Crunch Time For U.S. Trade Negotiations And Legislation

Saturday, May 1, 2004 - 01:00

U.S. trade policymakers are facing challenges on all fronts for the remainder of 2004. Several sets of critical multilateral negotiations are taking place simultaneously: the World Trade Organization (WTO) Doha Round talks, the Free Trade Area of the Americas (FTAA), and the OECD steel subsidy negotiations. Meanwhile, the Bush Administration is continuing to negotiate new free trade agreements even as three completed agreements await congressional approval.

All of these ongoing negotiations will occur against the political backdrop of a presidential election and a national debate about the nature of "fair trade," China, and the loss of U.S. jobs due to outsourcing and offshoring.

This article summarizes the current state of major trade negotiations, the difficult issues that lie ahead, and those factors that may indicate the likelihood of a successful outcome. U.S. companies should remain engaged in the process: Although many had assumed that 2004 would be a lost year for U.S. trade policy due to election-year politics, U.S. trade negotiators have pressed ahead on an ambitious agenda. Key trade negotiations will reach critical phases in the weeks and months ahead, and may bear fruit for U.S. companies seeking new trade opportunities.

WTO Doha Round

The Doha Development Round of trade negotiations has been underway since November 2001, but reached a critical milestone at the September 2003 ministerial meeting in Cancun, Mexico. The WTO's goal for Cancun was to emerge with a "framework agreement" - not specific tariff reductions or agreements, but merely the methodologies and outlines of an overall approach for negotiations.

This effort did not succeed. Negotiations broke down on a variety of fronts, including agriculture, deemed by many to be the single most important issue of the current Round. In addition, WTO members attempted to launch discussions on some of four new issues identified at the Singapore ministerial: competition policy, investment, transparency in government procurement, and trade facilitation. The members could not agree on how to move forward on any of these "Singapore" issues, and the talks ended in failure.

After Cancun, further work stopped for the rest of 2003, as various nations analyzed the negotiating failures and pondered the future. For several months, no one committed to a quick restart of the Doha Round. The Doha talks were scheduled to end in early 2005, and between the EU accession of new members in May 2004 and the fall U.S. presidential election, it appeared unlikely that the major parties would be able to overcome the differences of Cancun and move negotiations forward.

However, in January 2004, U.S. Trade Representative Zoellick made an effort to break the impasse, with an open letter to the WTO Ministers. Unlike earlier U.S. initiatives, the Zoellick letter was well received as a conciliatory and positive first step in restarting the negotiations. Zoellick emphasized: "I do not want 2004 to be a lost year for the WTO negotiations." In order to achieve that goal, he suggested a pared-back "Market Access Agenda" focusing primarily on three areas of "core work": agriculture, goods and services.

Agriculture: Agriculture remains the touchstone for the Doha negotiations. As Zoellick's letter stated, "An ambitious result in agriculture is essential for this negotiation to proceed and succeed." In turn, the agriculture puzzle contains at least three main components:

Export subsidies. Zoellick's letter proposed what other countries have demanded: an agreement to eliminate all agriculture export subsidies by a date certain. Although neither Zoellick nor other negotiators have yet suggested what the date should be, an end date to such subsidies will force movement on other issues.

Domestic subsidies. Much of the hostility directed at the United States and the European Union is focused on their domestic agricultural subsidies. This year, negotiators will try to address two kinds of domestic subsidies: "amber box" (those that are granted without any production restrictions or limitations), and "blue box" (those that are tied to production restrictions when granted).

Market access. WTO members must agree on how to reduce tariffs on agricultural goods. Again, the important first step that is missing is a basic methodology for how to reduce tariffs. Some approaches would create a straight percentage reduction of all tariffs over a number of years, while others would call for steeper reductions on the most prohibitive tariffs.

Manufactured Goods: Assuming that a framework on agricultural negotiations can be reached, other issues should begin to move ahead. One important core area is market access (i.e., tariff reductions) on manufactured goods. This is a popular topic for U.S. negotiators, since our tariff rates are relatively low, but the United States must find ways to make such negotiations more palatable to developing and less developed countries. Another alternative is to carve out manufacturing sectors for zero tariff treatment by all nations that are interested. The "zero-for-zero" approach of the recent Information Technology Agreement was a success for domestic industries, and could be replicated in other areas. However, there are concerns about "zero-for-zero," because it allows non-participating nations to free ride.

Services: Services negotiations are also high on the United States' list of priorities - which is why our trading partners have insisted on movement in the agricultural sector first. The current General Agreement on Trade in Services, reached in 1994, was only a first step, and negotiations remain limited.

One hurdle in the services negotiations process has been that all offers are based on a "positive list" approach, meaning that WTO Members must specify those areas in which they agree to make commitments. This approach, which reverses the way most WTO negotiations are conducted, places a high premium on initial offers, and so far, only 40 countries have tabled offers. Zoellick's letter set a modest target: meaningful offers from a majority of WTO members. However, it is unclear whether others share that goal.

Zoellick's letter was well received, and was followed by similar efforts from Pascal Lamy of the EU as well as WTO Director General Supachai Panitchpakdi. Both endorsed the goal of achieving a complete negotiating "framework" agreement by July 2004.

Negotiations are now underway on each of these topics: agriculture, market access, services, and many more. Notably, the negotiating process appears to have undergone a fundamental change. Early in the Doha Round, each of the various negotiating groups strived to create a "Chairman's Text," which tried to incorporate the various views of the parties, as a framework for negotiation. This strategy did not succeed, as demonstrated at Cancun.

Now, the new negotiating group chairs are placing an emphasis on informal "member to member" talks, rather than working from a Chairman-created text. Upcoming negotiating sessions should indicate whether this shift in emphasis produces results. Key tests will include a May meeting of WTO General Council, and a July meeting of WTO General Council, targeted by Dr. Supachai as the deadline for a framework agreement.

Other Ongoing Negotiations

While the WTO Doha talks are at least showing signs of forward movement, the Free Trade Area of the Americas negotiations are currently stalled. The United States and Brazil, who co-chair the FTAA, have three times this year postponed a meeting of the FTAA's trade negotiations committee. The FTAA's deadline for conclusion, January 2005, is already looming large.

Even so, the pause in negotiations can create opportunities for businesses and industries to suggest new negotiating positions on subsidies, market access, services, intellectual property and other issues.

Multilateral negotiations on a steel subsidy agreement are also reaching a critical point at the OECD. Negotiating countries have agreed on the overarching goal: elimination of all government subsidies in the steel sector. However, the exceptions to this fundamental agreement pose great difficulty for the countries involved. Most notably, various countries are seeking:

• Exceptions for R&D and environmental subsidies, and in particular the European Union's call to permit subsidies that would assist its industries in meeting the new environmental requirements of the Kyoto Protocol.

• "Special and differential treatment" for developing countries. Thus far, the negotiators have been unable to agree on who would qualify for such treatment, what it would consist of, or how long it would last.

The talks are scheduled to continue only through September 2004. Therefore, the coming months will determine whether the talks reach a final agreement or fall short.

Congressional Trade Agenda

The flurry of negotiating activity by USTR will result in a series of challenging trade policy votes for members of Congress. Three agreements await Congressional consideration later this year. First will be the U.S.-Australian FTA, which likely faces the least resistance of the three. Even so, the Australian agreement is notable in that it does not include the investor-state arbitration provisions that have been the hallmark of U.S. free trade agreements and bilateral investment treaties to date.

Next will be the U.S.-Morocco FTA, which is perhaps as important for its geopolitical significance as for its expected economic impact. Third on the list is the U.S.-Central America FTA (CAFTA), which faces strong opposition from U.S. sugar producers and will face the stiffest Congressional resistance.

Congress faces a more immediate challenge on its ability to comply with the WTO's adverse decisions on U.S. taxation of extraterritorial income. Foreign sales corporation (FSC) repeal legislation remains deadlocked in the Senate, pending numerous amendments on jobs, outsourcing, and a variety of trade and non-trade issues. As of mid-April, the Senate could only agree to "limit" themselves to 80 amendments on the FSC legislation - an impossibility in terms of the Senate's calendar and workload.

Meanwhile, many U.S. companies are already smarting from the punitive tariffs imposed by our trading partners in response to the FSC decision at the WTO. The European Union tariffs currently impose 6 percent duties on an estimated $4 billion of U.S. exports, and will increase by one percent every month for the next year. At some point, these duties will force Congress to work through the dozens of proposed amendments and pass FSC/ETI repeal. Unfortunately for the U.S. companies now facing the duties, that point does not yet appear to have been reached.

The United States must also take action to comply with several other adverse WTO decisions, including the 1916 Antidumping Act and Byrd Amendment rulings. However, changes to the Byrd Amendment appear unlikely this year. The Byrd provisions, which permit the payment of collected antidumping and countervailing duties to affected domestic industries, enjoy the strong support of Congress, and the level of permitted retaliation is only now being established by a WTO arbitration panel. That, coupled with the strong support of U.S. companies, makes repeal unlikely, particularly in an election year.

Conclusion

U.S. trade negotiators are continuing to press ahead on a lengthy list of multilateral and FTA negotiations. It now appears that 2004 will be the year that determines the fate, or at least the trajectory, of three sets of critical negotiations: the WTO Doha Round, the FTAA, and the OECD steel talks. U.S. companies should monitor these negotiations carefully, rather than assume election year inaction. Additional FTA negotiations with the Southern African Customs Union (SACU), various Andean countries, Bahrain, Panama, and Thailand may also be completed in the months ahead, and many of these agreements will contain valuable provisions opening new markets for U.S. and foreign companies.

Meanwhile, Congress will be hard-pressed to match the pace of U.S. trade negotiators. The ongoing FSC debate demonstrates the difficulty that Congress will have in enacting trade policy in 2004, and opportunities either for new legislation or trade agreement approval are likely to become more limited as the year proceeds.

Timothy C. Brightbill is a Partner at Wiley Rein & Fielding LLP, Washington, DC, specializing in international trade law. He is also an adjunct professor of international trade law and regulation at Georgetown University Law Center, and co-chair of the American Bar Association's International Trade Committee. He can be reached at 202-719-3138.

Please email the author at tbrightbill@wrf.com with questions about this article.