U.S. Trade Policy Tools

Why does the United States negotiate trade liberalizing agreements?

The United States negotiates trade liberalizing agreements for economic and commercial reasons, as well as foreign policy and national security reasons.110 Objectives include

• Encourage trade partners to reduce or eliminate tariffs and nontariff barriers and increase market access for U.S. exporters;

• Gain competitive advantages for U.S. firms over foreign competitors in third country markets;

• Increase access to lower-cost imports that offer domestic and industrial consumers a wider choice of products;

• Encourage trading partners, especially developing countries, to liberalize their trade and investment regimes, and thereby improve the efficiency of their economies and their integration with the global economy;

• Influence other countries in establishing standards that align with U.S. practices (e.g., intellectual property, labor and environment); and

• Strengthen alliances, forge new strategic relationships, and deepen U.S. presence and influence in a geographic region

What are the types of trade agreements?

The United States participates in three major categories of trade agreements:

• Multilateral agreements are negotiated in the World Trade Organization (WTO), and include all 164 WTO members.

• Free trade agreements (FTAs) are negotiated outside the WTO and can be divided by the number of participants. Bilateral FTAs involve two countries, while regional FTAs, such as the U.S.-Mexico-Canada Agreement (USMCA) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP-11) involve three or more, typically in a geographic region.

• Plurilateral agreements involve more than two countries but not all WTO members and typically focus on a specific sector, such as the Information Technology Agreement (ITA) or Government Procurement Agreement (GPA).

How many free trade agreements (FTAs) does the United States have?

The United States currently has 14 comprehensive FTAs in force, covering 20 countries, and a partial-scope agreement with Japan covering limited tariffs and digital trade.

What trade agreements have been recently negotiated?

The Trump Administration made U.S. trade agreements a focus of its trade policy. After withdrawing from the proposed Trans-Pacific Partnership in 2017—a regional FTA negotiated during the Obama Administration with 11 other countries in the Asia-Pacific—the Trump Administration made minor modifications to the existing U.S.-South Korea (KORUS) FTA, enacted a new limited deal with Japan covering about 5% of bilateral trade, and concluded other so-called mini-deals with Brazil and Ecuador that were limited in scope but intended to enhance trade relations in the region. These actions, undertaken without legislative approval, have led to debate within Congress over the future scope of U.S. trade agreements and presidential trade agreement authorities.

The Trump Administration also negotiated the U.S.-Mexico-Canada Agreement (USMCA), which entered into force on July 1, 2020, replacing the North American Free Trade Agreement (NAFTA). USMCA addresses new issues, such as digital trade and state-owned enterprises, increases North American content requirements for vehicles, expands market access in agriculture, and reduces U.S. obligations in certain areas, such as investment and government procurement. The Trump Administration also initiated but did not conclude FTA talks with the EU, the United Kingdom, and Kenya.

The Biden Administration has stated its intent to focus on enforcement of existing U.S. trade agreements and domestic economic policy issues before seeking new trade negotiations.

How do U.S. FTAs differ from FTAs negotiated among other countries?

Historically, FTAs negotiated by the United States have been more comprehensive—both in terms of tariff coverage and the overall scope of enforceable commitments—than those negotiated among other countries. However, the Trump Administration shifted this policy somewhat through its use of partial-scope agreements, particularly in the case of the “Stage One” U.S.-Japan agreement, which covered only 5% of bilateral trade. In general, U.S. FTA rules and obligations also go beyond those established in the WTO. Nearly all U.S. FTAs include not only the elimination of the majority of tariffs on trade in goods, but also reduction of barriers to services trade, rules on foreign investment, intellectual property rights protection, commitments on opening government procurement markets, and enforceable provisions on labor standards and the environment. The United States has sought to establish new trading rules within recent trade negotiations and agreements on emerging issues like digital trade and state-owned enterprises.

What are Trade and Investment Framework Agreements (TIFAs)?

A Trade and Investment Framework Agreement (TIFA) is an agreement between the United States and another country or group of countries to consult on issues of mutual economic interest in order to promote trade and investment. The USTR is the U.S. lead representative in TIFA talks. The United States has more than 50 TIFAs, most of which are with developing countries. The United States and its TIFA partners can agree to establish a joint ministerial-level council as the overall mechanism for consultations, as well as issue-oriented working groups. A TIFA is a nonbinding agreement and does not involve changes in U.S. law; therefore, TIFAs do not require congressional approval. In some cases however, TIFAs have led to FTA or bilateral investment treaty (BIT) negotiations.

What is the General Agreement on Tariffs and Trade (GATT)?

The General Agreement on Tariffs and Trade (GATT) was created in 1947 as a part of the post- WWII effort to build a stable, open international economic framework. The GATT was not a formal international organization, but it became the principal set of rules governing international trade for 47 years, until the creation of the World Trade Organization (WTO) in 1995. With some slight modifications, the GATT continues to be applied today. The core principles and articles of the GATT committed the original 23 signatories, including the United States, to lower tariffs on a range of goods and to apply tariffs in a nondiscriminatory manner—the so-called most-favored nation, or MFN principle. Although the GATT mechanism for the enforcement of these rules or principles was viewed as largely ineffective, the agreement nonetheless brought about a substantial reduction of tariffs and other trade barriers.

What is the World Trade Organization (WTO)?

The WTO is a 164-member international organization that administers the trade rules and agreements negotiated by its members, including the United States, to eliminate barriers and create nondiscriminatory rules to govern trade. It also serves as a forum for trade liberalization negotiations and dispute settlement resolution. The United States was a major force behind the WTO’s establishment in 1995, as well as the new rules and trade agreements that resulted from multilateral trade negotiations (Uruguay Round, 1986-1994). The WTO succeeded and encompassed the 1947 General Agreement on Tariffs and Trade (GATT). The WTO administers a number of agreements and separate commitments under the GATT, the General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), and others. It also oversees plurilateral agreements and negotiations among subsets of WTO members, such as the Information Technology Agreement (ITA).

The Doha Development Agenda, the latest “round” of multilateral trade negotiations, was launched in 2001, but ended in stalemate amid significant differences among members, with no clear path forward. At the most recent Ministerial Conference in 2017, WTO members did not announce major deliverables, leaving the stakes high for the next meeting. In 2020, members were forced to postpone the 12th Ministerial to 2021 due to the COVID-19 pandemic. Members have committed to complete or make significant progress on ongoing talks, including on fisheries subsidies, and advancing e-commerce and other areas.

The WTO’s effectiveness as a negotiating body for broad-based trade liberalization has come under scrutiny since the collapse of the Doha Round. Several members believe the WTO needs to adopt reforms to continue its role as the foundation of the global trading system, and are exploring aspects of reform and new negotiations. Reforms also aim to improve the working of the WTO’s dispute settlement system, in large part driven by U.S. actions. Under the Trump Administration, the USTR withheld approval for appointments to the Appellate Body (AB)—the seven-member body that reviews appeals of dispute panel findings—amid concerns over “judicial overreach” and certain procedures and practices. As a result, the AB ceased to function in December 2019, raising questions about the effective enforcement of WTO rules moving forward.

How are disputes resolved at the WTO?

A WTO member may initiate dispute settlement (DS) proceedings under the WTO to challenge another member’s trade practices that allegedly violate a WTO agreement. The DS process begins with consultations between the two parties. If the consultations fail to resolve the dispute, the member may request a panel adjudicate the dispute. A panel decision may be appealed to the Appellate Body (AB), although decisions appealed since December 2019 remain in limbo as there are no AB members to adjudicate them. If the defending member is found to have violated a WTO obligation, the member will be expected to remove the challenged measure within a reasonable period; otherwise, the prevailing member may request authorization from the WTO to take temporary retaliatory action, such as increased tariffs, or seek compensation.

Since 1995, nearly 600 dispute settlement complaints have been filed in the WTO. The United States has been an active user of the WTO dispute settlement system and, among WTO members, has been the complainant or respondent in the most WTO cases (see Figure 15). Several pending WTO disputes are of significance to the United States, including challenges by a number of countries to recent tariff measures imposed by the Trump Administration.

WTO decisions do not have direct effect in U.S. law. Thus, if a panel finds a U.S. statute, policy or practice to be inconsistent with U.S. WTO obligations, the findings may not be implemented except through U.S. legislative action. Where an administrative action is successfully challenged, USTR decides what, if any, compliance action will be taken. If there is sufficient statutory authority to amend or modify a regulation or practice or to issue a new determination in a challenged administrative proceeding, USTR may direct the agency involved to make the change (provided certain statutory procedures for such actions are followed). In some cases, the United States may pay compensation to the complainant country instead of changing U.S. rules or regulations. Traditionally, the United States generally sought to comply with WTO decisions against it, partly to ensure reciprocal compliance from other countries in dispute ruling favorable to the United States. However, the United States has appealed adverse panel rulings to the AB decided in 2020, which currently is not functioning, which some perceive as a way to potentially avoid compliance.

How are disputes resolved under U.S. FTAs?

U.S. FTAs establish procedures to resolve disputes in both state-to-state (STS) and investor-state (ISDS) fora. Similar to WTO dispute settlement, U.S. FTAs aim first to resolve disputes through consultations; otherwise, a panel can be requested to adjudicate the dispute. Once a decision is issued by the panel, the offending party is expected to come into compliance or can face possible suspension of trade benefits or other remedies. If a dispute is common to both FTA and WTO rules, a country may choose the forum in which to bring the dispute. STS dispute settlement has not been frequently used under U.S. FTAs—three cases have been decided under NAFTA and one under CAFTA-DR—and disputes are usually resolved via consultations. Most other U.S. disputes with FTA partners have been adjudicated under WTO rules, if applicable. However, USMCA dispute settlement contains changes in part to prevent panel blocking, thus assuring cases are heard. United States is already using STS in a dairy dispute with Canada. USMCA also contains a novel “rapid response” enforcement mechanism for labor disputes. Most U.S. FTAs also contain a separate dispute system for investment-related provisions, called investor-state dispute settlement. (See “What is investor-state dispute settlement (ISDS)?”). The USMCA also continues a binational panel system to review an administrative agency application of a country’s trade remedy laws hitherto unique to NAFTA.

 

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