have even agreed to reduce their tariffs and trade barriers on U.S. exports. But a key issue here is, what impact will all this have on U.S. exports?

I know that some U.S. agriculture producers in particular are hoping for a big increase in exports based on the lower tariffs/trade barriers they face. They should keep in mind, though, that retaliation isn't just about a foreign government imposing tariffs. What if the Trump administration's policies cause a broad backlash against U.S. goods and services exports? Foreign governments might lower their tariffs on U.S. wheat exports, but at the same time shift their purchases away from U.S. weapons. And foreign consumers might follow these events and have a negative reaction of their own to U.S. good and services. How exactly this all plays out – will there be lost sales of U.S. fighter jets? will U.S. liquor sales fall? – is unclear at this point. The evidence so far for an increase in U.S. exports under Trump's trade policies is mixed, and we'll have to wait and see what the coming months and years tell us.

Third, Miran argues that "[t]ariffs have earned a permanent place in the tax system, and economic consensus is slowly coming to appreciate it." My sense is that the economic consensus is pretty much where it used to be, but it can be hard to say for sure. On the Republican side, it seems like there are some people saying they support tariffs because that's what Trump wants to hear. When Trump is out of the picture, I can imagine these people shifting back to their pre-Trump views on tariffs though.

It's also worth emphasizing in this context that even during the "neoliberal" period (as usual, I put quotes around "neoliberal" to mock the term a bit!), there were plenty of people who supported tariffs. So, I'm not sure I see that much of a shift, other than in one obvious – and extremely important! – place: The views of the President of the United States.

And furthermore, there were plenty of tariffs during the prior period too. Miran refers to "near-zero levels" of tariffs that prevailed before January 2025, but the simple average applied tariff rate of 3.3% in the U.S. tariff schedule in 2024 masks some significant tariff peaks. Also, it doesn't take into account AD/CVDs, which can be much higher.

Let me wrap up this post by making two additional points.

First, to reiterate something I said in response to Julia's comment: Tariffs are regressive, and this political moment in particular seems like one in which regressive taxes will not play well with voters.

And finally, the Trump administration has adopted a highly stimulative fiscal policy, with budget deficits running around 6% per year. It's a procyclical version of the policy rather than a countercyclical one (most stimulus supporters would recommend the latter), but nonetheless it seems clear to me they are using deficit-spending for short-term stimulus. This policy may be able to mask the harmful effects of tariffs on the domestic economy for a while, but at some point a fiscal stimulus approach will run its course and U.S. economic policy will have to deal with the negative impact of tariffs.

Previous posts on this blog have looked at trends in U.S. exports under the Trump administration’s trade policies, focusing on either specific categories of products or on the top U.S. trade partners. This post combines these two elements, offering a comparison of (1) U.S. goods exports to Canada and Mexico in the first quarter of 2026 with (2) the average of these exports in the first quarters from 2022 to 2024, broken down by product category. The data, drawn from the Census Bureau, looks at both the aggregate exports and individual categories exported to both nations, categorized by HS code. 

One takeaway from this data is that exports to Canada and Mexico have moved in opposite directions. Canada’s total exports in the first quarter of 2026 fell roughly $5 billion below the 2022-2024 average, a decline of about 5.7%. The story with Mexico is different, though, with first quarter exports in 2026 rising sharply from the 2022-2024 average, about a $10 billion jump (+12.1%). The same trade environment produced two distinct outcomes for our neighboring countries.

The timing is what makes this comparison useful. The 2022-2024 average gives us a baseline before President Trump’s second term trade policy shuffle, while the first quarter of 2026 lands a full year into his term, after the new tariffs (and their many modifications) have taken effect. Comparing the two periods allows us to get a sense of the magnitude of Trump’s policy changes on trading patterns. (All figures in this post are adjusted for inflation into constant 2026 first quarter dollars using the BLS Export Price Index, so the changes reflect real shifts in trade rather than rising prices.)

Splitting the data into agriculture and industrial goods sharpens the picture, as industrial goods dwarf agriculture in terms of dollar value, driving the story for both nations. For Canada, both sectors decreased by almost identical margins, with agriculture down 5.7% and industrial goods down 5.8%. Mexico moved in the opposite direction, with agriculture increasing by just 0.7% and industrial goods by 13.1%.  

Some of the declines may trace back to Canada's response to U.S. trade policy. Canada placed retaliatory tariffs on a range of American goods in early 2025, and while it rolled most of them back by September, it kept its tariffs on U.S. steel, aluminum, and vehicles in place, which shows up directly in the export numbers below.

A few of the more notable findings include:

• Machinery exports to Mexico increased sharply (+$13.9 billion, a 121% increase), which could reflect near-shoring, as American companies ship equipment south to build out manufacturing.
• Iron and steel exports to Canada are down 38%, which likely reflects Canada’s retaliatory tariffs on U.S. steel and aluminum. Canada kept these counter-tariffs in place even after dropping most of its other retaliatory measures in September 2025, so they were still suppressing U.S. steel exports during this period.
• Vehicle exports to Canada are down $1.66 billion (11.9%), which likely reflects Canada’s 25% retaliatory tariffs on U.S. vehicles. Canada imposed this surtax on April 9, 2025 in response to U.S. auto tariffs, and kept it in place even after dropping most of its other counter-tariffs in September 2025.
• Precious metal exports to Canada more than doubled by $2.5 billion (113%), likely the result of the broad surge in gold exports and record gold prices through 2025–2026.
• A $3.28 billion decrease (-27%) of mineral fuel and oil to Mexico as Mexico's Pemex ramped up domestic refining, a shift unrelated to tariffs.
• Liquor exports to Canada fell $92 million (11.8%), one of the categories Canada singled out early in its retaliation and a recent flashpoint in Canada-U.S. trade relations. 

It's interesting to note the machinery surge in Mexico, since it is the largest single change in the entire dataset. The most likely explanation is near-shoring, that is, the ongoing shift of manufacturing from Asia into Mexico. As companies build and expand factories they need equipment to fill them, and a large share of that machinery comes from the United States. According to the International Bar Association, thousands of U.S. companies have relocated operations from Asia and Europe to Mexico in recent years, with a Dallas Fed report noting that the benefits to Mexico’s economy began materializing in 2022, particularly in electronics and manufacturing. The scale of this shift shows up in the new investment numbers. New foreign investment into Mexico rose over 200% in the first nine months of 2025, jumping from $2 billion to $6.5 billion, according to Mexico’s Economy Ministry. The United States is the single largest source of that investment, which fits the pattern of American firms building out manufacturing capacity in Mexico and buying U.S. machinery to equip it. In other words, the United States is increasingly selling Mexico the tools it uses to build out its own manufacturing base.

The jump in precious metals points to something happening beyond North American trade policy. Gold prices increased by about 42% in 2025, the largest annual gain since the late 1970s, as investors turned to it as a reliable asset amid a falling dollar and global uncertainty. This caused a dramatic effect on U.S. exports since precious metals usually make up about 4% of U.S. export value, but by February 2026 they had reached 15%, becoming the single largest U.S. export overall. That said, I am hesitant to draw too firm a conclusion here. Much of the gold export activity has been concentrated in countries such as Switzerland and the United Kingdom, which makes Canada’s sharp increase harder to explain.

There is also a slower-moving force worth watching. Canadian travel to the United States dropped sharply over 2025, with car trips down about 31% over the year and overall trips to the U.S. falling roughly 24% in the final quarter, according to Statistics Canada. Canadians also spent about 16% less while in the U.S. during that period. The pullback is tied to a broader "Buy Canadian" sentiment, with polling showing that more than half of Canadians report they plan to cut spending on U.S. goods and travel, according to Bank of Canada. None of this shows up directly in export figures yet, but it points to a cooling of cross-border ties that could weigh on trade well after the current tariffs are settled.

In addition to how the broad rethinking of U.S. trade policy by the Trump administration affects exports, in the Canada/Mexico context there is also the issue of the review of the USMCA. In that context, the administration will be pushing specific market access issues in order to boost exports. Whether those efforts will be successful remains to be seen. The timing for completion of the USMCA review is unclear at this point, but a future look at the export data may be the best judge of what was achieved.

Taken together, the data shows our two neighboring nations responding to the same conditions in completely different ways. Tariffs explain a good portion of the story, especially on the Canadian side, where steel and vehicles fell in line with Canada’s retaliatory tariffs, and where precious metals jumped alongside the global gold rush. But the largest movements in the data were found in Mexico, where the surge in machinery reflects near-shoring and the drop in fuel exports comes from Mexico refining more of its own oil. Tariffs set the backdrop, but are far from the whole picture. It is also worth remembering that the first quarter of 2026 was a moment of transition, which means the next set of numbers could tell a different story altogether.

U.S. Exports of Goods to Canada and Mexico by Product Category
January–March, Q1 2026 vs. 2022–2024 Average, adjusted for inflation using the BLS Export Price Index

For economies that impose a forced labor import prohibition—Canada, Ecuador, the European Union, Indonesia, Mexico, and Pakistan; for economies that have undertaken commitments in their respective Agreements on Reciprocal Trade regarding forced labor import prohibitions—Argentina, Bangladesh, Cambodia, Ecuador, El Salvador, Guatemala, Indonesia, Malaysia, and Taiwan; and economies that have imposed a partial regime with the effect of preventing the importation of certain forced labor goods—the United Kingdom; the Trade Representative proposes additional duties of 10% for products of these economies. For all other economies that have failed to impose and effectively enforce a forced labor import prohibition, the Trade Representative proposes 12.5% as the rate of additional duties.

In response to USTR's proposed tariff action, the governments of the affected economies (and the general public as well) had the opportunity to make their case against the tariffs. USTR invited comments on several specific issues, including this one:

• Whether different tariff rates should be applied to an economy where the economy has made a commitment to the United States to impose and enforce a forced labor import prohibition; has imposed a forced labor import prohibition; or has imposed a partial regime with the effect of preventing the importation of certain forced labor goods.

Written comments were due by July 6 and can be found here (there are 1518 of them!). A hearing was held on July 7 through 9. (The day 1 transcript is here; I will add links to the other transcripts when they are available.) [Update: Day 2; Day 3].

It seems to me that, as part of this comment/hearing process, affected governments could make one or both of the following arguments: (1) USTR got things wrong in the assessment of the government's laws/enforcement related to imports made with forced labor, and (2) since the USTR report was issued, the government has taken new actions in this area. On this basis, a government could argue that USTR should reconsider the proposed tariff in relation to its exports.

Canada's situation is particularly interesting, as there has been some movement in that country on new forced labor legislation. At a recent Parliamentary committee meeting on this issue, various Canadian government officials discussed Bill C-35, "An Act respecting the prohibition of the importation of goods produced by forced labour," which was introduced in Parliament in June. In its comments on USTR's proposed tariff action, Canada used these developments to argue as follows:

Canada has established a robust framework to prevent goods produced with forced labour from entering the Canadian market, while continuing to strengthen its enforcement tools and activities.

Building on this commitment, on June 12, 2026, the Government of Canada introduced Bill C-35, An Act Respecting the Prohibition of the Importation of Goods Produced by Forced Labour. This new legislation will strengthen Canada’s ability to identify, intercept and prohibit goods linked to forced labour at the border, while providing certainty and transparency for businesses operating in or trading with Canada.

...

In light of Canada’s existing prohibition, complementary supply chain transparency measures, newly introduced standalone forced labour import legislation and continued commitment to Canada-U.S. cooperation, Canada respectfully submits that there is no basis for the imposition of additional Section 301 duties on Canadian goods. Canada further submits that preserving the current treatment of goods that comply with the Canada-United States-Mexico Agreement would maintain consistency with our shared trade commitments.

Canada is raising these points in its comments on USTR's proposed action. If the changes to its forced labor regime don't get Canada a lower tariff rate in the final action, it will be interesting to see what steps it takes going forward. The process under the Section 301-310 provisions to account for changes to unfair trade practices seems murky to me, but I would think there's an argument that as part of its final tariff action in this investigation, USTR should take into account in some way recent efforts related to forced labor imports by the governments of the affected economies, with an explanation of why these efforts did or did not lead to an adjustment to the proposed tariff.

And then if the Canadian legislative efforts are successful in the coming months, and Bill C-35 becomes law, will USTR take that into account in setting its tariff for Canadian imports? Canada is at a 10% tariff under the proposed action. Assuming this tariff is maintained in the final action, could passage of the new legislation force USTR to take another look, and get Canada a lower rate? And what if implementation of the legislation makes Canada's forced labor import regime as good as, or even better than, the U.S. system? Would that lead to a zero tariff?

Here are the comments of a couple other governments who are also trying to make the case that their recent efforts should help their cause with regard to these Section 301 tariffs:

Japan:

The Government of Japan has been faithfully and swiftly implementing the agreement between Japan and the United States of July 2025 and calls on the U.S. Government once again to duly recognize these efforts by Japan and take appropriate actions.

Cambodia:

The Interministerial Regulation on the Prohibition on Imports of Goods Linked to Forced Labor, which is jointly administered and enforced by the three primary competent ministries as enclosed herein¹ became effective on 1 July 2026 and explicitly provides that “[t]he import, use, circulation, or supply of goods linked to forced labor within the Kingdom of Cambodia are prohibited.”²

<sub>1 Following the constructive and substantive consultative meeting with the Section 301 Committee on Forced Labor held on 15 May 2026 in Washington, D.C., the Royal Government of Cambodia meticulously considered the Committee's observations and relevant international practices. In response, the Royal Government of Cambodia adopted the Interministerial Regulation (a.k.a Prakas) No. 450 MEF.PrK dated 01 July 2026 on the Prohibition on Imports of Goods Linked to Forced Labor, establishing a coordinated regulatory framework to address the importation of goods produced with forced labor. This Interministerial Regulation is jointly administered and enforced by the three primary competent ministries, namely the Ministry of Economy and Finance, the Ministry of Commerce, and the Ministry of Labour and Vocational Training.

2 Articles 7 and 8 of the aforementioned Interministerial Regulation provide that where imported goods are found to be linked to forced labor, their importation, use, circulation, and supply within Cambodia shall be prohibited. Where the importer is found to have imported such goods, administrative sanctions shall be imposed, including the suspension of import and export activities, the suspension of the issuance of Certificates of Origin, and other measures in accordance with applicable laws and regulations.</sub>

Here are some links to the comments of other governments: Australia; Brazil; Chile; Colombia; Costa Rica; Ecuador; El Salvador; Guatemala; India; Indonesia; Kazakhstan; Malaysia; Morocco; New Zealand; Nigeria; Norway; Pakistan; Peru; Singapore; South Korea; Taiwan; Thailand; Uruguay; and Viet Nam.

And the following governments made requests to appear at the hearing: Chile; Ecuador; Guatemala; Guyana; Honduras; India; Jordan; Kazakhstan; Malaysia; Mexico; Pakistan; Peru; South Africa; South Korea; Sri Lanka; and Viet Nam.

ADDED:

In their post-hearing briefs, the following governments offered additional comments: Chile; Guatemala; Kazakhstan; Mexico; Norway; South Africa; Taiwan; Thailand; and Viet Nam.

I met David online before I met him in person. In 2016, I read his paper on “The Signing, Provisional Application, and Conclusion of Trade and Investment Agreements in the EU: The Case of CETA and Opinion 2/15.” I was a rising trade geek in Washington, covering North American and Transatlantic trade, as well as WTO issues. I reached out to David on what was then Twitter to ask him about his paper, and he responded right away. We had a great exchange. In the months that followed we would send each other messages about the state of trade policy, the most recent academic and policy papers, and our shared desire to connect with other folks that wanted to be a positive force for change. 

It wasn’t until June 2017 that we finally met in person at a conference at the Graduate Institute in Geneva. One evening after the conference we hung out at the local haunt many expats will know – the Mr. Pickwick Pub – with Holger Hestelmeyer – where over bags of chips and beer we laughed through the evening despite the conversation focusing on the tectonic shifts in U.S. trade policy at that time. Holger also encountered David during the conference in the most cheerful of moods working to the very last second to refine a presentation he was about to give. 

In 2019, when David was considering whether or not to come to DC, I made the case for it – ”there’s always something going on!” I said. Over the years, we stayed in touch, would send each other messages about “that silly trade NATO idea” before “economic security” became a buzzword. We would often get into deep discussions about the structural and political obstacles to new trade arrangements and cracked jokes about whether the transatlantic trade conflict would continue to sell well. 

These conversations continued in parallel to the great trade community that David helped build online, first through a Twitter chat and then on WhatsApp. He knew this was cool before anyone else did. David was passionate about trade policy and wanted to connect with others that were too. He was a stickler for providing evidence in a debate, and wanted folks to engage with each other for the purpose of generating ideas to make the world a bit better. 

What I remember most about David was his authenticity. He told you what he thought, and he would argue with you about the nitty gritty details of an idea until you were downright exhausted, and then you’d hang out over some good snacks and a drink. He taught me a lot about being true to who you are, and exemplified what you look for in a friend – someone that you not only enjoy hanging out with, but who lets you simply be yourself. I will miss him dearly.

I also know that I’m not the only one that had such experiences with David. The international trade community is surprisingly small, but spread across the world – and David was known by many. I asked a few folks to send me their recollections of David, and I share them below.

S-Curve Economics and the Green Trade Network (Institute for European Environmental Policy) will hold a memorial ceremony in honour of David. The ceremony will be held in a hybrid format, both in Brussels at Norrsken House (Rue du Commerce 72, 1000 Brussels) and online via Teams on Tuesday 14 July, at 3.30pm CEST. To register to attend in-person or online, please use this link: https://www.eventbrite.com/e/1992823333235/?aff=oddtdtcreator. 

Rob Francis, Borderlex:

One of my first jobs as a journalist was to interview David. I remember being quite intimidated but he was extremely knowledgeable and friendly. Whenever I contacted him afterwards he would always give a comment, even if he was super busy. And the comment was always on point and sharp. Just what we needed. He got me on the original Twitter group even though I knew nothing about trade (some things never change) and perhaps more importantly kept me on it. Later he would invite me out for beers but I could rarely go. How I regret that now. A great loss to the trade policy community, but also just a truly nice guy.

Mona Paulsen, LSE:

I will remember David for how unapologetically adamant he was that the discourse move beyond assessments of CBA compatibility with WTO rules. He advocated fervently for work demonstrating that the multilateral trading system could enhance CBA design and function. He created a space for daily engagement and shared experiences among our community. I will continue to make room for such a space as his legacy.

Simon Lester, WorldTradeLaw.net:

What always stood out to me about David was how knowledgeable he was at such a young age. When I first met him, I assumed he was much older, and it wasn't until his tragic and untimely death that I realized just how young he was. I remember going to an NBA basketball game with David and Joost Pauwelyn many years ago, and David kept jokingly saying how he was in awe of hanging out with "trade law legends" like Joost and me. When he said this, I think I responded with a comment about how he was very well-respected in the field too, but I really had no idea how young he was at the time. Even as a relative youngster in a field often dominated by the old guard, he came across as an established expert. His loss means we are all missing out on a great deal in terms of substantive knowledge and discussions (along with the frequent joking around).

Amy Porges

I knew David from his COVID-era stay in Washington. He was devoted to fighting climate change. Also devoted to democracy in trade policy, and particularly to democratic process in the European Parliament. David was generous with his time and thoughts, always willing to discuss, passionate about trade law, the WTO and international institutions. 

Ignacio Garcia Bercero, Bruegel:

The legacy of David can best be measured by the passion and coherence of his work. A strong commitment to the rule of law in international trade that led him to offer equally scathing and even handed criticism of the US IRA and its late epigone, the EU IAA. A principled commitment to decarbonisation, which underlined his defence of CBAM vis a vis one sided criticism together with the recognition that Common but Differentiated Responsibilities had to be given meaning through differentiated carbon pricing. And a willingness to tackle the hard issues like how to construct an effective and equitable agreement to decarbonise the steel sector. I will miss immensely my conversations with David but the legacy of his work will live on.

These writers point to a range of actions that could be taken: A greater use of AD/CVD/safeguards and the Foreign Subsidies Regulation; new instruments on diversification/overcapacity; some kind of Section 301-like instrument; and domestic industrial policy such as Buy European requirements.

What these suggested actions all have in common is their fundamentally unilateral nature, and my sense is the people proposing them see this as the tough approach. If the EU imposes trade restrictions unilaterally, the view may be, China will take Europeans concerns more seriously, and either change its own policies or be faced with more limited access to the EU market.

But how tough is this approach? What if it is tough in the way you feel inside when you do it, but not in its effectiveness? If you don't achieve your desired result, are you really being tough?

It may be, of course, that of the two objectives, changing China's policies is less important than limiting accessing to the EU market, and thus limiting market access is, in fact, the desired result. If keeping Chinese products out is the real goal, then yes, these import restrictions will do the job. You may end up with retaliation that hurts your exports and consumers who are paying more, but it is certainly true that import restrictions will restrict imports. However, my sense from at least a few people is that they would actually like to see China change its policies, and if that's the case the calculation is more complicated.

In thinking about how to induce a change in China's policies, one question to ask is, how different is the proposed approach from what has already been happening for a while now? While the approach is portrayed as a new one to some extent, I think it could also be described as a more intense version of the same thing. To illustrate this, you can see past EU anti-dumping/anti-subsidy actions here. There are a lot of them! Essentially, the new approach takes the existing approach and goes harder with it.

Of course, maybe it's the case that the existing approach just hasn't been implemented strongly enough. Perhaps turning it up to 11 is sometimes the right strategy rather than a punchline. But it may also be that the existing approach simply isn't an effective one, and it's time to think about other possibilities.

One possibility here is WTO complaints. There has been a lot of talk about Chinese subsidies as part of the Chinese economic threat to the EU, and if I were thinking about possible WTO complaints, I might start with this. In particular I would focus on complaints under the SCM Agreement, including those (1) based on the Article 5 "adverse effects" provisions and (2) against export credits that are not justified under item (k) of the Illustrative List. But there are other possibilities too, and people can put whatever specific concerns they have on the table and see where enforcement of WTO rules might be able to help.

Now, I know some people don't think changes to these Chinese policies are possible these days (if they ever were). That may be true, as some of these measures will be sensitive for China domestically, and I can't say for sure how these WTO complaints will play out. However, it is important to note here that even if China doesn't come into compliance, the authorized retaliation that comes with a successful WTO complaint gets you to the rebalancing of trade obligations many people seem to want, and does so within the rules.

Just to spell everything out clearly, when I say "authorized retaliation," that probably means tariffs. So regardless of whether we have a unilateral or a multilateral approach, there may be tariffs involved. But tariffs authorized through WTO dispute settlement can be distinguished from unilateral tariffs in an important way: If China is hit with the authorized tariffs, it can't complain that the EU is just being protectionist, as countries often allege in response to unilateral tariffs or similar measures. The problem with unilateral tariffs is that, no matter how much a government imposing these tariffs wants to believe it is doing so in good faith and for legitimate reasons, that is almost never how it comes across to the people being hit with the tariffs. Instead, the reaction is to accuse the government imposing the tariffs of protectionism. By contrast, with tariffs authorized through the WTO dispute settlement process, while you may hear a bit of whining about the reasoning of the panelists/arbitrators, you won't get much sympathy or support if you argue that the tariffs are protectionist.

Having said all this, I do acknowledge that there may be a perception problem here: For the reasons stated above, WTO complaints may be the most effective approach, but do they feel sufficiently tough? This approach involves getting permission to impose tariffs, and to some people that may seem like a touchy-feely way to do things. If you are following the rules and asking politely, are you really being tough?

It seems to me that it's difficult to measure the "toughness" of any particular course of action, though, and I try to focus more on outcomes and avoid vibes-based policymaking. What is it that Europeans are looking for from China? What I would be looking for is how to induce more market-oriented behavior from China. I would then ask, what is the most effective way to achieve that?

You could, of course, argue that the time for WTO complaints was back in, say, 2018 (when these conversations first started picking up steam), and we are eight years too late for this approach. Perhaps. But on the other hand, if people don't start the WTO complaints now, we could be having the same discussions in 2034.

Reimagining International Economic Law: Reasons, Challenges, and Future Directions

7-9 July 2027, Christchurch (New Zealand)

The Tenth Biennial Global Conference of the Society of International Economic Law (SIEL) will take place in Christchurch, New Zealand, from 7 till 9 July 2027, hosted by the University of Canterbury, with support from the New Zealand Law Foundation Centre for Law and Emerging Technologies at the University of Otago.

Conference Theme

The Tenth SIEL Biennial Global Conference will take place at a time of continuing uncertainty in geopolitics, trade and investment relations, alongside ongoing challenges for international economic institutions such as the WTO. At the same time, new bilateral, regional, and plurilateral agreements, together with rapid technological, environmental, and economic change, are reshaping the global economic order.

Against this backdrop, the Conference aims to bring together scholars, practitioners, policymakers, students and other stakeholders to reflect on the future of international economic law and to debate the key challenges and emerging approaches shaping the field. Held between WTO Ministerial Conferences MC14 (2026) and MC15 (2028), the Conference will also provide a timely opportunity to assess recent developments and future institutional directions.

Key themes are expected to include geopolitical shifts, multilateralism and its discontents, trade and investment protection measures, economic security and sanctions, sustainability and climate change, digital transformation, industrial policy, critical supply chains, and food security. More broadly, the Conference will explore how international economic law is adapting to profound changes in global governance and evolving visions of sustainable economic cooperation.

The Call for Panels, Papers and Poster can be found here.

Enquiries

Please submit any enquiries to SIELGlobalConference@gmail.com

The Agreement between the United States of America, the United Mexican States, and Canada (USMCA or “Agreement”) requires the USMCA Free Trade Commission, composed of government representatives of each Party, to conduct a joint review of the Agreement on July 1, 2026. In accordance with the Agreement, the United States, Mexico, and Canada met virtually today to discuss the operation of the USMCA. The United States did not agree to renew the USMCA in its current form. As a result, the USMCA is not renewed. The United States will continue to engage with Mexico and Canada to address the Agreement’s shortcomings and our trade deficits with these countries. However, the Agreement remains in force pending resolution of these issues or until the Agreement’s termination. As previously announced, the United States will meet with Mexico the week of July 20 for a third round of bilateral negotiations related to the USMCA joint review.

What does this mean exactly? Let's look at the legal context.

Recall that USMCA Article 34.7 provides in relevant part:

1. This Agreement shall terminate 16 years after the date of its entry into force, unless each Party confirms it wishes to continue this Agreement for a new 16-year term, in accordance with the procedures set forth in paragraphs 2 through 6.

...

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.

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.

Practically speaking, what these provisions say is that as part of the joint review of the USMCA at its 6-year mark (which is today), each government is to "confirm" whether it "wishes"/"desires" to extend the agreement for another 16-year term. If all three governments confirm that they do want to extend, the agreement gets the new 16-year term. If not all governments confirm this, however, the term is not extended at the 6-year mark, but the governments can keep talking and decide "at any time" that they do wish/desire to extend; and until there is such a decision, they will conduct annual reviews (along the lines of the review happening right now), and a decision to extend can be made at those reviews as well. If all three have not confirmed their wish/desire to extend by the end of the 16-year period (i.e. 2036), then the agreement terminates.

The language of Article 34.7 is a bit confusing because a failure to "confirm a wish/desire to extend" at the 6-year mark kind of sounds like a decision to end the agreement, but it actually has a very different impact in practice. As noted, if a party fails to confirm this wish/desire at a given moment, it can still do the confirming later on. Thus, a failure to confirm extension as part of the 6-year review is just a temporary state of affairs that could be reconsidered down the road. (For media folks trying to explain what is happening, I sense that this situation has presented some difficulties in getting a clear explanation out there, and I confess that I'm not sure how clearly I explained things above!)

Given the Trump administration's decision today, where do things stand right now on the future of the USMCA? "Totally up in the air" is probably a good characterization.

What are the chances of this administration deciding to extend on the basis of a negotiated deal at some point in the near future (or before Trump leaves office anyway)? Given that the agreement will continue through 2036 regardless of the administration's decision on the extension, I have doubts that it will rethink its position here and express a wish/desire to extend. There may not be enough near-term economic downside for them to feel compelled to agree to an extension.

An important consideration is likely to be how much Canada and Mexico are willing to concede on trade and non-trade issues. If Canada and Mexico give enough, then perhaps the administration would change its mind and agree to an extension. But I'm skeptical this will happen. Thus, the decision on extension of the USMCA could carry over to a future U.S. administration. (How would a different U.S. administration see this issue? As much as I like to speculate, that one's a little too far off, so let's come back to it later!)

For example, in steel, where the U.S. industry has been weakened over the years by competition from abroad, President Trump famously said, "If you don't have steel, you don't have a country." And then putting that declaration into practice, the U.S. steel industry has been the beneficiary of Section 232 national security tariffs, and national security was invoked in the case of the purchase by Nippon Steel of U.S. Steel.

In the tech sector (including AI), by contrast, the U.S. is currently dominant and therefore downplays concerns about the sovereignty and security of others. As an example, here's a recent post from Jacob Helberg, the Under Secretary of State for Economic Affairs, arguing that by pushing for sovereignty in the digital arena, other countries will be choosing to leave themselves behind, and that they should rely on products from the more advanced U.S. industry instead:

These days, few words flatter a government like “digital sovereignty.” It carries the music of independence, the dignity of self-rule, the promise that a nation holds its own destiny in its hands. So it is no surprise that the expression has been pressed into the service of a fashionable, fast-spreading policy debate.

... a growing number of governments, persuaded that independence requires duplication, are drafting national AI strategies to match [a UN proposal]—each resolved to rebuild, inside its own borders, a stack that already exists somewhere else.

It is a seductive vision. It is also backward and counterproductive.

... Picture the conference—there is always a conference—where forty governments rise in turn to pledge a sovereign cloud, a sovereign model, a national champion of their very own. They will applaud one another’s independence. Then they will go home and pour billions into companies built to do precisely what thirty-nine others are doing, in markets too small to sustain even one of them, chasing margins that thin asymptotically toward nothing the moment the next champion is announced. They will have achieved not so-called “digital sovereignty” but a kind of synchronized mediocrity—a planet of subscale clones, each heroically reconstructing last year’s breakthrough while the breakthrough itself moves on without them.

While others rebuild the present, American firms will be inventing the future. ...

...

The champions of digital sovereignty believe they are arming their nations for the future. In truth they are marching them, in perfect and well-funded formation, into the past. Digital sovereignty was never a wall, and it was never a copy. It was always a frontier—and the only nations that will be digitally sovereign in the age of intelligence are the ones bold enough to keep pushing it outward, into the territory no one has built yet.

As this shows, the "haves" in a particular sector (in this case, the U.S. in AI) tend to take a position that is, in essence, "don't worry about sovereignty, it's not that big a deal, and you will hurt yourself by trying to achieve it."

By contrast, the "have nots" will say something like "actually, we are very worried about sovereignty in this area, in part due to concerns about security." As a reflection of this view, take a look at this conversation between Soumaya Keynes of the FT and UK Minister for AI and Online Safety Kanishka Narayan:

Soumaya Keynes

Yeah, so I suppose there is this narrative that the UK is particularly good at this application layer when it comes to AI. But there’s also a concern about sovereignty. Because, you know, if what we’re doing is using the AI and applying it well, that potentially leaves us vulnerable to another actor whose name rhymes with Shmerica, shutting off our access to the AI stack, the AI supply chain overall, right?

And so, there was obviously this event a few weeks ago that freaked everyone out when the US restricted access to Anthropic’s frontier models, Mythos and Fable, to non-US citizens. How do you think about the kind of vulnerability that the UK faces there?

Kanishka Narayan

Well, I think that the diagnosis has to be that we are not in a terrific position from a strategic leverage point of view. The frontier models are developed either in the United States or slightly behind them by a few months in China. And so Britain does not have companies when it comes to frontier language models, and we don’t have the core chip architecture, the Nvidia chips, as well as the memory and packaging.

...

And so the nature of the problem is very stark, and I think it’s a serious question for the future of our economic and national security. And so what do you do about it? And there are two ways I think about this. Broadly, what you’re trying to do is have ... chips on the table so that you can access others as critical inputs.

And you can do that either by having chips on the table in the AI stack, or you can also think about it as a broader international negotiation bundle. We might not just offer AI things, we might offer other things that are important to, say, the United States or to China to be able to secure access. On AI, what we’re trying to do is effectively say we think it’s really critical we build more leverage, and that’s why we are focused on things that give us leverage.

For the UK (and others), then, there are important sovereignty and security concerns related to AI – mirroring to some extent the current U.S. concerns about steel – that can't be ignored.

A few decades ago, similar concerns led to a push by many countries around the world to promote a domestic steel industry. Will we see something similar now in AI? Will countries ignore the U.S. downplaying of sovereignty on this issue, and adopt interventionist policies that aim to develop a domestic AI sector?

Finally, it's worth emphasizing that the varying positions that governments adopt on sovereignty are tied to the state of specific industries, and are somewhat predictable and understandable as governments try to promote what they see as in their interest for each sector at a given moment. As mentioned at the outset, sovereignty is good and important if you are weak in a particular sector and need to justify protection from foreign competitors, but it can be dismissed if you are the dominant player. It would be interesting to try to press them on these inconsistencies, although I suspect that in most cases you will not get much of an acknowledgement of this.

Butts: And just to be clear about this, because I think it's a really important point, and this is one point we definitely agree on: No matter who is in the White House in 2028, these tariffs are going nowhere. In your view?

Lighthizer: ... nobody here has a grandchild in whose lifetime America is going to be free trade, right? It's just not going to happen.

(I assume Butts meant "after 2028" here).

Obviously, we've never had anything close to free trade before, so it's unlikely to happen after 2028 either. But putting that aside, there's an important question here about what happens to the various recent tariffs after Trump leaves office.

On this question, I would say that there is currently a lot of evidence being gathered on how well these tariffs – what Trump did with tariffs in his first term, the tariffs kept in place and sometimes expanded a bit by Biden, and Trump's tariff surge in the second term – have worked. So far, I don't think they are looking great, either for the specific objectives articulated by the Trump/Biden administrations or the overall impact on the economy, and it seems to me that politicians and policymakers who want to get us back to the more moderate system of protectionism that we had pre-Trump will have a pretty good case to make.

Contracting parties shall not, by exchange action, frustrate* the intent of the provisions of this Agreement, nor, by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund.

The asterisk leads us to a note clarifying the term “frustrate”:

The word “frustrate” is intended to indicate, for example, that infringements of the letter of any Article of this Agreement by exchange action shall not be regarded as a violation of that Article if, in practice, there is no appreciable departure from the intent of the Article. Thus, a contracting party which, as part of its exchange control operated in accordance with the Articles of Agreement of the International Monetary Fund, requires payment to be received for its exports in its own currency or in the currency of one or more members of the International Monetary Fund will not thereby be deemed to contravene Article XI or Article XIII. Another example would be that of a contracting party which specifies on an import licence the country from which the goods may be imported, for the purpose not of introducing any additional element of discrimination in its import licensing system but of enforcing permissible exchange controls.

The point of this post is to encourage thinking about how we read current trade restrictions in the context of rules written in the 1940s, given a different system of fixed exchange rates, in which a balance-of-payments deficit meant something else. 

The architects of the ITO/GATT discussed the need for close institutional coordination, as quotas and exchange controls both restricted trade. Therefore, there was a desire to prevent circumvention of the prohibition on the use of quotas by employing exchange controls. The drafters foresaw a cooperative relationship between the ITO and the IMF, which is why the provision addresses the frustration of the intent of the rules governing quantitative restrictions and the intent of the IMF’s Articles of Agreement (entered into force December 27, 1945). Imagining a close partnership between the agencies, the ITO would consult the Fund on financial matters, and ITO Members could seek permission from the Fund to impose exchange controls (as set out in Article XV:9). A concern about the United States voting power in the IMF, owing to the Fund’s weighted voting system, did not go by unnoticed.

The Interim Commission for the ITO outlined a future institutional relationship in a draft 1948 agreement concerning the relations between the ITO and the IMF. The institutions would coordinate on ‘rules governing the conversion by Members of currencies of countries which maintain multiple rates of exchange’, consistent with the IMF’s articles or a special exchange agreement.

Per the 1948 interim arrangement, the IMF would coordinate reports required under Article XIV of the Articles of Agreement, which governed the ‘transitional period’ following the war. In this context, where governments had to ‘adapt to changing circumstances’ members would need to impose restrictions on payments and transfers. In the interest of returning to ‘commercial and financial arrangements with other Fund members’ and the ‘maintenance of exchange stability’ with them, governments were to withdraw exchange restrictions ‘as soon as they are satisfied that they will be able, in the absence of such restrictions, to settle their balance of payments in a manner which will not unduly encumber their access to the resources of the Fund’ (article XIV(2)). As Roessler explained, the function of Article XIV, lacking a definition for ‘transitional’, empowered Fund members to ‘determine [for] themselves when their economic conditions permit currency convertibility.’

Sub-paragraph (4) of Article XIV of the IMF Articles of Agreement (AoA) confirms the IMF’s role concerning exchange restrictions. Though governments could determine for themselves the necessity of restrictions in transitional periods, the IMF could ‘if it deems such action necessary in exceptional circumstances, make representations to any member that conditions are favorable for the withdrawal of any particular restriction, or for the general abandonment of restrictions, inconsistent with the provisions of any other article of this Agreement.’ Fund members would have time to reply and the Fund could then determine whether a member’s decision to maintain restrictions are then ‘inconsistent with the purposes of the Fund.’ If so, the Member would be subject to AoA Article XV(2)(a) – which empowered the Fund to ‘declare the member ineligible to use the resources of the Fund’ on the basis it has failed to fulfil its IMF obligations. If this failure to meet IMF obligations persisted, the IMF member would be ‘required to withdraw from membership in the Fund by a decision of the Board of Governors carried by a majority.’

The IMF thus had oversight over governments’ exchange actions. With a formal agreement between the ITO and the IMF, stronger coordination could have been built into the GATT’s architecture. Instead, the GATT lacked a formalised process for linking up on exchange matters affecting trade. Roessler described the original relationship as asymmetrical, with GATT consultation procedures set out in informal arrangements, made through exchanges of letters between the Chairman of the GATT Contracting Parties and the Fund’s Managing Director. For Roessler, the inability to formalise the necessary coordination meant that neither body could govern exchange actions ‘speedily, discreetly, and authoritatively’ (645). The GATT would have to depend on IMF coordination, for it operated under a different compliance structure.  

One relevant example of that coordination occurred in 1971, concerning the United States’ temporary import surcharges announced by President Nixon. Before the GATT Council, the United States argued that its balance-of-payments (BoP) deficits had created, over a decade, ‘severe’ and ‘persistent’ distortions, combined with ‘eroded’ reserves and a trade deficit, had ‘jolted’ the United States into action. The 10 per cent import tariff rate increase was applied on an MFN basis and would be a temporary measure within a broader programme. The United States took the position that it was ‘entitled under Article XII to apply quantitative restrictions’ but had chosen instead to apply higher tariff rates, ‘which were less damaging to world trade.’

Upon review, the IMF found that ‘in the absence of other appropriate action, and in the present circumstances, the import surcharge can be regarded as being within the bounds of what is necessary.’ When asked, the IMF representative could not offer any alternative measures to improve the United States’ BoP. 

By contrast, the GATT Working Party concluded the trade restrictions were ‘inappropriate given the nature of the United States balance-of-payments situation’ and the ‘undue burden’ placed on other Contracting Parties. Members of the Working Party urged consideration of the ‘full findings’ of the IMF, noting that movements of capital funds of multinational corporations ‘played an important role’ in the United States BoP situation – and the fact that foreign direct investment came with the substitution of US exports with manufacturing facilities abroad. Seeing ‘massive outflow of short term capital’ as ‘the most important and immediate cause’ of the US BoP deficit, import restrictions were just the wrong medicine for the US’s ills. These Working Party Members found that import restrictions were ‘counterproductive in relation to the objective of fostering price stability and increasing export and industrial competitiveness, apart from being damaging to the interest of other contracting parties and undermining the world trading system.’ The Working Party ‘urged’ the United States to continuously review its circumstances and remove the import surcharge ‘within a short time.’

With this brief history in mind, how might it colour a contemporary interpretation of GATT Article XV? In practice, the GATT Council would validate surcharges that complied with IMF recommendations, even if they were also found to be GATT-inconsistent. The IMF held competence and enforcement powers over exchange actions, and therefore, the GATT deferred to its recommendations. 

A few years later, in a separate issue, Spanish representatives engaged in consultations concerning its BoP situation, finding that the GATT BoP Committee had followed the IMF determinations ‘too strictly’ and raised concerns about Spain’s economic development. Some Contracting Parties were sympathetic to Spain’s arguments and ongoing efforts to progressively liberalise. The consultation revealed slightly competing interpretations of Article XV:2, with some representatives understanding the consultations as one element of GATT assessment. However, the United States representative declared that Article XV:2 ‘obliged’ the Contracting Parties ‘to accept the determination of the IMF.’ 

We might read GATT Article XV:4 and the Note in a different light, imagining the GATT Council as understanding its coordination with, and deference to, IMF authority in these exchange matters. Yet the United States case, albeit briefly introduced, illustrates the tensions that can arise, leaving trade governance the loser (so to speak). Roessler criticised the ‘division of labour between the GATT and the Fund,’ finding that GATT ‘Article XV therefore provides no protection against frustrating exchange action approved by the Fund.’

Another issue is whether it matters that the preferred techniques for adjusting exchange rates today were foreseen by the GATT drafters. Do Members today require added rules and criteria respecting each potential technique? Is it enough that there was a commitment to consult and coordinate with the IMF on all monetary matters, regardless of what the drafters knew? How important is it that the exchange system looked wildly different?

In recent discussions with a colleague, I was reminded of the difference between legal history and legal interpretation. I always find it helpful to better understand how the architects of the ITO/GATT legal regime understood the meaning and function of norms and rules, particularly because they foresaw that consultation with the official drafting documents would be useful in early diplomatic consultations. But today, an international lawyer might say such history is contextual and offered only as a subsidiary source in narrow circumstances.

Paul Kahn, thinking of Robert Cover’s work, wrote that the law has many meanings, which explains why the law is what it is. Kahn wrote that ‘a community that understands a unique, normative past will understand itself as carrying that set of meanings into the future.’ If legal interpretation empowers a community to choose meaning, giving in to the idea that norms are ‘essentially contested,’ then there may be no reason to find them outdated, lost in the dusty box marked for the charity shop. On the other hand, we might think more practically and argue that not every term can live on – some are tethered by roots which hold firm, until state practice proves otherwise. The point was not to highlight past wrongdoing through temporary surcharges imposed by the United States (that may have been a happy accident). But beyond interpretation, we might consider the conceptual structure at play and what the group of WTO Members, as a community, finds integral. It may not be then we need to point to the IMF and demand action, or abandon hope of a conversation about China at the WTO.  Instead, history suggests the only way for a community to figure out whether the interpretation reflects the community is to get on with the business of talking about it. Article XV:4 provides one opportunity for doing so, but there may be others as well.

* * *

The WTO and the Fund signed a formal cooperation agreement in 1996, which replaced the informal letters I referred to above. The 1996 agreement sets out how each institution ‘shall’ facilitate ex ante cooperation, including reciprocal attendance at meetings and the provision of necessary information, such as agendas and documents. Thus, for example, the IMF invites a member of the WTO Secretariat to attend meetings on issues with ‘significant trade content’, and, reciprocally, the WTO invites a Fund staff member to attend meetings concerning the IMF’s jurisdiction (see paras 5, 6). Paragraph 10 requires consultation on possible inconsistencies with each institution’s constituting documents.

In studying GATT Article XV commitments, Deborah Siegel described this ‘cornerstone’ of the WTO/IMF legal relationship as ‘one-sided,’ noting that certain WTO obligations lack a corresponding requirement imposed on the Fund. However, Siegel also observed that, in practice, ‘procedures have been put in place to ensure that no actions taken in members’ relationship with the Fund give rise to WTO inconsistency.’ In terms of the WTO/IMF relationship, and in the context of dispute settlement, Rob Howse refined this position: where an exchange measure is ‘not consistent with the IMF Articles,’ the ‘safe haven’ of Article XV GATT disappears, and a WTO dispute settlement panel may consider whether a measure is consistent with WTO obligations – turning the WTO into a ‘residual enforcer for the IMF’ (my emphasis). Both scholars agree that ambiguities remain regarding the governance of the institutional relationship.

While Simon has recently offered several thoughtful reasons why litigation could be a path to an objective assessment of currency practices, it may be that the political economy of both institutions demands that coordination start with more politics.

China benefits from an undervalued exchange rate. A country running large current account surpluses would normally see its currency appreciate as it repatriates the foreign exchange earnings into domestic currency. In turn, this would curb Chinese exports and increase demand for imports. Instead, China’s currency fell as China’s central bank cut rates to offset the property downturn and guided the currency down (Chart 4a). Once pressure from the rising trade surplus meant the renminbi would rise, Chinese state banks – likely under the guidance from the central bank – bought dollars, at times heavily, to resist the currency’s appreciation (Chart 4b). The IMF estimates the renminbi may now be undervalued by 16 per cent.

Along the same lines, Brad and Shahin Vallée had a piece in Foreign Affairs on "How China’s Currency Manipulation Is Warping the World Economy." And the Economist tells us that "China’s currency is undervalued by between 15% and 30%, making its exports cheaper."

This view has been getting some traction with government officials. EU Parliament International Trade Committee Chair Bernd Lange recently made the following argument:

... the undervaluation of the Chinese currency must be addressed. The fixed exchange rate has resulted in an undervaluation of between 20 and 40%, which, alongside other unfair measures, also gives China a significant competitive advantage. The EU must find a way to address this. First and foremost, of course, is dialogue with Chinese partners. However, there can also be joint actions with other countries, particularly Japan and Korea, which are also severely affected by the undervaluation. As a last resort, the EU could consider imposing countervailing duties.

And Finbarr Bermingham of the South China Morning Post reports that "German Chancellor Friedrich Merz signalled a major shift in Berlin’s economic relations with Beijing on Friday, saying the Chinese currency was undervalued by 30 per cent, well above the International Monetary Fund’s estimate of 'about 16 per cent'." He also notes that "Merz pointed to the Plaza Accords as an example of how such matters could be addressed."

In considering how the EU should handle this, I thought it was worth mentioning that Chinese currency undervaluation was a big topic in the U.S. about 15-20 years ago, and there were lots of IELP blog posts about it. The "currency disputes" tag for the blog is here (with the earliest post back in December 2007!), listing all of the posts on this topic, but let me highlight some of the key ones:

• A number of experts weighing in on the consistency of China's currency policy with WTO rules. 
• Excerpts from a House Ways and Means Committee hearing on the China currency issue (additional details here).
• Excerpts from a CRS report on the WTO legal issues involved.
• Two posts about GATT Article XV:4.

So, for any Europeans trying to figure out what to do on the issue of currency undervaluation, it may be worth taking a look at previous thinking on how WTO rules might apply.

As far as I can tell, though, the European discussions do not involve the possibility of WTO complaints. This seems strange because the EU and China are both parties to the MPIA, so WTO dispute settlement still functions as between them. And the EU has been willing to bring complaints on other issues against China in recent years. Why not consider a complaint on currency undervaluation?

To be clear, the possible WTO complaints in this area all come with a good deal of uncertainty. The provisions are a bit vague on key points and the outcome of a dispute based on China's currency practices is unclear. Nevertheless, it seems to me that WTO obligations in this area should be part of the conversation.

If the approach taken is going to be something other than a WTO complaint, however, based on the statements above from government officials, it sounds as though there are several options under consideration: Dialogues, joints actions, and countervailing duties.

With dialogues, the question I would ask here is: How often do these approaches work to change a country's practices? There's a long history of these efforts, and I'm not sure how successful they have been, on currency or other policies. Would the circumstances here allow China to quietly make changes to the practices that are at issue? I don't have a good sense of this. Merz mentioned the Plaza Accord, and perhaps this could be one version of the outcome of a dialogue.

In addition, Lange talked about "joint actions" with other countries, but I'm not sure what those actions would involve. Maybe this is the better Plaza Accord example?

And then on countervailing duties, as with dialogues, it is worth considering whether this is likely to lead to changes in government practices. I'm not sure CVDs have a great track record in this regard. It's also worth considering how much effort would have to go into defending the CVDs in litigation. It's an open question whether CVDs as a response to an undervalued currency are allowed under either WTO law or EU law, and the EU would likely to have to put in a good deal of effort defending its actions in both WTO dispute settlement and EU courts.