The first 7 days of the Trump administration ‒ revolutionary or a naughty boy?

This article was written by Rigby Cooke Lawyers Trade and Customs Partner Andrew Hudson, and was originally published by Lloyd’s list Australia on 6 February 2017. For further information, please contact Andrew Hudson

The first week of the Trump administration delivered a number of the outcomes promised during the election campaign and put to rest the theories that the outcomes were only rhetoric.

Now the world is trying to make sense of the consequences. It is worth taking a closer look at a few of the outcomes and what they could mean for industry.

However, at the outset, it is worth noting that these actions were all taken by way of Executive Order (Order) and not by way of action by Congress and it will be of interest to see the extent of the use of such Orders by the President and the response (if any) by Congress which may not be thrilled by being sidelined in this way.

Immigration bans and the message for trade with Iran

Late last week, the President signed an Order for a 90 day travel ban applying to people from seven Middle-Eastern countries. While this is effective immediately, the effect of that Order has already been challenged in a number of Courts.

This has created significant confusion as to the ability of many to enter the US for business purposes, let alone those with green cards, refugees and dual citizens.

Of potential significance for industry is that one of the countries on the travel ban is Iran. Many would be aware that a number of countries (including Australia) had relaxed their trade sanctions with Iran after the UN Security Council found that Iran had observed its promises regarding reduction of its nuclear capacity.

In our case, decisions were taken to enhance the ability of Australian companies to trade in Iran, including investment for a new Austrade facility in Tehran. Other countries in Europe relaxed their own sanctions and started to re-establish trading relations and China initiated a massive investment in Iran.

However the initial optimism in Australia had been tempered by the reality that the major Australian trading banks would not fund trade by Australian companies in Iran and, further, had directed their clients not to trade with Iran, whether the banks funded that trade or not.

These directions arose from concerns that any trade with Iran may place the banks or their clients in breach of US sanctions with Iran which sanctions could still apply to Australian entities.

Those wishing to be involved in trade with Iran had been hoping for some clarity on the US position with a new administration and that the US position would be relaxed. However the action on immigration may suggest that the Trump administration still perceives Iran as a threat which would mitigate against the relaxation of the US position and that of our major trading banks. At the least, the current level of uncertainty will continue indefinitely and the anticipated opportunities from the Iranian market may not eventuate.

Building – and paying for, the wall with Mexico and the impact on NAFTA and other deals

The commentary during the election campaign was that for border security purposes, the US would construct a wall at the border with Mexico and that Mexico would pay for the construction of that wall.

The President signed the Order to initiate the process for construction of the wall but when pressed on the funding it was announced to be by way of imposition of a new 20% tariff on Mexican goods being imported into the US.

Of course, this means that US importers and their consumers will be the ones actually bearing the costs for the wall. The broader challenge is that the imposition of such additional duties would appear to be inconsistent to the North American Free Trade Agreement (NAFTA) and to the wider global move towards reducing tariffs and barriers to trade. It certainly has created tension in the diplomatic relationship between US and Mexico – which does not appear to have caused many concerns for the Trump administration as it pursues a ‘US first’ agenda.

Of course, a ‘US first’ agenda may make it difficult to strike many FTAs or other trade deals which are predicated on the notion that all parties gain from the deal and the deal does not favour one party ahead of another. In a manner consistent to the ‘US first’ mantra, the Trump administration has announced that it proposes to re-negotiate those FTAs it believes to be ‘bad’ FTAs and make them more favourable to the US.

Putting to one side the odd idea that the US (of all countries) would allow itself to negotiate an FTA which was adverse to its interests, a remaining issue is whether the other parties to those trade deals would be willing to re-negotiate them to suit US interests or whether they run the risk that the US may merely withdraw from those deals.

Withdraw the US from the TPP

Almost the first Order issued by the Trump administration was to withdraw the US from the Trans Pacific Partnership Agreement (TPP). Even though it has also been described as a ‘senseless act of wanton destruction’ by the Cato Institute and been met with dismay by almost every commentator it certainly made the US position very clear.

The premise of the withdrawal was that the deal was ‘bad’ for the US, which ignored the fact that a number of the outcomes were expressly driven by the US. It also ignored the facts that being a good deal for the US trading partners is also good for the US and global economies generally. Further, the TPP included a series of outcomes which facilitated trade by adopting broad standards across a wide number of trading partners.

What to do with the TPP?

The issue then becomes what to do with the TPP? It is certainly a superior agreement with the US included and actively participating. However I believe we have to proceed on the basis that the US will not be advancing with the TPP and is not merely using the withdrawal as a means of seeking renegotiation of its terms.

The Trump administration has made it clear that its preference is for bilateral deals which ‘promote American industry, protect American workers and raise American wages’.

That leaves us with 11 countries in the TPP all of whom have already agreed on commitments to one another and to new rules to assist trade infrastructure. It is my view that pursuing the current TPP even without the US is by far the best outcome.

The idea of the parties retreating to 11 new bilateral deals based on their TPP commitments is not an attractive proposition.

Many of the parties already have bilateral deals and the key point of the TPP was to overcome all the separate sets of rules with one new and improved agreement.

Trying to get the parties back together (potentially with China and Korea) to undertake a new set of negotiations is an equally unattractive proposition.

It seems illogical to embark on such a path when the ‘TPP 11’ already have a decent agreement negotiated.

The agreement is capable of immediate adoption before the world begins to suffer from further uncertainty hampering the willingness of parties to negotiate a new deal.

There is already ample evidence that a TPP without the US would still deliver worthy benefits (see, for example, the study by the Asian Trade Centre).

Further, the absence of the US from the TPP would not be a total disaster. The US economy is already largely open and as many of the TPP parties already have bilateral deals with the US.

The ‘how’ to do this would entail a couple of steps. First the agreement would require domestic ratification and adoption of the TPP by the TPP 11 (which our Government is sensibly recommending but which the Opposition is opposing for unconvincing reasons).

Second, some adjustment to the provisions of the magic Article 30.5 is necessary. In its current form it effectively requires the US to ratify the TPP. This would need to be amended to include a clause that would allow a TPP with the TPP 11, or to have some other form of agreement between those parties to supersede article 30.5 of the TPP.

What will happen with the TPP and international trade post Trump and Brexit?

What will happen (as opposed to what I would like) is another thing altogether. We are very clear on the US position so any other developments will need to leave the US behind (it won’t mind – after all they are getting what they voted for).

Certainly in the region there will be a renewed focus on completing the Regional Co-Operation and Partnership Agreement (RCEP) although there have been real issues on advancing that deal in a meaningful way.

In all likelihood countries will probably return to a conservative position with limited bilateral deals with long term allies. In our case, this may include seeing deals with Canada, the EU and UK form and perhaps Mexico.

Whichever way matters develop, it may well be slower and mitigate against significant gains from the impending start of the WTO Trade Facilitation as natural caution takes over.

So stay put, watch the skies carefully, do your homework, check in with your friendly trade lawyer if pain persists and remember – democracy just doesn’t work.