Trade Agreements: Deal or No Deal

https://www.youtube.com/watch?v=B5Ili9kse8Q&t=112s 

Take that deal! Take that deal! Take that deal! 

Deal or no deal?

https://youtu.be/owdIZkV_KZs?feature=shared&t=110 

We have to win.

https://youtu.be/O5s3Oj2cPgc?feature=shared&t=54 

We have to make a deal.

https://youtu.be/WQrwgSe2pJA?feature=shared 

It’s America’s game.

https://youtu.be/fqhIpof8uGg?feature=shared&t=136 

You know everything that had to happen for this to happen?

Oh my god!

Welcome to the show everyone and today let’s talk about deals! Specifically, trade deals. 

As President Trump continues to raise and implement tariffs on everyone from our adversaries to our allies, it has become even more important to know what trade agreements we currently have, so that we know which are up for renegotiation.

We are at a crucial moment, one that could potentially reorient or at least fundamentally shift the path of global trade. This could change the way the world looks at U.S. trade policy, push allies to trade with adversaries, and even lead to a recession on par with the Great Depression. 

As CFR president and former Trade Representative, Michael Froman, said in The World This Week newsletter, "Uncertainty is upon us.” That lack of certainty now extends to trade deals, one of the pillars of global trade coveted by many U.S. partners. 

I’m Gabrielle Sierra, and this is Why It Matters. Today, we continue with our special series unpacking global trade. So spin the wheel, because when it comes to trade agreements, there’s no telling where the ball will land.

Gabrielle SIERRA: Inu, friend of the pod, welcome back to Why It Matters.

Inu MANAK: It is fantastic to be here. Thanks for inviting me. 

This is Inu Manak. She’s a fellow for trade policy here at CFR. Inu has been chronicling Trump’s trade war, paying especially close attention to global trade deals.

SIERRA: Alright, let’s dive straight in here. What is a trade agreement?

MANAK: Well, a trade agreement is a basic agreement between two or more countries about how to regulate their trade and also sometimes their investment relationship with each other. It can include rules on lowering tariff barriers. It could include rules on cooperating on regulations such as standards like crash tests for vehicles or the ingredients in your sunscreen. And it also includes things like intellectual property, environmental, and labor rules too. So, a lot can go in there and they're really important to have these, and it's some of the ways that we sort of figure out how to create a stable relationship between the partners involved and create some predictability in what they're trading with each other. So, overall trade agreements benefit the economy because they allow for lower cost inputs for producers and greater choice for consumers. 

SIERRA: And then, what is a free trade agreement? Are there non-free trade agreements?

MANAK: Well, a free trade agreement basically reduces barriers to what we call substantially all trade. This means that they're comprehensive deals. So, they'll cover things from industrial products to agriculture to all sorts of other things we trade like services too. 

The United States actually only has 14 free trade agreements with 20 countries. And there are three main ways these trade agreements are negotiated. 

One, a multilateral trade agreement. This is an agreement between many countries, and these are designed to benefit everyone, even those not included in the agreement itself. 

Two, a plurilateral trade agreement. This is an agreement involving three or more countries. These agreements lower barriers for just those in the agreement, no one outside of it. 

And three, a bilateral trade agreement. This is the most typical of the agreements, and you’ve probably heard about these the most. It involves trade deals between two countries. It is also called the preferential trade agreement. 

And as Inu said, these cover more than just trade, they can touch on  everything from foreign investment to intellectual property rights. Therefore they can influence labor standards, environmental regulations, and even e-commerce rules. 

SIERRA: We’re saying “countries” but that is pretty broad, so who exactly is making these agreements?

MANAK: The U.S. trade representative is the chief trade negotiator. This is a role that's a political appointment from the president, and then he is confirmed by Congress to serve in that role. And we have other agencies that get involved in the trade negotiation process depending on whether the issue that is being covered there touches their area of expertise. And then most importantly, other than Congress, you have all the outside stakeholders in the U.S. public. So, you're talking about businesses, associations, regional groupings, and then individual consumers who can all play a role in shaping trade policies. So, it's a really all-of-country effort, honestly, to actually negotiate a trade agreement. And you kind of don't know what the impact's going to be or what you should be doing unless you talk to people, figure out how it affects them, because you can't do it after the fact. You could have some pretty unintended consequences if you do it that way.

SIERRA: Is this the way it has always been or have things evolved as time has passed?

MANAK: If you look at the history of tariff delegation and trade authority delegation to the president, Congress basically gave a lot of its authority away in the thirties in response to what was a huge protectionist action that Congress itself initiated. So, the infamous Smoot-Hawley tariffs which are mentioned in Ferris Bueller's Day Off, one of my favorite films of all time.

https://youtu.be/yuOHbyuanbY?si=5Ft0zjpdSTZ-VBw6&t=29

Did it work? Anyone? Anyone know the effects? It did not work and the United States sank deeper into the Great Depression.

MANAK: Congress essentially had this huge tariff hike. They realized it was a big mistake and they wanted to roll it back, but they also recognized that they had to give away some of their power and delegate it to the president who unlike Congress has a national constituency. 

In theory, this felt like a more democratic system. Because the president answers to everyone, whereas congress can be influenced by lobbying in their specific districts. 

MANAK: But Congress has something else too, and we see this ratcheted up a little bit more during the Cold War that they give the President a lot more authority to actually address economic issues that may be related to national security concerns. Now in the past, the norm has been that you kind of have to be very careful in how you use these tools, right? That you should only really use these tools when there is a legitimate national security concern and that's when you would take action. But what we've seen in the last eight years in fact, is that these tools have been used quite a bit for things that have nothing to do with national security. So, I think that that's where there's been a big change and it was a change that was never intended by Congress.

One of the tools Inu is talking about is known as IEEPA or the International Emergency Economic Powers Act of 1977. This grants the President sweeping economic power during an emergency. Most recently, we saw President Trump use IEEPA to deploy 25 percent tariffs on Canada and Mexico to stem the flow of fentanyl over the border.

Trade experts call this the “nuclear weapon of trade” because very little can be done to stop the President from using it.

MANAK: President Trump did this in his first term with tariffs on steel and aluminum, and he's done that now again in his second term with tariffs on automobiles and blanket tariffs on Canada and Mexico and China as well in the name of national security. So, yes, the president can do a lot when he claims national security is the issue.

SIERRA: Let’s get further into that realm actually. So, you've become CFR's sort of can he do that person. So, let's play a quick game, if you will, of ‘can he do that?’ So, I'm going to ask you some rapid fire questions about what the president can and cannot do when it comes to trade. Here we go! Can the president unilaterally arrange or renegotiate trade agreements?

MANAK: Technically the president can ask to renegotiate a trade agreement, but if it has gone through Congress for approval, Congress then needs to approve any changes that he makes to it.

SIERRA: Can the president withdraw from an existing trade agreement without Congress?

MANAK: So, existing trade agreements that have been approved by Congress, the president can't unilaterally withdraw from them. He can basically threaten to withdraw as President Trump has done, but at the end of the day, he needs Congress on his side.

SIERRA: Can the president direct the U.S. trade representative in trade negotiations?

MANAK: Absolutely. So, the president sets the trade policy agenda and he gets to decide what his administration wants to pursue. And so he can tell the trade representative what his priorities are and then get him to go ahead and negotiate those.

SIERRA: Can the president unilaterally impose tariffs without approval from Congress?

MANAK: Unfortunately, yes, the president has a lot of authority to set tariff rates without Congress. The president has a lot of discretion to do a lot of things in trade, not just tariffs, but like export controls, meaning you restrict things that are exiting the country and he has a way to apply other sanctions as well.

SIERRA: Okay and finally, this one is really a can “they” do that. Can the judiciary and or Congress retroactively veto executive trade orders?

MANAK: Absolutely. So, Congress has the ultimate authority when it comes to regulating trade with countries. So, Congress could have a vote and take away the president's authority. They could narrow the scope of what he could do and they can repeal some of his actions as well. The courts can do this too. We have several court cases already that have been filed against President Trump's recent actions, and the courts can also reverse a lot of those decisions. But again, they tend to be very discretionary about doing this and let the president do a lot of what he wants to do if it entails national security.

SIERRA: Well, you've won, the game was rigged because you knew all the answers, but you've won this spot on Why It Matters. And let's see, a council on foreign relations pencil, I have a World Next Week mug. Anything I can see in my line of sight, it's yours for running us through this quickly and efficiently.

MANAK: I could definitely use a new mug and maybe a pencil too. So, thank you.

SIERRA: Let’s transition from can HE do that to President Trump specifically. What effect has he had on all of this?

MANAK: President Trump has really shifted in many ways the approach to trade. So, typically when the president wants to pursue a certain trade policy, he will come up with a bit of a plan, ask Congress for what's called trade promotion authority, which allows him to submit agreements to Congress for an up or down vote so they wouldn't make amendments to it when it's submitted. The reason you would do that is because why would a trading partner negotiate something if it would be changed by Congress later? So, it's an important innovation in U.S. trade policy to do this. So, what we've seen in the last eight years is that we really haven't seen a good use of trade promotion authority, with the exception of the renegotiation of the USMCA, which fell under trade promotion authority from the previous administration, the Obama administration. That expired in 2021 and has never been renewed. The importance of trade promotion authority is that Congress basically sets objectives for the president and priorities based on all the different interests of folks around the country. And then the president has to basically try to figure out how to square those and then negotiate those deals with whoever he wants to negotiate and then submit them to Congress. So, it's really important that Congress is involved and then stakeholders involved throughout the process. What we're seeing today is quite different.

https://www.youtube.com/watch?v=c2bZto8YvEc&t=208s 

Donald TRUMP: My fellow Americans this is Liberation Day. Been waiting for a long time.

https://www.youtube.com/watch?v=E6uFW0gHwXU 

Donald TRUMP: In a few moments I will sign an historic executive order instituting reciprocal tariffs on countries throughout the world. Reciprocal. That means they do it to us and we do it to them.

MANAK: This president is using his executive authority and issuing proclamations and executive orders to regulate trade. He's doing this without that consultative process. Congress doesn't know about what he's going to do until he does it. In fact, for President Trump, his cabinet doesn't know what he's going to do until he does it and announces on Truth Social. So, this is really ad hoc trade policymaking, which is unlike anything we've really seen before. And most importantly, it's the transparency that's really shifted in sort of modern trade policy making that we don't really have the involvement, not just of Congress, but all the other stakeholders they had impacted by this. We're talking about U.S. businesses and consumers, expert groups, all of those folks who have an important role to play in shaping a trade policy that benefits all of the country instead of just a select few. So, I would say that's the biggest thing that we've seen shift. But in addition to that, we just don't see President Trump and even President Biden having engaged in some of the international institutions like the World Trade Organization, where we typically would negotiate big treaties among a big set of countries. And so traditional institutions, whether they be multilateral or those plurilateral or bilateral, we're just not engaging in them in the same way anymore.

SIERRA: Sort of become a move fast, break things attitude for an area of focus that I'm sure you did not expect to take on that pace.

MANAK: Absolutely. I mean, trade negotiations are long and boring. Right? They take a really long time to think up the structure of what you're going to negotiate. There's so much prep for the negotiators to figure out how they're going to sort out the trade-offs between the things. They usually come up with a list of things they're going to concede, things that they want from each other, and it's a back and forth, right? So, it's a cooperative sort of discussion that you have. And what we're seeing today is, hey, you do this, otherwise we're going to hit tariffs on you. That's really not traditionally how you'd think about trade negotiations at all. It's sort of like negotiating with a gun to your head and whoever wants to do that? 

SIERRA: Okay so he is upsetting norms and changing things sort of all on his own. Congress doesn’t really seem to be stopping him at least as of now. So, what are the important agreements that we should really be keeping an eye on?

MANAK: I think the most important agreement to keep an eye on right now is the US-Mexico-Canada agreement. That was the agreement that used to be NAFTA, the North American Free Trade Agreement, which President Trump renegotiated in his first term. Now the reason it's important is because it's up for review next year, but the Trump administration has decided to sort of kick off that process already for renegotiating it. Now why are we potentially renegotiating or reviewing it? USMCA has a provision in it called a Sunset Clause that basically requires the agreement to be reviewed after six years from its entry into force, which is 2026. And if the parties can't decide to continue it, then it expires in 16 years. So, it would just, poof, disappear in 2036 if they did not agree to it. Now it's really important because Canada and Mexico are our two most important trading partners. We trade a tremendous amount with them every single minute crossing our border. We build cars with them, we have an integrated energy infrastructure, they're really critical trading partners. So, this is why this agreement is so important. And so this is going to be up for review and what happens to that, how narrow that review is, how broad it is will really have an impact on the day-to-day lives of many Americans, including their gas prices and the vegetables that they buy at the supermarket. The second thing I would pay attention to is what happens at the World Trade Organization. Now I know it's not really a cool thing to talk about anymore. The WTO was kind of like yesterday's news.

SIERRA: Anymore? Was it cool back when?

MANAK: Maybe it's cool to me, but I am definitely a trade nerd and I just love talking about institutions. But, you know, the WTO is still doing a lot of stuff. And one actually important thing that the Trump administration will probably be interested in are the rules it's been negotiating for quite some time on digital trade. So, when you open up iTunes or Spotify, that's a digital trade. There are digitally delivered services that you can get. Let's say you're using some sort of software that helps you communicate with someone around the world, or you make a phone call with someone, a zoom call with someone who's helping you, maybe, style your hair. That's a digitally delivered service, because you're actually not physically meeting that person. Now, the U.S. is a global leader in the digital trade landscape. We have tons of tech companies that are really interested in ensuring that the rules of digital trade reflect US interests and priorities. And if we're not there in Geneva stirring those conversations, then it may not reflect what's in the best interest of US companies. So, I think that's an instance where we may actually get that deal over the finish line next year when the WTO countries meet to finalize this. So, let's see what happens. But I do think that'll be an interesting one to watch.

SIERRA: Let's talk briefly about tariffs. We've done a lot on tariffs. Everyone knows a lot on tariffs, I mean, I was at a brunch this weekend with a friend of mine who's an interior designer, and suddenly we're sitting there talking about tariffs. It feels like tariffs are everywhere, and we've also gone through a bit of tariff whiplash. So, why do you think tariffs are the tool of choice for Trump? 

MANAK: It's a great question, and honestly, I personally apologize for everyone having to talk about tariffs on their wonderful Sunday brunches. That sounds like an awful brunch, but tariffs are really in vogue again. They haven't been in vogue for a really long time in the United States, and President Trump really likes tariffs. He's called tariff the most beautiful word in the English language, and he said over and over again that he just likes tariffs. So, I don't think it's more complicated than that, to be honest. I don't think he has any sort of grand strategic vision for how to use them or thinks a lot about how they can be used more effectively because all the tariffs that he's put in place have been really blunt instruments, particularly the ones that he levied against Canada and Mexico, our closest trading partners, which basically affect us quite a bit.

And so that's something that I think has not been really thought through. Now, I don't think any trade expert would ever counsel any president to impose blanket tariffs on all imports at all, or even against any country. But let me just say one important thing that I think we should keep in mind, and I think maybe why trade is such a popular topic now, and tariffs are the subject of a lot of personal conversations, you know? The way of thinking about tariffs as a tool, it's kind of out of step with the reality of trade today. Take an iconic product like the Ford F150. This is like your American truck. You can't get more American than this. 

https://www.ispot.tv/ad/59pO/ford-f-series-americas-best-selling-trucks-for-46-years-t2?utm_source=chatgpt.com 

F series, America's best selling trucks for 47 years straight. There are so many reasons why...

MANAK: In addition to the American labor components, Ford relies on a lot of foreign parts to make the F150. About one third of all the parts in that truck are from abroad, and then it's sold in the United States into countries around the world. Now, U.S. firms that trade in goods also support half of all the jobs in the US economy, and almost three quarters of those jobs come from firms that both export and import products. A lot of our economic value comes from firms that trade. And this is something that is really impacted by tariffs if you increase them. 

SIERRA: It seems like the response to this is to put things on hold. Are you finding that things are just sort of being put on hold until the decisions become clearer, things level out? 

MANAK: Yeah, I mean, I think some firms are thinking about how they can just wait on long-term decisions until they figure out where this is going to land. Because at the moment, president Trump has ordered his cabinet to essentially go out and negotiate a bunch of trade deals with our foreign partners, and some folks are just going to wait this out and see what happens. Now the reality also is that even if you're a big company like Walmart, you can't hold onto that much inventory for that long. So, eventually stuff is going to run out and the shelves are going to go empty, and that might start happening pretty soon. But even if you're a small business, that's even a much more challenging situation to be in because I doubt you're stockpiling in your house if you're running a business out of your house or if you have a small shop, there's very little you can do there. You're not going to buy in big volumes because that's going to be a cost you're going to have to eat up front that you may not be able to afford. And so it pushes you into making these very difficult decisions about your business. And for some folks it means closing up shop, laying off workers, and we already have seen some layoffs percolate down the economy. 

The thing is this approach where we're basically slapping a big tariff on forcing people to negotiate the table and then trying to make them accept things that they don't want to accept, what that's going to do in the long term for the United States is actually erode its soft power because basically you're not really going to want to trust the United States anymore if you're willing to rip up old agreements and also just be kind of a bully when it comes to negotiating new ones. So, I think for our trading partners, even those who are willing to come to the table and negotiate, I mean, they're doing that because they appreciate their relationship with the United States.

Recently Trump struck what the White House called a “historic trade deal” with long-time trading partner the U.K.

https://www.youtube.com/watch?v=5ZlkxveGYPY 

With this deal the UK joins the United States…

However, experts say the agreement significantly undercuts what the United States could have attained through traditional trade agreements. Trump’s universal 10 percent reciprocal tariff still remains on everything not specifically spared in the deal, meaning the effective U.S. tariff on goods remains much higher than it was before “Liberation Day.”

Not long after the U.K. deal, the U.S. and China reached a temporary, 90-day agreement mutually reducing tariffs by 115 percent.

But as is with many of the trade deals Trump is trying to carve out, uncertainty still looms for business owners, investors, and the American people. The 90-day duration of the U.S.–China agreement and the early stage of the U.K. negotiations still leave room for potential changes.

MANAK: A lot of these are long in economic integration partnerships that we've had, and they respect not just the United States, but the American people, and they want to have a deal with all of us. I think that's why they're showing up. But at the end of the day, they have their own interests and they have to sell that agreement back home too. So they have to make sure that the deal is balanced. And I think right now what they're seeing when they look at the United States, it's sort of like, you know, that friend that you're always making plans with for dinner and then they never show up or they bail on you at the last minute.

SIERRA: Flaky.

MANAK: Which is always changing. Yeah, very flaky. You cannot predict. And so what happens over time with that friend, you're just either not going to invite them to things and you'll go and negotiate or hang out with other people on your own, or you'll basically invite them with the expectation they're just not going to be there, and you'll just be disappointed every time if you expect them to show up. So, I think it's a fundamental change to the way the rest of the world sees us, and that should be really concerning.

SIERRA: Yeah. Oh God, no one wants to be the flaky friend.

MANAK: Oh no, I never am the flaky friend.

SIERRA: No, same.

MANAK: I always show up exactly when I mean to.

SIERRA: Okay so as we wrap up, what do you say to those who feel like we should have fewer trade agreements and really focus on making everything here, right? Keeping our goods and services all local so that we can save American jobs?  

MANAK: The impact of trade agreements on the economy are really complex, and they can vary a lot. So, overall trade agreements benefit the economy because they allow for lower cost inputs for producers and greater choice for consumers. But trade agreements also lead to a lot of competition right? Because you open your market, then you have all these other products coming in and all these other services coming in. And so some sectors of the economy may not be able to compete as effectively with this new competition. But technological innovation such as automation and then gains from productivity also lead to job losses. And that's not because of trade. In fact, manufacturing employment has been declining since the 1970s, well before China actually entered the global economy. And the rate of decline in the US mirrors that of other high income countries like Germany for example, which is a manufacturing powerhouse. As countries get richer, they tend to shift employment from manufacturing to the services sector. And that's sort of what we've seen here. But the jobs that get reallocated, they have to go somewhere, right? And the challenge is that it's often very difficult for some people to find other jobs. So, the distribution of the gains from trade can be unequal, and trade agreements can't solve for that. That's something that we actually need to solve and should solve with domestic policy. This includes things like worker training programs to help people get new skills, supporting folks that want to go to college and can't pay for it, or want to go to technical school so they can learn a new skill. But then also when you think about it, more affordable housing. So, you can move somewhere in the city, you can get a job, and lower healthcare costs, healthcare costs that can be lower so you can get up and move and you don't have to worry about losing your health insurance at your job. So, I think we hear a lot of anecdotes about trade-induced job losses, and those anecdotes really stick because they put a face to things. That's not to say this isn't a problem. I think it's a really big problem, and we need to find better ways to help these people at home find better jobs. And we shouldn't just be thinking about this in terms of the shocks of trade, but the shocks of an open competitive economy. We need to find a way to make the whole U.S. workforce, not just those affected by trade, much more competitive across the board. And that means investing in Americans, helping them get their skills up, helping them get the education that they want and lowering their costs of living so they can choose to live how they want.

SIERRA: Well, thank you so much, Inu. So appreciate you joining us and walking us through all of this. 

MANAK: It was great to be here today.

Stay tuned because next week we have a special live Why It Matters episode coming your way.

And to continue with Why It Matters tradition, here are our wonderful interns from this semester to read us out. Take it away guys!

Isabella HUSSAR and Jo STROGATZ: Thanks Gabby!

HUSSAR: For resources used in this episode and more information, visit CFR.org/whyitmatters and take a look at the show notes. If you ever have any questions or suggestions or just want to chat with us, email at [email protected] or you can hit us up on X at @CFR_org.

STROGATZ: Why It Matters is a production of the Council on Foreign Relations. The opinions expressed on the show are solely that of the guests, not of CFR, which takes no institutional positions on matters of policy.

HUSSAR: This episode was produced by Molly McAnany, and Gabrielle Sierra. Our sound designer is Markus Zakaria. Our interns this semester are me, Isabella Hussar...

STROGATZ: ...And, me Jo Strogatz. Robert McMahon is our Managing Editor. Our theme music is composed by Cary Torhuesen.

HUSSAR: You can subscribe to the show on Apple Podcasts, Spotify, YouTube or wherever you get your audio. For Why It Matters, this is Isabella. 

STROGATZ: And this is Jo! Signing off.

HUSSAR and STROGATZ: See you soon!