Recent IMF research found that persistent trade imbalances harm deficit economies and benefit surplus ones by reallocating productivity gains. ...

The IMF acknowledged recently that imbalances are “concentrated and persistent” and driven at least in part by surplus country policies. In its most recent Article IV report, the IMF raised the alarm on the US current account deficit (driven primarily by the trade deficit), noting that the resulting negative net international investment position “raises the risk of an eventual disorderly external rebalancing.”

But, to address this problem, the IMF recommends untenable and outrageous solutions: large-scale tax increases (including a 10 percent federal sales tax) and austerity measures (including deep cuts to popular entitlement programs). ...

Jamieson says the IMF "recommends untenable and outrageous solutions" on taxes and spending. Let's take a look at what they said exactly. On p. 28 of the Article IV report, "Box 5. Potential Tax and Spending Policies to Lower the Federal Debt" provides the following:

A combination of options will be needed on both the revenue and expenditure side of the budget to bring the debt-GDP ratio down over the medium term. These include:

• Scaling back poorly targeted tax expenditures. These include not taxing the value of employer-provided health care, capital gains exemptions for individuals selling their principal residence, and income tax deductibility for mortgage interest and state and local taxes. Removing these tax expenditures would increase progressivity and generate around 1.4 percent of GDP per year in revenues.

• Closing the “carried interest” provision whereby income earned from partners in an investment fund can be treated as capital gains and taxed at a 23.8 percent rate (rather than at the 37 percent top marginal rate).

• Eliminating “step up basis” for capital gains which allows the value of inherited assets to be reset at the date of death so that any capital gains that has accrued during the life of the original owner are effectively never subject to capital gains tax.

• Phasing in a federal consumption tax. Such an increase in indirect taxes would generally be regressive and so would need to be combined with a well-designed social assistance program to cushion the impact on poor households. As an example, a 10 percent, broad-based VAT would yield around 2 percent of GDP in revenues per year.

• Raising the federal excise tax on gasoline and diesel. The federal tax on gasoline and diesel is not subject to indexation and has remained unchanged in nominal terms since 1993 (at 18.4 cents for gasoline and 24.4 cents for diesel). Doubling the tax on both gasoline and diesel would yield around 0.15 percent of GDP per year. A carbon tax could also be considered.

• Raising the corporate tax rate and fully moving to a cashflow tax. If combined, such a change in the corporate tax system could both raise revenue and reduce the marginal disincentive to invest. Each 5 percentage point increase in the corporate income tax rate would yield around 0.3 percent of GDP per year.

• Reducing imbalances in the social security system. Indexing social security benefits to chained CPI would save around 0.1 percent of GDP per year. Subjecting earnings greater than US$250,000 to social security payroll taxes would increase progressivity and yield around 0.4 percent of GDP per year.

• Lowering public healthcare outlays. A range of policies to mitigate the impact of population aging on the federal healthcare deficit have the potential to significantly reduce Medicare outlays and increase the program’s efficiency (see Box 6).

Reasonable people can disagree on these specific suggestions. For instance, I would say that removing the tax exclusion for employer-provided health care is a great idea, and a change that is crucial in order for the U.S. health care system to become something other than the horrible mess it is now; on the other hand, I'm more skeptical of a "10 percent, broad-based VAT." Others might have a different view on each of these.

Regardless of what you might think of each item, though, it's good that the IMF is putting specific proposals out there. It's clear that a change in direction is necessary for U.S. fiscal policy, and it's only going to happen if someone finds a way to get the issue into the political conversation. In domestic politics right now, these problems are mostly being ignored. For almost a decade now, U.S. fiscal policy has involved very high deficit spending, acting as a stimulus to keep the economy growing. You can do that for a while, but at some point you have to adopt a more fiscally responsible set of tax and spending policies.

In the meantime, a side effect of the fiscal irresponsibility is going to be trade deficits that are higher than they otherwise would be. If balanced trade is your goal, then U.S. fiscal policies need to be put in the mix of solutions. Whether the IMF's specific recommendations are appropriate ones will, of course, be the subject of disagreement among people who have always disagreed about these things. Regardless, it's clear that the U.S. needs to reduce its budget deficit, and that one of the effects of doing so will be to lower the trade deficit (although there are many other factors in play here, so it's hard to say with any precision how much of an impact this would have).

Senior U.S. officials have held preliminary discussions with major artificial intelligence companies about the potential for the federal government to acquire some shares in their firms, according to three people familiar with the matter.

Sam Altman, the CEO of OpenAI, has discussed the idea with senior Trump administration officials periodically since the president began his second term, said two of the sources, all of whom spoke on the condition of anonymity to reflect private deliberations. Altman first pitched the concept directly to President Donald Trump in a conversation in early 2025, and has discussed it again with senior administration officials in recent weeks as a way to more broadly distribute the economic benefits of AI to the public, they said.

While planning is ongoing and details are in flux, discussions have centered on having the firms voluntarily cede the shares to the government, the people said. The returns on the investment could then be directed to public purposes, one of the people said, such as distributing a dividend payment to all American households.

In comments he made on Friday, Trump seemed open to this idea.

If this actually happens, it will be interesting to see what the final arrangement looks like, but regardless I think this policy is likely to generate the following international response: Foreign governments could decide to pour resources into developing their own domestic AI sector. There are a couple reasons for this.

First, if a person's use of services from OpenAI and other American AI companies means that money gets sent to Americans but not to non-Americans, non-Americans are going to have a disincentive to use the service. Such a financial outcome would feel totally unfair to non-American users, and they are likely to seek out alternative services.

Second, there will be added privacy concerns with the U.S. government being involved in these companies. There is already a good deal of distrust about the U.S. government getting access to data held by U.S. tech companies. U.S. government ownership of shares in these companies makes this an even bigger concern.

It seems to me, then, that in response to demands from their citizens (and nascent industries), many foreign governments are almost certain to move in the direction of developing their own AI industries to compete with American government-owned AI companies, kicking off an industrial policy competition in this sector.

How difficult will it be for a foreign government to do this successfully? That's hard to say. Building an industry that is as good as the American one could be tough. The American industry has both a head start and greater resources. On the other hand, it's much easier to follow than to lead, so I think a fair number of other countries could develop a sector that offers a pretty good service, even if not quite at the American level at first.

And if they follow the U.S. model that is being suggested, it will be easy to market the product domestically by telling people there is money in it for them if they use the domestic service, and also that by using the domestic service they can help it improve and catch up to the Americans.

At this point, let me just add a general comment that will not come as a surprise to this blog's readers: In my view, state capitalism of this sort would be a terrible policy for the U.S. government (and every other government) to adopt, and everyone should turn away from this approach immediately. It will lead to worse services, worse business practices, and worse government policies in this sector, and should be avoided. Whatever your views on AI in general (I'm more on the skeptic side, as I think of AI as probably useful for some things but a bit overhyped*), I don't think government ownership of this industry is the right road to go down. What we want instead is a competitive industry that gives companies an incentive to behave better, and is subject to regulation that will prevent the range of abuses and harms that have been widely reported and should be taken more seriously.

Finally, let me note that if the real reason for U.S. government ownership here is that the AI sector has no path to profitability and the government is effectively being asked to "socialize the losses," this whole thing makes even less sense.

* _{The caveat to this is that I don't use AI at all (except for when a Google search forces it on me), so it's possible I don't know what I'm talking about! But I've read enough about how it works, and also I ran this by some people who are actual users/experts, so I feel confident enough to post this. Feel free to tell me in the comments how I'm getting it all wrong though!}

First, the switch from the old platform last September led to the loss of threading in comments that had been posted up to that point, which made it difficult to follow those conversations. I was recently able to salvage the original version of a good portion of those older comments and restore the threading, so things should look better now (although I think I've reached the limits of what can be accomplished and some comments from the old platform will remain jumbled).

Let me also note with respect to the comments that if there are multiple comments on a post, the current platform defaults to sorting them by "best." You can adjust this to "newest" or "oldest," but it starts out with "best." If I understand it correctly, "best" is judged by likes and dislikes on the comments. I don't find any of this very useful, but at least as of now there doesn't seem to be a way to disable it.

Second, just a reminder that if you are signed up for email notifications of new posts, they sometimes end up in the spam folder. So if you happen to be reading this post and are wondering why you aren't getting the email notifications you signed up for, please check your spam folder and tag the IELP blog emails as "not spam" or "not junk" (or however your email system describes these things).

 At the March 2026 Ministerial Conference of the World Trade Organization (WTO), India blocked the adoption of the Investment Facilitation for Development Agreement (IFDA), a plurilateral initiative backed by 131 members, including 94 developing countries. India stood alone after South Africa and Türkiye withdrew their objections.

The IFDA is, by design, modest in scope. It does not address market access (including for firms from specific countries), investment protection, or investor–state dispute settlement; nor does it restrict the ability of governments to formulate their own investment policies. Instead, it focuses on improving transparency, streamlining administrative procedures, and fostering cooperation between governments and investors.

These are not abstract ideals; they are practical reforms that many countries—including India—have already pursued domestically. India’s own policy trajectory mirrors the Agreement’s core objectives.

If India has already validated these reforms at home, why resist their codification at the global level?

The answer lies less in substance and more in principle. India’s opposition reflects a deeper concern about the rise of plurilateral agreements within the WTO framework.

The WTO has been anchored in consensus-based decision-making. Plurilateral agreements, negotiated among subsets of members, risk diluting this principle by creating parallel rule-making tracks that exclude dissenting countries. From a systemic standpoint, plurilateralism could fragment the WTO.

Yet there is a difference between resisting a trend and isolating oneself from it.

India’s solitary opposition to the IFDA carries reputational and strategic costs. When a major economy stands apart from a proposal supported by a broad coalition of developing and developed economies, it can appear hesitant about transparency or broader rule-making efforts.  

This perception sits uneasily with India’s parallel ambition to position itself as a leading destination for global investment. Over the past decade, India has invested significant political and economic capital in improving its business and investment climate. But global investors assess not only domestic policies; they also read signals from international engagement. A veto at the WTO risks undermining the credibility of reforms undertaken at home.

More importantly, when a critical mass of WTO members moves ahead with plurilateral agreements, the resulting standards often become de facto global benchmarks. In this case, the 131 participants in the IFDA accounted for over 75% of world imports (2025) and over 70% of world inward FDI flows (2024).

This dynamic is already visible in areas such as digital trade, where subsets of countries have advanced negotiations despite the absence of full consensus. Over time, these rules shape global value chains, regulatory expectations, and investment flows. Countries that remain outside such frameworks do not escape their influence.

How, then, to move forward?

A first option is for India to lift its veto on the IFDA’s integration into the WTO rulebook as a plurilateral agreement while safeguarding its systemic concerns.  

During the Ministerial, Minister Piyush Goyal indicated how this could be done, namely by establishing clear guardrails and legal safeguards. These could be enshrined in a Declaration accompanying the adoption of the IFDA, approved by consensus among all WTO members.

Such a Declaration could:

·      Reaffirm the core safeguard embedded in the WTO’s founding Marrakesh Agreement: that decisions must be taken by consensus.

·      Clarify that the IFDA is a standalone agreement, and its adoption does not establish a precedent for other plurilateral initiatives.

·      Confirm that any investment-related issue going beyond investment facilitation as contained in the IFDA—such as market access, investment protection, investor-state dispute—is separate and distinct from the IFDA.

·      Underline that nothing in the IFDA affects the rights and obligations of non-participants.

·      Reiterate that the IFDA is open to all WTO members to join in the future.

·      Require that the implementation of IFDA measures needs to be done in a non-discriminatory manner regarding foreign investors from all WTO members.

The second option is straightforward: India joins the IFDA, thus allowing the Agreement to be adopted by consensus. This would align India’s international stance with its domestic reform agenda and send a clear signal of commitment to transparency and predictability. Given that the Agreement does not constrain policy space on sensitive issues such as market access or investment protection, the costs of participation are limited, while the reputational gains could be significant. A Declaration as outlined above could facilitate this option, although joining the Agreement would in any event give India a direct role in its further development.

Whatever option is chosen, India can uphold multilateralism without resorting to obstruction, by engaging constructively in shaping emerging trade rules.

With the WTO at a turning point, India faces a choice not between multilateralism and plurilateralism, but between influencing the future of global trade or being shaped by decisions made without it.

· Karl P Sauvant is Senior Fellow, CCSI, Columbia University, and former Director of UNCTAD’s Investment Division; Rajesh Aggarwal is Visiting Professor, ICRIER, New Delhi.

Briefly, the report finds that all 60 economies under investigation, including the European Union, Canada, and Mexico, either failed to effectively enforce a forced labor prohibition or failed to impose any legal prohibition on the importation of goods produced wholly or in part with forced labor. Citing Section 301(b) of the Trade Act, the report notes that the Trade Representative must now “take all appropriate and feasible action …to obtain the elimination of that act, policy, or practice.” USTR proposes 10% as the rate of additional duties for one group of countries, and 12.5% as the rate for another group. To make this argument, USTR’s report simultaneously needs Customs and Border Protection (CBP) to be effective (to sustain the commerce-burden claim) and ineffective (to explain why forced labor still pervades the U.S. supply chain).

Researchers and practitioners have already devoted considerable time trying to understand the report’s implications for trade and labor governance, including why an initiative as critical to market integration as a forced labor import ban is being weaponized to justify yet another round of tariffs. I look forward to hearing from others, perhaps during the written comments period, which closes on July 6, 2026, or hearings on July 7, 2026. In this post, I offer a critique of some of the core elements of USTR’s reasoning related to forced labor import bans and their effects on destination and source economies.

 The Findings

Section 301(b) of the Trade Act authorizes the Trade Representative to take action to address acts, policies, and practices of a foreign country that are “unreasonable or discriminatory and burden[] or restrict[] [U.S.] commerce….”

Before applying that standard, the report divides the 60 economies into two distinct buckets. It finds that those in the first bucket (Canada, Ecuador, the entire European Union, Indonesia, Mexico and Pakistan) have “failed to effectively enforce a forced labor import prohibition” while those in the second bucket (54 other economies, including Australia, Singapore, and Switzerland) have “failed to impose a legal prohibition on the importation of goods produced wholly or in part with forced labor and to effectively enforce such a prohibition.”

The report then finds that the failure of all 60 economies to impose and effectively enforce a forced labor import prohibition is actionable. Referring back to the statute, the report argues that such a failure is “unreasonable” because it:

 (1) undermines the universal aim of eliminating forced labor; (2) permits firms that avail themselves of forced labor to produce goods at a lower cost and thereby distort market conditions for firms that do not use forced labor; (3) undermines the profitability of firms that do not use forced labor; and (4) contributes to the circumvention of existing forced labor import prohibitions.

That failure also:

[B]urdens or restricts U.S. commerce by subjecting U.S. producers to unfair competition from forced labor goods in both export markets and the U.S. market, and by displacing foreign goods produced without forced labor or forced labor inputs from their domestic market to the United States and other markets.

The report’s thesis, as I understand it, is as follows. U.S. forced labor import bans require U.S. producers to exercise, under relevant statutes, “reasonable care” in importing their goods into the United States, including through costly due diligence. Importers in the 60 named economies do not have to exercise reasonable care, or pay associated costs. When responsible U.S. producers export their goods, they have to compete with foreign producers in other countries, despite having higher production costs, giving foreign competitors an unfair competitive advantage in export markets. Moreover, when foreign producers import goods produced in whole or part by forced labor, they sell goods at artificially depressed prices in their domestic market, which in turn can pressure producers (presumably, the good actors) in those countries to look for markets elsewhere, “thereby perpetuating the trade in forced labor goods.” The U.S. economy, with its compliant production practices, is presumably one such external market.

 The Critique

USTR’s findings and reasoning require a lot from us without offering us much in return. They require us to agree that: (1) U.S. enforcement authorities, namely CBP, effectively enforce forced labor import bans in the United States; (2) CBP’s effective enforcement compels compliance with forced labor import prohibitions in the United States; (3) U.S. forced labor import bans make it more costly for U.S. companies to produce goods with supply chain inputs than foreign competitors; and (4) U.S. exporters do not similarly export inputs produced in whole or part by forced labor. I take each argument in turn.

 1. The United States Does Not Effectively Enforce Its Forced Labor Import Bans

USTR’s Section 301 findings rise or fall on its argument that CBP effectively enforces forced labor import bans under Section 307 of the Trade Act and the Uyghur Forced Labor Prevention Act (UFLPA). The report argues: “Economies like the United States that effectively enforce laws that prohibit importation of forced labor goods are a natural destination for these producers, as they would be less subject to price distortions caused by forced labor goods.” If CBP’s enforcement is deficient, however, none of the interconnected consequences described above come to fruition. USTR argues in support of its thesis that CBP has “at present 55 WROs and eight Findings in place with respect to various goods whose entry into the United States is prohibited under the U.S. forced labor prohibition.” There are (at least) two problems with this argument.

First, the premise of the report is that forced labor is prevalent in the supply chain, requiring an all-hands approach to banning imports produced with it. That is correct, and the strongest portions of the report draw on empirical data showing how forced labor continues to permeate production in trade and distort markets. In particular, the report aptly relays polysilicon and cotton case studies to show how forced labor inputs transit through third economies to reach U.S. markets despite existing prohibitions.

In fact, USTR makes such a strong case for the prevalence of forced labor that it sets up CBP’s 55 WROs and eight Findings to appear rather inadequate. If the U.S. import market is truly facing a barrage of inputs and goods produced by forced labor (as a consequence, presumably, of weak import bans elsewhere), why has CBP only issued 55 WROs?

While USTR’s report paints these empirics in the best light possible, a quick review of congressional testimony sheds better light on CBP’s enforcement scorecard. It is safe to write that Congress, the entity that designed and enacted the forced labor import bans, hasn’t given the agency high marks. During a congressional hearing in 2024, for instance, Representative Dan Bishop observed that “CBP’s detention rate is just a sliver of the billions of dollars of textile products the U.S. imports annually, emphasizing the continuing challenge in effectively enforcing the law.” That inadequate detention rate, he elsewhere observed, compounds the “lack of visibility into CBP’s decisions [and thus] represents ‘the epitome of failure of government.’”

Representative Bishop is not alone. In a public letter to CBP in 2023,  seven U.S. Senators, including Senators Bill Cassidy and Ron Wyden, wrote: “Recent reports of textile and apparel mill closures in the United States raise serious concerns as the lack of effective customs enforcement has been cited repeatedly as a key factor contributing to declining demand,” and argued: “Insufficient enforcement can create a pathway for banned Xinjiang cotton to infiltrate regional supply chains and undermine efforts to enforce the Uyghur Forced Labor Prevention Act.” CBP’s track record, according to Congress, fails to align with USTR’s characterization of effective enforcement.

Second, USTR’s figures are questionable for two reasons: (1) the link offered in the footnote, like many in the report, is wrong and (2) even a correct link reveals that at least four of the active WROs have been superseded by the UFLPA’s rebuttable presumption and thus no longer function as independent enforcement tools.

USTR has dug itself into an analytical hole here. It needs to convince us that the lack of effective forced labor import bans elsewhere has led to pervasive forced labor in the supply chain, including the U.S. supply chain, harming U.S. producers. But it also needs us to agree that CBP is effectively enforcing the ban to keep those imports out of the United States. Instead of addressing this tension head on, the report under-analyzes CBP’s track record and over-credits CBP’s enforcement statistics.

 2. CBP’s Enforcement Does Not Compel Compliance

Part of USTR’s Section 301 investigation centered on whether the 60 economies effectively enforce their forced labor import bans, raising an obvious question about what “effectively enforce” means. According to the report: “USTR considers that an economy fails to effectively enforce a prohibition if the economy is deficient in compelling observance of its forced labor import prohibition, if any.” To show how CBP compels observance, the report merely recites the number of WROs, Findings, and examinations the agency has conducted since 2016, indicating that CBP modified 16 WROs and Findings after importers “demonstrated they had remediated the indicators of forced labor” that led to the enforcement action.

Again, USTR’s statistics are not doing the empirical work it needs here. According to the Global Slavery Index, a total of $196.6 billion worth of imports at risk of being produced by forced labor make it into the United States. Neither foreign exporters nor domestic importers have been compelled into observance. Against that backdrop, the USTR’s paltry 16 actions stand starkly.

Furthermore, USTR offers no methodology for how it counts remediation actions. It does not break this figure down by sector or importer, nor does it provide a basis for treating 16 modifications across a decade as evidence of systemic compliance.

Perhaps acknowledging that arguments about compulsion require empirics on compliance behavior that exceed USTR’s expertise, the report helpfully points the reader to eight elements that can “also assist in examining whether an economy has the tools necessary to effectively enforce its forced labor import prohibition.” Space does not permit me to do a full assessment of CBP’s procedures, so I will stick to the first element: “A statutory definition of forced labor grounded in international law.”

I want to review this element because of its importance to broader trade and labor governance efforts. USTR’s invocation of international law to benchmark effective forced labor ban legislation is highly problematic in two respects.

First, while the U.S. forced labor import ban legislation reproduces the International Labor Organization’s definition of forced labor, it departs from that definition in the details. The ILO’s definition is codified under ILO Convention No. 29. The Convention states:

For the purposes of this Convention the term forced or compulsory labour shall mean all work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily.

Meanwhile, Section 307 similarly states:

'Forced labor', as herein used, shall mean all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily.

However, Convention No. 29 expressly includes “the imposition of forced labor for the benefit of private individuals, companies or associations.” U.S. legislation fails to honor that definition. When the question of ratifying Convention No. 29 was before the U.S. Tripartite Advisory Panel on International Labor Standards (TAPILS), the panel concluded:

Convention 29 cannot be ratified without amending U.S. law and practice…[TAPILS] concluded that the trend of states to subcontract the operation of prison facilities to the private sector in the United States conflicted with the requirements of Convention 29 relating to circumstances under which the private sector may profit from prison labor.

Consequently, the U.S. definition of “forced labor” is not grounded in international law.

Second, the deviance in the definition of forced labor has salient effects on trade. Private prisons in the United States made billions of dollars in profits last year owing to ramped up immigration detention. Prisoners who “volunteer” to work make $1 a day. The goods they produce, including food items, make it into the stream of commerce.

 3. U.S. forced labor import bans do not make it demonstrably more costly for U.S. companies to produce goods with supply chain inputs than foreign competitors

USTR’s report claims that due diligence costs in the United States are equivalent to a 2.5 percent tariff and attributes it to a RAND study commissioned by the Department of Homeland Security. It uses this statistic as evidence that U.S. producers are at a competitive disadvantage because producers in the offending economies “do not have to undertake due diligence to ensure that their goods are produced free of forced labor.”

USTR mischaracterizes what the RAND Study measures. The study’s actual calculation is entirely different. It calculates the tariff equivalent of the UFLPA’s observed trade effect, that is, the total reduction in import volumes the UFLPA caused.

USTR misattributed a macroeconomic policy effect to a microeconomic firm-level cost category. The UFLPA’s total trade-reducing effect has nothing to do with the specific cost burden on complying businesses. The UFLPA is a statute, not an enforcement action. Its trade-reducing effect reflects U.S. policy choices. However, Section 301(b) requires a finding that foreign conduct burdens U.S. commerce; USTR has instead substituted evidence of a U.S. statute’s trade effects to satisfy that requirement.

I am not suggesting that these data do not exist, merely that USTR has failed to offer them. An empirical survey of U.S. importers testing due diligence costs before and after 2016 would be probative, if USTR has time between now and the rather predictable litigation that will surely arise as this action unfolds.

 4. USTR’s Argument Falsely Assumes U.S. Exporters Are Compliant

The report’s comparative disadvantage argument assumes that U.S. companies do not engage in forced labor practices. This is a separate argument from above. If companies in the United States use forced labor to produce goods they export, then those companies are placing destination country companies at a similar competitive disadvantage.

Tellingly, USTR made no effort to show that U.S. exports comply with forced labor legislation. It merely contrasts the United States with another economy that “permits or does not police the use of forced labor to produce or provide services.” If the United States is guilty of the same, the comparative disadvantage argument either fails or is significantly weakened. Sectors of concern, the report notes, include agriculture, construction, manufacturing, and mining and quarrying. The report argues that “When these goods enter into an economy that prohibits the domestic use of forced labor, they directly undercut domestic producers and importers of legitimate goods.”

USTR is partly right. Its conclusion that forced labor practices undermine compliant companies is well documented. But its failure to engage with the U.S. forced labor practices in those same sectors raises significant red flags. Reports documenting forced labor in the United States are abundant. They suggest that between 50,000 and 1.1 million people are working in forced labor in the United States right now. They work in agriculture, where immigrant workers and young children are exposed to hazardous work without pay, including in export sectors. They work in manufacturing, where unaccompanied migrant children are forced into debt bondage. Private prison labor produces inputs in the global supply chain.

If U.S. exporters, like exporters elsewhere, defy forced labor prohibitions to produce tradable goods, then USTR’s comparative disadvantage argument requires rethinking. Before it can claim unreasonable interference with fair conditions of trade, USTR must think deeply about how U.S. corporate practices play into the so-called “race to the bottom.”

 Conclusion

Forced labor, whether in the United States or abroad, is abhorrent. It distorts the supply chain through perverse incentives to maximize profits at the expense of fundamental human rights. Curiously, USTR’s report characterized the prohibition against forced labor as “universal,” noting “the consensus within the international community that forced labor goods should not exist.” Its arguments seem to advocate for a rule of customary international law that could entice all governments, as a matter of erga omnes obligations, to enforce the prohibition under a shared legal interest. Rather than take that approach, USTR has tied itself (and brought us along for the ride) in circles, requiring it to argue, on the one hand, that forced labor continues to permeate the U.S. supply chain and, on the other, that CBP has effectively enforced U.S. forced labor import bans so as to compel compliance among importers. USTR’s poor reasoning and misleading use of data raise more questions than the report answers.

In this post, I'll go through some of the key issues I'm thinking about in the context of this review:

• Will the USMCA be extended for another 16 year term?
• What's the timing of the review process?
• What are the main substantive issues being discussed?
• Are separate bilateral deals really a possibility?
• Where is Congress in all this?
• What non-trade issues are kind of, sort of a part of these talks?
• Will Canada and the U.S. find a way to be friends again?

To extend or not to extend

I don't want to make people wait, so let's start with the big question on everyone's mind. As part of the Article 34.7 "review and term extension" process, the USMCA "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 ... ." So will the agreement be extended for another 16-year term as part of the upcoming review? I've been skeptical for a while and I'm still skeptical now, for the following reasons.

I've never been a trade negotiator, but from what I understand from those with direct experience, deadlines can be a useful way to force governments to come to agreement. Often this means setting somewhat arbitrary deadlines, just to get people moving, although in some cases you have an election in a particular country that you have to work around, so the deadline is more real.

In the USMCA review and extension context, we do have a deadline of sorts. The problem is, it's somewhat of a soft deadline, in the sense that not much happens if the parties don't extend the USMCA as part of the upcoming review. If they don't extend, the agreement stays in place for 10 more years, and they can just go on negotiating during that time, either though the annual reviews that follow or outside of them. As a result, the incentives for forcing the governments to make a decision to extend may not be there at the moment. Yes, the failure to agree on an extension will create some uncertainty, but 10 years is a long time and I'm not sure how much people will be panicking just yet.

To state the obvious here, the views within the U.S. – and in particular the Trump administration – are the most important on this point (Canada and Mexico would probably be happy to sign on to an extension that kept the agreement as is – Canada said as much here). But the Trump administration is looking to extract various additional concessions, and does not seem particularly eager to extend without getting something more. My instinct here is that the Trump administration might be willing to extend if they got everything they asked for, but they are asking for so much that I'm not sure Canada and Mexico can give it in terms of their own domestic politics.

Also, while there are U.S. companies with an interest in keeping the USMCA in place, and might put pressure on the Trump administration to do so, given the 10 years left on the current term these companies won't be sufficiently panicked yet. Instead, some of them may be happy to wait for a change in who is in charge in U.S. politics, thinking that this process might go better for them in those circumstances.

So my prediction is no extension in July or soon thereafter, but I make it with the same degree of certainty about anything in the policy world at the moment, which is to say very little!

(I need to add a parenthetical here about the possibility of a U.S. withdrawal. I can imagine this will be threatened from time to time, but I'd be very surprised if it actually happened. The chances are so low that I'm not even giving withdrawal its own section in this post!)

The timing of the review

As mentioned in the intro, July 1 is the six-year anniversary of the USMCA entering into force, and Article 34.7.2 tells us that on "[o]n the sixth anniversary of the entry into force of this Agreement, the Commission shall meet to conduct a 'joint review' of the operation of this Agreement, review any recommendations for action submitted by a Party, and decide on any appropriate actions." But what exactly does the timing look like here? Deputy USTR Jeffrey Goettman recently said "we'll make a decision on July 1." But presumably even if they make that decision on July 1 (and I can imagine it might see a bit of a delay), they are unlikely to wrap up everything with the USMCA review on that day, and we should give them some time to meet and discuss things further. The U.S. and Mexico have already scheduled a negotiating round "[d]uring the week of July 20," so it doesn't seem like a quick outcome is being anticipated.

If on July 1 (or shortly thereafter) they are not ready to agree to extend, and this is stated publicly, where do we stand then in terms of the likely timing going forward? Note that Article 34.7.4 seems to provide for an open-ended amount of talking even if there is no decision to extend:

... 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.

The "at any time" language provides a lot of leeway here. Let's say the parties get to July 28 or so and recognize that they won't reach an agreement to extend this time around. Well, presumably that would conclude the review, but the "at any time" language makes it sounds like the parties can still keep talking and at some later point – say, just before the midterm elections if someone wanted a political victory to announce – could decide to extend. So, if the parties end up going this route, we could see a continuous negotiation that lingers on and which could lead to a term extension decision at any time. Or things could just linger on without an extension or continuous negotiations, and we could end up with the annual joint reviews that Article 34.7 also provides for.

Summing up here, I feel like there's some uncertainty on the timing of key aspects of the review, and it's not clear to me what each of the three governments has in mind, whether they are all on the same page, and how things will proceed.

Main topics under discussion

Last December, U.S. Trade Rep. Jamieson Greer submitted to Congress a list of what the administration saw as the key issues in the USMCA review. Are these the issues the administration cares most about? Or are these issues just what the administration thinks Congress wanted to hear that they care most about? Hard to say! But certainly it's a good starting point for thinking about what the main topics of discussion will be.

At the outset, though, it's worth noting a broad objective in the USMCA review that reflects the administration's overall trade policy: A concern about trade deficits. As Greer put it at a CFR event in late May in response to the question "[w]hat is it that you want to see changed vis-a-vis Mexico?":

Well, President Trump is concerned about our deficit with Mexico. It has grown over the past. It's one of the few where their deficit has grown with us. So while our overall trade in goods deficit, ... Mexico has been one of the big winners of American diversification from China and Asia, right? They've been one of the big winners. So while our trade deficit in goods has gone down over the past 12 months, the share of imports from Mexico has gone up. They've taken some of that. All that being said, we would like to see a broader and more balanced distribution of that production, including in the United States. So what do we want to see? We want to see that deficit go down. I think that over the course of these negotiations, we are going to be talking about rules of origin in a way that enhances U.S. content in these goods.

Underlying the trade deficit issue, of course, is the Trump administration's goal of bringing manufacturing back to the U.S., in autos and other products, and this is a fundamental U.S. objective in the USMCA review. (A proposal to require 50% U.S. content in USMCA-qualifying autos reflects this idea).

As for more specific topics to be discussed in the review, in his remarks at the CFR event, Greer mentioned Mexico's "external trade policies," noting that Mexico has already "raised tariffs on non-FTA partners, particularly in Asia, because it's in Mexico's interest. Mexico competes with a lot of these Asian economies for the US market, and so that's an area I think of common agreement ... ." Obviously China is the main target here.

China also lies behind various other "economic security" issues: The Trump administration would like to see Canada and Mexico coordinate more with the U.S. on export controls and investment screening (the Biden administration wanted this as well).

And China plays a role in U.S. demands to tighten up rules of origin to limit non-USMCA content in imports that benefit from zero tariffs on USMCA-qualifying goods, including autos and other products.

And finally on China, there will be talks about cooperation on critical minerals.

Summing up those last few paragraphs, China will be a big deal in the USMCA review!

Beyond China, there are traditional issues related to U.S. market access for agriculture, such as dairy in Canada and corn in Mexico, both of which were litigated under the USMCA's state-state dispute settlement mechanism.

And then there are a variety of other laws and regulations that U.S. interest groups have raised concerns about and the U.S. government has already been pushing:

- Mexican energy regulation
- Mexican labor laws
- Mexican treatment of geographical indications
- Canada's online streaming law
- Canadian provincial bans on U.S. alcohol

Clearly, there are a lot of issues on which the Trump administration will be pressing Canada and Mexico. But which of these are most important to the Trump administration? How do they rank all of these? What tradeoffs will they be willing to make? That's very hard to say looking in from the outside. (And they may not know yet either!)

Taking a quick look in the other direction, what do Canada and Mexico want out of all this? One big issue is how the various Section 301 and Section 232 tariffs are applied to them. The forced labor Section 301 investigation targets both Canada and Mexico; the excess capacity Section 301 investigation includes Mexico but not Canada. And the Section 232 tariffs have an impact on a wide range of Canadian and Mexican products.

Canada and Mexico would like as big an exclusion from these tariffs as they can get, on steel, aluminum, autos, lumber and other products. As the Canadian government put it in relation to Section 232, "discussions with the United States on addressing sectoral tariffs will be essential." (The proposed Section 301 tariffs related to forced labor concerns do not cover "USMCA-compliant goods of Canada or Mexico.")

Finally, for Canada, anti-dumping/countervailing duties on lumber are always a concern, and for Mexico these kinds of duties on seasonal produce are an issue, so that may come up as well.

Are separate bilateral deals possible?

As there was with the original NAFTA renegotiation, there has been talk of separating the USMCA into separate bilateral deals between (1) the U.S. and Canada and (2) the U.S. and Mexico (Canada and Mexico have the CPTPP which applies between them). I think it's unlikely things will go this route, but if you wanted to make the case that it could, you might point to the following.

First, Mexico and the U.S. started their USMCA review discussions well before Canada and the U.S. did. Here are some USTR press releases on the Mexico-U.S. developments from March 5, March 18, April 20, May 27, and May 29. The May 27 link sets out the following negotiating timeline:

On May 28-29, Deputy United States Trade Representative Ambassador Jeff Goettman will lead a U.S. delegation to Mexico City for the first bilateral negotiating round with Mexico, which will feature negotiations on economic security and rules of origin for key industrial goods. On June 16-17, the two countries will hold a second negotiating round in Washington, D.C., which will also include discussions on agriculture and a level playing field. During the week of July 20, the United States and Mexico will hold a third negotiating round in Mexico City.

By contrast, formal Canada-U.S. talks have yet to take place, and clearly Mexico and the U.S. started talking earlier and are further along.

Second, as is well-known, and which I'll come back to later in the post, the Canada-U.S. relationship is struggling to deal with some heated rhetoric at the highest political levels. I won't go through all the details, but everyone knows the main points here.

Could all of this lead to separate bilateral deals? At a CFR event in late May, Greer was asked the following by former U.S. Trade Rep. Mike Froman:

... how serious are the fissures with Canada, the rupture with Canada? And can you envisage USMCA being transformed into separate agreement with Mexico, separate agreement with Canada, or no agreement with Canada?

Greer responded:

Well, I would say that, the team right now is in Mexico, my team, and they're negotiating with Mexico on a bilateral basis. I speak with some regularity to my Canadian counterparts. Our sense is that we have with Canada some trade challenges, which ... some people might think, "Oh, those are just irritants." To us, they're significant, and the reality is we've spent the past year and a half going to countries, telling them we have to have some level of tariff on the globe to deal with this giant deficit that we're dealing with, to try to reshore, etc. And most countries have, grudgingly, but they've said, "We understand your policy. We understand, so we're going to negotiate with you. We're going to remove some of these tariffs and non-tariff barriers, etc." Canada's approach has been different. They and China retaliated against the United States. Two countries in the world ... China and Canada. So they're just in a different spot, and it's hard to see necessarily where that ends. I will say, we have trade in energy and minerals and other things, fertilizers between the U.S. and Canada, that really has not been affected. It's been untouched, that's gone without any trouble. I think those are areas of common economic benefit, I think. When it comes to some of these manufactured goods, we have a different view.

Will any of this matter for the USMCA review? As discussed further below, the personal animosity between some people in the U.S. and Canada at the moment is beyond anything I've ever seen in that relationship. In the NAFTA renegotiation, things got a bit touchy between the Canadian and U.S. trade officials, but this time around the touchiness has filtered down to the people. A significant number of Canadian citizens are very angry, and that has had a real impact on how government officials approach things.

Nevertheless, I tend to agree with Prime Minister Carney's assessment of the USMCA negotiations: "These things have their own rhythm, and they also have what's happening above the surface and what's happening below the surface." It may be that some statements by government officials for public consumption are more of a negotiating tactic, and things aren't quite as bad as they sound.

But you never know, and the occasional talk about turning the USMCA into bilateral agreements has me wondering (and worried!) about the following scenario.

I had been assuming that under USMCA Article 34.7, the decision on whether to extend the agreement would be purely a trilateral one. Either the three parties agree to extend, or they don't. But given the recent rhetoric, I'm thinking the Trump administration could actually try to inject a bit of bilateralism into the renewal decision, either as a threat to Canada or just as a preferred outcome.

Let's say the U.S. and Mexico reach agreement on the various issues they have been talking about. Could these two countries then sign a protocol that says something like "in the event that the USMCA is not extended, and terminates in 2036, the USMCA will continue as a bilateral agreement between the U.S. and Mexico"?

I can imagine that Trump administration officials are looking into possibilities like this. Would Mexico go along with it though? They have been talking to the Canadians about all this as well, and it would certainly not be an ideal outcome from their perspective. At the same time, they would still have a trade deal with Canada through the CPTPP.

Anyway, I don't think this is likely, but if we are thinking about all possible outcomes here, we may have to put this on the table.

Where is Congress in all this?

This question about Congress applies to many things in trade policy over the past year and a half or so. Will the USMCA review be the event that wakes Congress up? Are they going to hold any hearings? Will they just put out press releases and letters to the administration, with some generalities about what they want to see here? (So far I've come across letters from a group of Dem Senators, a group of Dem House Ways and Means members, a bipartisan group of Senators on agricultural market access, and a group of House GOP members of Congress on enforcement of the Mexican VAT.)

Will members of Congress mostly just send these letters and lobby quietly behind the scenes? Whatever their plan is, they better start speaking up soon if they want to have an impact on the decision on whether to extend. But maybe they don't see a non-extension as a big deal at this moment either, given the 10-year soft deadline noted above.

Non-trade issues

As much as many of us in the trade policy world might like to, we can't separate out non-trade issues from trade issues. For Canada, some of the key non-trade issues being contested right now relate to defense.

One of these is Canada's potential participation in the Trump administration's Golden Dome project. Back in 2025, Trump said: "I told Canada, which very much wants to be part of our fabulous Golden Dome System, that it will cost $61 Billion Dollars if they remain a separate, but unequal, Nation, but will cost ZERO DOLLARS if they become our cherished 51st State ... They are considering the offer!" I'm not sure if that reflects actual costs, but regardless, it would cost Canada something. Is paying some amount here worth it for Canada to get better USMCA review terms?

Along the same lines, there are also some purchases of planes at issue right now. Canada is trying to decide between buying U.S. F-35s and Swedish Gripens; and there is a radar plane purchase up for grabs too, with Canada apparently going with Saab over U.S. suppliers.

I don't know exactly how the Canadian government is thinking about all this, but I can imagine they are using these military spending decisions as leverage to try to get a more favorable trade deal. (There was also a U.S. pause with the U.S.–Canada Permanent Joint Board on Defence (PJBD), which may fit in here somehow, I think.)

And then on the Mexican side, you have the perennial "cracking down on cartels" issue, as well as the more recent "oil sales to Cuba" issue.

These issues may not come up directly between the USMCA trade negotiators, but they will be there in the background and could influence the USMCA review outcomes.

Tough rhetoric and bad feelings in Canada-U.S. relations

Trump and his administration must be aware of the effect the 51st state talk has had in Canada. Whatever their level of awareness, though, they have not toned things down very much, with the U.S. ambassador to Canada being quite aggressive with his rhetoric.

Canadians have reacted to all this with moves such as the Ontario ad touting Reagan's tariff policies or Carney's speech in Davos. In response, the Trump administration and its surrogates have been very critical of the Canadian reaction. Here's Deputy USTR Rick Switzer speaking at an event in April:

What I'll say is that the countries that are led by serious leaders, and I'll say President Sheinbaum is a serious leader in Mexico, when we came in and we were talking, Ambassador Greer was just there, we're talking to Mexico about this, and the President has spoken directly about this, they have been very serious. Look, we know the United States is our most important economic partner, that it is the policy of President Sheinbaum, that the United States and Mexico will have a positive economic relationship, and that we know that we'll have some friction, ... but we're going to figure it out, right? This is the bottom line.

There are other economies who decided to make it personal. And you know, I think Carney has made it personal. I think it's political malpractice for the prime minister of ... Canada to pit politically himself against any president. I don't care what the president is, who the president is, what party they represent, it's political malpractice. Canada is dependent upon the US economy. That's just a fact, right? That's not hubris. That's not something that Canada needs to be concerned about. It's not something Canada can change, right? The fundamental fact is geography wins out. Canada is located where it's located. They can't move shop. They can have a weak economy that is underperforming and not doing well, and Carney can feel superior. Or they can have an economy that participates as a partner to the US economy. And Carney can do what a grown-up should do, which is figure it out, and come like President Sheinbaum and decide that the United States and Canada will have a positive economic relationship. It's my job as a person who's [supposed] to protect Canadian jobs, Canadian citizens, and the Canadian economy, to not let my ego and my feelings dictate what's best for my own economy.

See also Greer's remarks quoted above.

I'm going to offer three points here:

• All of this is bad, and it will take some time to repair the damage to the broader Canada-U.S. relationship.
• If the administration's view is that the Canadians should not respond to Trump's statements, I would say this is unrealistic given Canadian domestic politics. Even if taking the high road were the right approach, I don't think Canada's politics would allow it. (American politics certainly does not allow for this sort of thing!)
• The impact of all this tension means that trade is affected in a way that goes beyond government-enacted trade barriers that can be dealt with through trade agreements. When you have Canadians choosing not to buy U.S. goods or travel to the U.S., tariffs and trade barriers become less important. It's not about market access anymore, it's about whether a market for those goods and services exists.

The response to Chad

First up, Chad made some good points in his post. He notes that "[i]n terms of facts about use of WTO dispute settlement against China, the empirical reality from the data is that it turns out the US did most of the heavy lifting." I think my main response here is to say, yes, the U.S. brought a fair number of complaints and was reasonably successful. So, given that success, why not bring complaints against a broader set of non-market policies and practices as well? For example, how about some SCM Agreement Article 5 adverse effects complaints?

Chad also asks: "What prevented the EU, Japan and other countries from bringing disputes against China?" Here, he means complaints on the big systemic issues, because there were some complaints against China on narrower issues. I agree that these complaints could and should be brought by any WTO Member, and it's not just the responsibility of the U.S. here.

One thing to note is that when it comes to taking action against Chinese subsidies, many people seem to think the strong response is domestic countervailing duties. So, instead of bringing SCM Agreement adverse effects complaints, they want to use CVDs. To me, though, the decision to go with the CVD approach reflects a misjudgment about what constitutes a "strong" response. I'm not aware of CVDs leading to the withdrawal of subsidies, so if that's what you are hoping for (and you should be!), I don't think CVDs are the answer. But that's often where we have ended up.

Chad then talks about "contributing factors from the data and from our conversations with policymakers behind WHY there was insufficient willingness to challenge China" at the WTO, including this:

Worry that a government wouldn't win a case against China even if companies turned over information. China's system is non-market. How does one even define a subsidy in China? (The public body ruling seemed to suggest Chinese SOEs were not providing subsidies? Hmmm...) Showing evidence might mean an even heavier lift than in a case against a market economy if you have to use third country benchmarks to make your case due to Chinese data (on prices and quantities) being so whacky, again because of its system. 

On the point about the Appellate Body's public body ruling, I'm not sure it suggests that Chinese SOEs were not providing subsidies. Here, I would distinguish between situations where WTO panels and the Appellate Body are evaluating complaints against domestic trade remedies, on the one hand, and situations where they are evaluating WTO complaints against subsidies, on the other. In the former, its the trade remedy agencies that are "on trial," as their reasoning in the investigation is scrutinized through WTO dispute settlement; in the latter, it is the governments doing the subsidizing that are going to be subject to this scrutiny. The upshot is that I think you might do better challenging Chinese subsidies as part of a WTO complaint than you would in defending your agency's countervailing duties that were imposed in reaction to those subsidies. I sometimes hear people talk about "bias" in WTO dispute settlement, and I'm generally skeptical that this bias exists, but I can imagine that, in some instances, there is a bit of skepticism from the WTO "judiciary" towards the measures being challenged, as governments usually don't bring a complaint unless they are convinced of the merits of the case (I can think of some exceptions though!). As a result, both the Chinese subsidies and the CVDs against Chinese subsidies will face a tough review by panels and the Appellate Body (now the MPIA).

The Froman-Greer conversation

Now to Froman and Greer. At the CFR event, these two had an interesting exchange about what past and present U.S. administrations wanted to get from China on trade:

Greer: [The Trump-Xi meeting] was a good meeting. We got what we came for, and then when we got back, [people said] "oh, well, you didn't get anything." It's like, first they didn't want us to give anything away, and we came back with the stability and the things we were looking for, and now people said, "You didn't get anything." I want to know, what did people want? They wanted them to say, "We're done being communist, and we're not going to subsidize"?

Froman: Well, it's an interesting question, because traditionally, rightly or wrongly, administrations would go to Beijing and try and convince the Chinese leadership to move away from excess capacity, export-led growth, and move more towards domestic demand, consumer-led, more of a social safety net. All the things that China knows it needs to do to have a more sustainable economic path, but refuses to do. Are those issues no longer on the agenda?

Greer: Well, how effective was that? ...

Froman: Yeah, that's a good question. Not fully effective,

Greer: ... I guess my point here is we have tried that for a long time.

Froman: So we're giving up on that?

Greer: I would say mostly. I would say when it comes to managed trade, for example, [agriculture], so we've said, listen, we need to be able to export $17 billion worth of [agriculture], separate and on top of soybeans. In order to do that, you have to have some things adjusted that are in their regulatory system, they have certain things, registrations, and a variety of non-tariff barriers that they do have to change those to facilitate that. But listen, in the first term we went to them, and we started negotiating a deal, and you'll all probably recall who were around at the time, there was a broader deal in the offing. There was a broader deal made that would have gotten at some of these things, industrial subsidies, etc. and it went all the way to the top in China, and it came back red-lined in a way where it's very clear that they were not going to change some of these things, that some of these things we've been asking them for decades are in fact part and parcel of their political system, right? We think of them as part of their economic system, [but] it's part of their political system, right? ...

We've just come to terms with the fact that there's not going to be some giant comprehensive reform of the way the Chinese political system works, including all these economic elements of it, but we can have some managed trade, we can maybe have some reform around the edges of that managed trade in the interest of stability and continued economic peace between our countries.

I found this exchange to be useful because I think it helps illustrate several points on which, in my view, the conversations about China conflate some issues that should be separated, and overlook how existing trade rules could provide solutions.

Let me first note that this exchange takes me back to my original questions for Chad, where I talked about U.S. priorities and how issues with China have been approached in the past. While it's true that U.S. trade officials have made demands of China like those noted in the Froman-Greer exchange, my sense is that these U.S. demands were never a top priority in U.S. foreign policy, and that they were pursued in ways that were not likely to be effective. That's a big part of how we got to the current situation.

Now let me turn to the conflation. As I see it, there are the issues that Froman talks about ("excess capacity, export-led growth, and move more towards domestic demand, consumer-led, more of a social safety net"), on the one hand, and there are non-market policies and practices such as industrial subsidies, on the other. Importantly, it needs to be recognized that these are very different categories of issues. While there is some connection between excess capacity/export-led growth and industrial subsidies, they are nonetheless separate. To me, subsidies are an identifiable measure that it makes sense to complain about in the trade context. By contrast, excess capacity is vague and hard to define in terms of a government action. It's better to focus trade complaints on actual government measures rather than on production levels.

And then "domestic demand, consumer-led, more of a social safety net" is something else entirely. Now we are getting into broader economic policy and individual consumer preferences.

Unfortunately, people sometimes blur all of these distinctions, and I think that makes the policy discussion less clear.

Let's move now to the issue of subsidies, which I think is the right place to focus. I'm not sure what Greer had in mind with the industrial subsidies demands that he says the Chinese leadership "red-lined" during the first Trump administration. I don't know what those demands called for exactly, so it's hard to evaluate this argument. But it's worth pointing out that the Chinese government had already agreed to significant subsidies disciplines when it joined the WTO. As my discussion with Chad makes clear, though, there has been only limited enforcement here, and that seems like a big missed opportunity. Would additional subsidies obligations, beyond those in the WTO, have helped? Maybe, but it depends on the precise obligations and whether there was an effective enforcement mechanism (I always said the Phase One enforcement mechanism wasn't effective, and as far as I know it has never been used, which I think supports my view).

Ultimately, I think that if you want China to rein in its industrial subsidies, you need to say that directly in the form of a WTO complaint, and not bring issues such as the social safety net into the discussion. Making demands about domestic economic policies and individual consumer choices is very different than demanding compliance with the subsidies obligations that China took on when it joined the WTO.

Froman and Greer talked about the efforts of past U.S. administrations to persuade China on these issues. These efforts by the U.S. may not have worked, but that may be because the method of persuasion was the wrong one. On the subsidies, as I said above, either you bring WTO complaints on industrial subsidies or you don't. If there's no formal complaint, the accused country probably figures it has some flexibility in responding. And then on issues such as the social safety net, telling China what we think they should do seems about as effective as other countries telling the U.S. what fiscal policy it should adopt.

So, while it is true that these issues have been raised in the past, and those efforts did not turn out to be effective, it's important to think about how the issues were raised, both in terms of identifying the specific problem at issue and the way the demands were presented. This could help guide us on these issues going forward.

I.        Introduction

The European Union’s (“EU”) Green Deal dream, the long-awaited Carbon Border Adjustment Mechanism (“CBAM”) – a carbon-pricing measure covering six industrial sectors – entered its definitive phase of application on January 1, 2026.^[2] Just a day earlier, the European Commission (“Commission”) had published, in its Official Journal, rules concerning the calculation of “default values” – emissions figures that the Commission could apply to products manufactured in installations abroad, should the “actual emissions” reported by those installations not be acceptable.[3] In fact, throughout December 2025, the Commission had released a series of complex instruments intended to operationalize CBAM. And within days, the Commission had declared CBAM to be a success.^[4]

However, ground realities appear somewhat different. As CBAM moves along its merry way down the train of full enforcement, concerns abound, inter alia regarding the calculation and verification of embedded emissions – the very heart of the CBAM framework and, financially, the most pressing and significant aspect for businesses.^[5] Whether the Commission accepts “actual emissions” from foreign “installations” will depend on whether businesses can obtain the required ‘verification’ of their emission data.

This blog seeks to shed light on one practical issue relating to the reporting (and 'reportability') of embedded emissions – namely, whether the CBAM system, as presently designed, is operationally viable. More particularly, is the system capable of catering to the myriad exporters – numbering in the hundreds of thousands – that serve the EU’s internal market and the vast network of customers that rely on these exporters?

II.     CBAM without the "bam!": A simplified primer

Under the CBAM framework, importers of certain industrial goods: steel, aluminum, fertilizers, and electricity (yes, electricity), are required to declare the total emissions embedded in the imports they make. This extends not only to emissions generated during the production process of imported goods, but also to the emissions embedded in ‘precursors’, i.e., the input materials used in the manufacture of these goods.^[6] Article 7 of the central CBAM Regulation provides that such emissions may be calculated in one of two ways: either by reliance on ‘actual emissions’ or, in the alternative, via the application of ‘default values’.^[7]

If importers seek to rely on actual emissions data, the emissions so declared must be verified by an EU-accredited verifier. Each EU Member State is to have a “National Accreditation Body” ("NAB")^[8] responsible for granting accreditation, and only verifiers accredited by these bodies may undertake verification of emissions reported by foreign producers.[9] 

On the other hand, if actual emissions data are not accepted, default values can be used by the EU.[10] These default values are, by design, hiked up (as compared to the relevant 'actual' emission value^[11]) and contain a mark-up, depending on the product category (with steel and aluminium having high and increasing mark-ups and fertilizers relatively lower ones).^[12] Since CBAM payments (number of CBAM certificates to be collected) are directly linked to the value of the reported emissions,[13] reliance on default values will typically result in higher CBAM liabilities, as compared to situations where verified actual emissions data are used.

III.   CBAM's verification set-up: A system ‘designed to fail’?

The difficulty lies in the simple fact that there seem to be not enough participants in the CBAM system. Ex-concessis, regulation is difficult.[14] However, since default values are inherently higher than using actual emissions values,^[15] exporters face two choices: either accept inflated CBAM liabilities or somehow get their emissions data verified. However, obtaining such verification is no mean feat.

Only 403 accredited verifiers are registered in the Union Registry^[16] in comparison to 4,100 CBAM declarants that have been authorized as of 1^st January 2026, and nearly 12,000 economic operators that have submitted applications for CBAM authorizations until 7^th January.^[17] As each operator may source goods from multiple installations abroad, the actual number of installations requiring verification is probably significantly higher. Going forward, the gap between the number of installations requiring verification and the number of accredited verifiers available to verify the reported emissions data is only set to increase.

The emerging mismatch has been acknowledged elsewhere as well. France’s national competent authority has warned that not enough verifiers may be ready in time to meet the anticipated demand for CBAM audits. The first accredited verifiers are not expected to be available until autumn 2026.^[18] One wonders if this leaves enough time for all installations to be verified before the September 2027 deadline. Accreditation, moreover, itself appears to be progressing at varying speeds across Member States, with only a few jurisdictions^[19] currently accepting applications. This further adds to the uncertainty surrounding the availability of verification capacity.

Accreditation can also be a time-consuming process, since, under the CBAM Regulations, accreditation requires a detailed assessment of whether verifiers possess the necessary technical expertise and organizational capacity to carry out verification in accordance with EU-prescribed standards.^[20] A bottleneck therefore emerges: the pool of accredited verifiers grows slowly, as their demand continues to rise. In practice, this makes timely verification of emissions data less likely. Thus, even if a company has diligently collected the required emissions data, it may still face the risk of CBAM non-compliance – simply because it cannot get access to an EU-accredited verifier. It is not unreasonable to submit that, as the creator of the system, the EU bears the primary responsibility for ensuring that the system works (or is at least 'workable').

And what about the much-sympathized-with MSMEs? CBAM requires reporting of granular information regarding the functioning of installations and the goods produced therein.^[21] This may be something that large-scale exporters, with pre-existing data and digital systems, can manage.[22] However, for MSMEs, this task may prove considerably more difficult, since they have to not only gather the required detailed information (itself quite a task for a company), but also secure an accredited verifier in time to meet their CBAM obligations.^[23]

IV.   Conclusion

The CBAM thus appears somewhat 'designed to fail'. On the one hand, its framework emphasizes reporting of 'verified' actual emissions data; but on the other, there does not seem to be a sufficient number of accredited verifiers to realistically enable such verification within the applicable deadlines. This should have been an obvious fact to the legislators, given the sheer volume of exports that are subject to this framework.

The asymmetry seems even more unfair when viewed via the prism of the intended use of CBAM revenues. As has been well reported, the revenue generated through the CBAM, including that arising from the application of default values, will go towards supporting decarbonization efforts within the EU.^[24] In effect, therefore, non-EU exporters must not only bear the costs of complying with CBAM reporting requirements, but they must also watch as these revenues are channeled to support decarbonization efforts outside their own jurisdiction (i.e., in the EU's industry).[25]

And if non-EU exporters are to contribute to the financing of the EU Green Deal, it raises a legitimate question about the character of CBAM as a measure supposedly designed as an instrument in furtherance of global climate objectives.[26] The externalization of decarbonization costs onto non-EU exporters, particularly in developing and least developed countries, sits uncomfortably with the notions of ‘Nationally Determined Contributions’ (NDCs) and ‘Common-but-Differentiated Responsibilities and Respective Capabilities’ (CBDR-RC), as enshrined under the Paris Agreement.[27]

If the objective of CBAM is to prevent ‘carbon leakage’ and encourage cleaner production methods beyond the EU’s borders through accurate accounting of emissions, the absence of sufficient verification capacity appears to undercut that objective. Conversely, if the mechanism is 'designed to fail', i.e., designed in a way that makes it difficult, if not impossible, to achieve compliance, in order to ultimately support the EU’s own NDCs through the revenues that it generates via CBAM, the resulting burden on non-EU exporters, to say nothing of the unfairness of the situation, becomes difficult to justify.

We wish to be helpful here; not merely critical. In our view, some degree of procedural flexibility within the verificatory framework of CBAM may be necessary, at least during the initial phase of CBAM’s operation. EU legislators are free to decide the length of time for which this flexibility should remain. As we see it, the present system of individual (i.e., verifier-by-verifier) accreditation, undertaken by one NAB at a time, appears too rigid and slow to square with the sheer number of installations and exporters subject to the framework. Some possible approaches include (1) permitting provisional recognition for verifiers already operating under internationally recognized carbon accounting and auditing standards, such as ISO 14064^[28], ISO 17029,^[29] GHG Protocol^[30] etc., and (2) expedited accreditation, particularly for entities that are subsidiaries or affiliates of (already) accredited EU-based verification bodies that follow common compliance protocols. Such measures will mitigate the risk that CBAM’s verification mechanism will collapse under the weight of its own procedural rigidity.

The ‘workability’, and therefore the credibility, of CBAM, now depends on whether the EU's verificatory framework is capable of sustaining the system that it seeks to enforce. At a more fundamental level, the quieter though uneasier ('trade-and-' [31]) question is: whose CBAM is it, anyway?

[1]              Hridyanand Ojha is an Advocate with Sarvada Legal in India; Akhil Raina is an independent practitioner based in Belgium. The views expressed here are in the authors' academic capacities, and do not reflect the views of their firms or clients. We would like to thank Mr. Atul Sharma, Mr. Folkert Graafsma, and Mr. Maksym Podopryhora for their views and support. All errors and omissions remain ours.

^[2]              ‘CBAM Legislation and Guidance’ https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism/cbam-legislation-and-guidance_en

[3]              Commission Implementing Regulation (EU) 2025/2621 of 16 December 2025 laying down rules for the establishment of default values https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202502621.

^[4]              ‘CBAM successfully entered into force on 1 January 2026’ https://taxation-customs.ec.europa.eu/news/cbam-successfully-entered-force-1-january-2026-2026-01-14_en

^[5]              Stakeholders had previously raised concerns regarding the lack of clarity on the calculation and verification of emissions. See, for instance, ‘Staalfederatie calls for urgent clarification on CBAM’ https://eurometal.net/staalfederatie-calls-for-urgent-clarification-on-cbam/; ‘Lack of clarity ‘undermines’ CBAM objectives: summit’ https://eurometal.net/lack-of-clarity-undermines-cbam-objectives-summit/; ‘Cement importers dread CBAM rollout as EU finally releases details’ https://www.spglobal.com/energy/en/news-research/latest-news/fertilizers/121725-cement-importers-dread-cbam-rollout-as-eu-finally-releases-details; Certain industry stakeholders, including EU-based traders, have indicated that a significant proportion of exporters in their supply chains remain insufficiently prepared to produce defensible verification reports https://eurometal.net/eu-steel-imports-ex-asia-risk-failed-cbam-verifications/;  Concerns pertaining to verification have also been raised in academic circles, See ‘Carbon Borders Without Differentiation: Why India's Challenge Tests the European Union’s Climate Diplomacy’ https://ielp.worldtradelaw.net/2026/03/guest-post-carbon-borders-without-differentiation-why-indias-challenge-tests-the-european-unions-climate-diplomacy/ ; 

^[6]              See, Regulation (EU) 2023/956 dated 10 May 2023 establishing CBAM, Annex IV, para. 3.

^[7]              CBAM, Article 7, para. 2.

^[8]              CBAM, Article 8; European Commission, list of National Accreditation Bodies https://webgate.ec.europa.eu/single-market-compliance-space/notified-bodies/acred-bodies ; individual National Accreditation Bodies maintain and publish lists of accredited verifiers on their respective websites, See e.g. https://tools.cofrac.fr/fr/easysearch/resultats_advanced.php?list-10290708

[9]              Commission Delegated Regulation (EU) 2025/2551 of 20 November 2025 laying down rules on accreditation of verifiers, including conditions for grant, oversight, withdrawal, and mutual recognition and peer evaluation of accredited bodies.

[10]             Guidance Document on CBAM Implementation for Installation Operators outside the EU, page 157 and 158 https://taxation-customs.ec.europa.eu/system/files/2023-12/Guidance%20document%20on%20CBAM%20implementation%20for%20installation%20operators%20outside%20the%20EU.pdf.

^[11]            See, for example, CBAM, Annex IV, para. 4.1 “when reliable data for an exporting country cannot be applied for a type of goods, the default values shall be based on the average emission intensity of the 10 exporting countries with the highest emission intensities for which reliable data can be applied for that type of goods.”  

^[12]            ‘Questions and answers on the Carbon Border Adjustment Mechanism (CBAM)’ https://ec.europa.eu/commission/presscorner/detail/en/qanda_25_3089.

[13]            EU importers must purchase and surrender CBAM certificates corresponding to the embedded emissions they declare. https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en. See also, ’What is a CBAM certificate and how do you get one?’ https://www.coolset.com/academy/what-is-a-cbam-certificate-and-how-do-you-get-one.

[14]            See generally, Thomas A. Lambert, How to Regulate (Cambridge, 2017).

^[15]             CBAM Default Values vs Actual Data: Cost Analysis for Exporters’ https://carbonsettle.com/blog/2026-01-29-cbam-default-values-vs-actual-data-cost-analysis-for-exporte

^[16]            These are the verifiers under the EU ETS, See  https://union-registry-data.ec.europa.eu/report/eu-registry-accounts. While the EU has not yet released an official list of accredited verifiers for the CBAM, EU ETS verifiers are allowed to extend the scope of their accreditation to cover CBAM verification (See Commission Delegated Regulation (EU) 2025/2551 of 20 November 2025, Preamble, para. 9).

^[17]            https://taxation-customs.ec.europa.eu/news/cbam-successfully-entered-force-1-january-2026-2026-01-14_en.

[18]            ‘France warns of verifier shortage’ https://www.cbamboo.com/newsletter/cbamboo-insights-16

[19]            Ibid. The source suggests that only three countries are currently accepting applications: the Netherlands, Sweden, and Italy.

^[20]            See, CBAM, Article 18, para. 2 and Commission Delegated Regulation (EU) 2025/2551 of 20 November 2025, Article 3 para. 1 and Article 3, para. 4, read with Annex II. Along with its application, an accreditation applicant is required to furnish descriptions of the procedures prescribed in Annex II, including those relating to verification processes, its quality management system, and the competence of its personnel.

^[21]            See, Commission Implementing Regulation (EU) 2025/2547 of 10 December 2025 laying down rules for the calculation of emissions embedded in goods, Annex IV, para. 1.1. This information includes information on the installation’s monitoring plan, specific direct embedded emissions of goods produced; balances of imported, produced, consumed, and exported measurable heat, waste gases and electricity per production process etc.

[22]            See Colette van der Ven and Sanvid Tuljapurkar, ‘The CBAM and Beyond: Leveraging EU-India trade cooperation to decarbonise Indian steel’ (Tulip Consulting, 30 April 2026) https://www.tulipconsulting.ch/content/uploads/2026/04/FINAL-Tulip-CBAM-Final-.pdf

^[23]            ‘Auto Bytes July 2025’ https://www.grantthornton.in/insights/thought-leadership/auto-bytes-july-2025/. Many MSMEs in India lack the requisite infrastructure and financial capacity to comply with CBAM requirements, as they often do not possess advanced metering systems to accurately track inputs, and find it difficult to access or invest in costly low-carbon technologies such as hydrogen-based DRI or renewable energy integration.

^[24]            ‘Proposal for a Regulation of the European Parliament and of the Council establishing the Temporary Decarbonisation Fund’ Article 3.2 r/w Article 6 and 7. https://eur-lex.europa.eu/resource.html?uri=cellar:95ee45d7-db37-11f0-8da2-01aa75ed71a1.0001.02/DOC_1&format=PDF and ‘Temporary decarbonisation fund’ Page 2 and 3. https://www.europarl.europa.eu/RegData/etudes/BRIE/2026/782666/EPRS_BRI(2026)782666_EN.pdf. A ‘Temporary Decarbonisation Fund’ has been proposed to support EU operators in carbon-intensive sectors such as aluminium, fertilisers, and iron and steel in undertaking decarbonisation efforts, and is to be financed by 25% of the revenues generated from the sale of CBAM certificates.

[25] https://www.europarl.europa.eu/RegData/etudes/BRIE/2026/782666/EPRS_BRI(2026)782666_EN.pdf.

[26]            See, Atul Sharma and Sahil Verma, ‘Developing Countries Are Being Asked To Fund EU’s Decarbonisation Efforts’ https://www.ndtvprofit.com/business/developing-countries-are-being-asked-to-fund-eus-decarbonisation-efforts-10831066

[27]            ‘Principle of CBDR-RC: Its Interpretation and Implementation Through NDCS in the Context of Sustainable Development’ https://digitalcommons.law.uw.edu/cgi/viewcontent.cgi?article=1133&context=wjelp page 14. The CBDR-RC principle recognizes that countries have differing national circumstances, capacities, and vulnerabilities, which must be considered in designing and implementing climate action.

^[28]            In particular, ISO 14064, Part 3 specifies principles and requirements and provides guidance for verifying and validating organizational, product-level, and project-level greenhouse gas (GHG) statements by companies, See ISO 14064, Part 3 https://www.iso.org/standard/66455.html.

^[29]            It contains general principles and requirements for the competence, consistent operation, and impartiality of bodies performing validation/verification as conformity assessment activities, see ISO/IEC 17029:2019 https://www.iso.org/standard/29352.html.

^[30]            See Greenhouse Gas Protocol https://ghgprotocol.org/about-us. The GHG Protocol establishes comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains, and mitigation actions.

[31]            See generally, Jeffrey L. Dunoff, ‘The Death of the Trade Regime’ (1999) 10(4) European Journal of International Law. https://academic.oup.com/ejil/article-pdf/10/4/733/6922772/100733.pdf

Here are two quick reactions to the super important question of what explains why countries did not use WTO dispute settlement to push China to change: 

1. In terms of facts about use of WTO dispute settlement against China, the empirical reality from the data is that it turns out the US did most of the heavy lifting. 

Look at the caseload. The US was the complainant or co-complainant in almost 100% of WTO disputes challenging China between 2001 and 2017 on issues that affected the broader WTO membership (eg, subsidies) as opposed to just one trading partner (eg, one Chinese antidumping order).  Aside from the US, no one else was willing to challenge China on issues that affected anyone beyond a country's own (bilateral) narrow economic irritant. 

That is a weird fact pattern. Lots of smaller or poorer countries brought many WTO disputes against the US or EU during this period. Why was everyone so afraid of China? (The answer cannot be that China never did anything WTO inconsistent. Everyone in the WTO lives in a glass house, even China.) 

The bigger question is thus not for the Americans but for the rest of the world: What prevented the EU, Japan and other countries from bringing disputes against China? 

2. Here are some of the most important contributing factors from the data and from our conversations with policymakers behind WHY there was insufficient willingness to challenge China (and even why it was difficult for the US to bring more cases against China): 

- Concerns over China's extra-WTO coercion/retaliation vis-a-vis (a) countries doing things China did not like (eg, Japan rare earths 2010; US tires safeguard in 2009, etc), including using the DSU against them, AND (b) foreign/multinational firms seen as complicit in providing evidence needed to prosecute actual WTO disputes in the real world. (If you can't get the evidence from firms, governments won't bring the case.) 

- Worry that a government wouldn't win a case against China even if companies turned over information. China's system is non-market. How does one even define a subsidy in China? (The public body ruling seemed to suggest Chinese SOEs were not providing subsidies? Hmmm...) Showing evidence might mean an even heavier lift than in a case against a market economy if you have to use third country benchmarks to make your case due to Chinese data (on prices and quantities) being so whacky, again because of its system. 

Soumaya and I go into more details about this in Chapter 7 of HOW TO WIN A TRADE WAR. 

Given that the dispute settlement system did not work with China before 2017, and we are now 10 years beyond when even the US stopped trying (and no other WTO member has picked up the mantle, even with the MPIA, there are still virtually no disputes successfully challenging China's non-market practices!) the big question is, what comes next?

The answers to that are found in chapters 8-end of the book.

 Can't wait to see the next post!

My thinking evolved when it became clear to me that the world had changed, and the key driver of that change was China. But maybe not necessarily in the reasons why you would think.

First, initially, the challenges with China were essentially just over its economic system. It wasn't becoming more market-oriented – lots of subsidies, industrial policies, state-owned enterprises.

But over time, it also became clear that China not only had a different economic system, but it had a different way of viewing and interacting with the international trading system than we were used to as well, and that that created conflicts. China's policies and outcomes made it clear that it really didn't believe in interdependence the same way that the other members of the WTO and other economies around the world did.

The Made in China 2025 policy, its dual circulation policy. These were really attempts and efforts to make other countries dependent on China for inputs necessary for their supply chains, while at the same time reducing China's dependence on the rest of the world. And in a trading system that is oftentimes based on trust and the idea that when things happen and you need to engage with trading partners, either to sell them things or to buy things, if one of the major players out there isn't looking at the system in that same way, the world really has changed.

So you put those aspirations together, the policies together with the objectives, and the fact that over time China has just grown so large economically that what it does really, really matters and has impacts around the world, it became impossible to ignore.

In reaction to this, here are some questions I have for Chad (or anyone else who wants to address the issue) about trade relations with China: Would you like to see China participate in the world trading system in the way many other governments do, based on the idea that market-orientation and interdependence are key elements? Would we all be better off if China did so?

If the answer to those questions is yes, then I have this follow-up: Should pushing China in this direction have been, and should it be now, a priority of U.S. foreign policy? (For some people, I sense the answer to the first set of questions is something along the lines of "no, we just want China to go away," but this post is going to focus on the people who say "yes." "No" will have to be dealt with in a separate post some day!)

In terms of this being a priority in the past, I think it's clear that putting pressure on China was not a priority for the U.S. government in the years following China's accession. China acceded to the WTO just after 9/11, and U.S. foreign policy was distracted by the 9/11 response for many years. Pressuring China on anything was not high on the agenda, and in fact getting China's support (or non-objection) for War on Terror things was more of the focus when it came to relations with China.

If pressuring China on trade and economic policy had been a priority, there would have been a much more aggressive effort to try to ensure China's compliance with its WTO obligations. We did see some WTO complaints, and they seemed to work reasonably well. But we didn't see complaints on the big structural issues people are talking about now. (There was also the issue of using Section 421 or standard trade remedies against China, but that's not the same as pressuring China to liberalize).

And while we got some degree of U.S. pressure through bilateral dialogues, and through attempts to negotiate trade in China's neighborhood via the TPP, it never seemed to me that those were likely to have much impact on China's economic policies. I don't know if the people pushing for those approaches believed they were being tough, but as an outsider I always saw these options as much weaker than WTO complaints.

Obviously, it would have been nice if China had just, on its own, kept moving in a market-oriented direction after its WTO accession, so that no one had to do the work of pressuring. But it's fairly common for governments to resist liberalizing in accordance with the commitments they made, and when they don't do what they promised, other governments need to use the available tools to push them. And when it comes to Chinese trade and economic policies, from what I can tell, a ruling by a neutral international judicial body is the most effective tool there is. I'll leave it to the China experts and political scientists to explain why, but it seems to be the case.

Of course, that's not to say this is a perfect tool. How would China have reacted to successful complaints on issues such as industrial subsidies and the behavior of its state-owned enterprises? I don't know! But if it didn't comply, there would have been the possibility of authorized retaliation, which could have gotten us to some rebalancing in a way that was consistent with the rules of the world trading system.

So that's the past. Turning quickly now to the present, some people may say, well, maybe using WTO dispute settlement to pressure China should have been a priority then, but it wasn't, and it's too late now. But I'm not sure that's right. We've seen some successes with WTO complaints in recent years. Why not take it further and see how it goes?

Instead, we have gone down a different path, and are taking an approach based on unilateral tariffs and trade restrictions (along with pressure on allies to also impose tariffs and trade restrictions), with a focus that is more on closing our market to China than on pressuring China to liberalize. (We are also closing our market to other countries, which throws everything off here!)

We'll see how it all turns out. So far, I would say the answer is "not that well." But we can reconvene in a couple years when we've given it a bit more time.

On May 7 a three-judge panel of the Court of International Trade (CIT) ruled against the Trump administration’s latest round of global 10% tariffs. The government argued that Section 122 of the Trade Act of 1974 authorizes these import duties because we face a “large and serious balance-of-payments deficit.” There is one problem: we do not.

Historically, under the Bretton Woods system of fixed exchange rates, a balance-of-payments deficit meant a drawdown on the country's official reserve assets. But Bretton Woods ended half a century ago. Under the flexible exchange rate system we have today, there cannot be a surplus of dollars that forces an outflux of gold or otherwise triggers a balance-of-payments crisis. Instead, the exchange rate–the price of the dollar–simply adjusts.

After previously acknowledging that trade deficits and balance-of-payments deficits are “conceptually distinct,” the Trump administration is now attempting to blur the distinction. Thankfully, the CIT, relying heavily on legislative history, saw through this chicanery.

As the government prepares to appeal its case to the Federal Circuit, it is important to emphasize how badly they have misconstrued Section 122’s purpose. One aspect of its history has not received much attention yet: its relationship with the General Agreement on Tariffs and Trade (GATT). This landmark trade agreement makes it crystal clear what a balance-of-payments deficit is.

Article XII of the GATT, as amended in 1955, allows member states to enact import restrictions to safeguard the balance of payments. This provision only permits countermeasures “to forestall the imminent threat of, or to stop, a serious decline in [a member state’s] monetary reserves” or, if reserves were very low, “to achieve a reasonable rate of increase in its reserves.” This is precisely how economists, plaintiffs, historians, and now the CIT have defined the balance-of-payments. And the provision remains in force. In fact, the administration invoked Article XII as the legal basis for its Section 122 tariffs when it notified the WTO.

Congress was fully aware of this article when, in 1973, it started work on what would become the Trade Act of 1974. In fact, in June of that year the Senate Finance Committee commissioned a study of how Article XII worked. In the study, Article XII’s conceptualization of balance-of-payments deficits is simply taken as given. The same year marked the beginning of the Tokyo Round of GATT negotiations. By revising our trade laws, Congress aimed to equip US negotiators with leverage tools under the GATT provisions – not to run afoul of Article XII by dramatically expanding the definition of balance-of-payments deficits, as Trump now imagines.

The language of Section 122 itself makes the distinction between balance-of-payments and trade deficits clear as well. It explicitly refers to the trade balance just a few lines down from the balance-of-payments provision the government relies on, demonstrating that legislators saw it as a distinct concept.

When introducing this section of the bill Senator Russell Long (D-LA) explained that “our payments deficit had grown from a bearable $2.9 billion” in 1962 “to an intolerable $14.7 billion” – figures that could only refer to the monetary reserve drawdown found in accompanying measures from the Commerce Department. He differentiated this statistic from a distinct $11 billion “trade deficit” that emerged in 1971-72. In his own testimony, U.S. Trade Representative William Eberle confirmed that Section 122 sought to equip “current negotiations for international monetary reform” by codifying a tool “to achieve and maintain international payments equilibrium.” He noted that it was meant to be used “for balance-of-payments purposes rather than for altering trends in import growth,” explicitly contrasting the provision’s true purpose with the Trump administration’s interpretation.

The economics and history are clear. Section 122 applied to monetary reserve balances, not trade deficits. If President Trump wants to impose a worldwide tariff because he believes that will improve the economy, he should convince Congress to pass legislation. He should not be allowed to rely on word games to circumvent the Constitution.

Since 2019, the European Union (EU) officially defines China as a ‘multifaceted partner, economic competitor, and systemic rival’. In 2025, it reaffirmed this assessment of its relationship with China, putting more emphasis on the rivalry. There is much, both in terms of politics and economics, that divides, and gives rise to tension between, the EU and China. However, in times in which the United States (US) imposes, through coercion and extorsion, a most unfavourable trade deal on the EU and threatens to annex territory of one of its Member States, the EU may need to reassess its relationship with China. The US is evidently intent on redesigning the international order in its own narrow national interest and has turned its back on international cooperation and the rule of law in international relations. Both the EU and China, on the contrary, still profess their adherence to a rules-based international order and peaceful, mutually beneficial international relations. While this would be most desirable, it is unclear, however, whether the EU and China can be partners in, and global leaders of, an effort to preserve a rules-based international order. What is clear is that for such partnership to be possible, and global leadership to be credible, the EU and China must overcome, or at least mitigate, current disagreements, in particular disagreements on economic issues. This conference aims to address these disagreements and search for common ground on issues that currently divide the EU and China.

And this is the conference flyer:

The livestream link is here.

First of all, I was very excited when I came up with the Trade War Games title for the post, and was planning to make a reference to the famous line from the movie WarGames about how the only winning move is not to play. It was disappointing, then, to see that Chad and Soumaya themselves make this reference in the book, stealing what I thought was going to be my thunder. But I left the title anyway, because I had already typed it in there and couldn't think of a better one

More substantively, let me note that I agree with a general point that they make at various times: Empirical evidence doesn't tell us as much as we might like about trade policy, and to some extent we are all going on instinct. Yes, there is data out there, and equations, and logical arguments. But there is a lot of uncertainty, and often some arguments on both sides. So, we should probably all have a bit of humility about these issues. (Having said that, I'll put aside that humility for some of the points I make below!)

With apologies to Chad and Soumaya, now I'm going to raise a complaint. The subtitle of the book is "An Optimistic Guide to an Anxious Global Economy," but I don't think they are very optimistic! Right away, on pp. 3-4, they talk about "a little elegy for the old rules-based trading system" and say they eventually "realized that there was no going back." Come on, Chad and Soumaya, don't give up so easily! Let's keep up the fight!

(Let me interject a non-trade point here. Has anyone come up with a Brangelina-style name for Chad and Soumaya? Choumaya maybe? It would save a bit of space in writing about them.)

Back to the fighting (or not), on p. 5 Chad and Soumaya – I'm not using Choumaya until I get their permission! – say "[d]on't expect an ideological defense of free trade." Well, OK. But this makes me wonder if I need to put together a defense of free trade – evidence-based rather than ideological – in book form myself. If someone could turn off trade policy for a few months, maybe I could find the time to write one?

Turning to Chapter 2, on trade and peace, I want to make the point that some people – I don't mean Chad and Soumaya here – seem to frame the issue as trade not being able to prevent all war, perhaps as a way to dismiss the narrative that trade contributes to peace. So, some people might say, Russia and Ukraine were both part of the WTO, and that didn't stop the war, so ipso facto trade does not promote peace.

Now, while it's no doubt true that trade doesn't stop war completely, nevertheless, it seems to me that there are some pretty good success stories (e.g., the EU), and I think it's fair to say that, on balance, trade contributes to peace. As Chad and Soumaya put it more elegantly, on p. 34 of the book, "a world with a full tapestry of economic connections is safer than one with lots of spooled threads sitting alone."

Skipping ahead a bit, they note on p. 76 that most people don't care much about trade, which is something I've mentioned here on this blog. I'm not sure whether this is good or bad. Sometimes the public attention on our subject area is nice (and I hope it helps their book sales!); other times it feels good to argue quietly about things few people care about (like when Chad and I argue about "optimal tariffs").

Just after that, Chad and Soumaya make a point, in a very polite manner, about how "political identity" might be a better explanation for populism then reactions to trade policy. There's a lot going on with this issue, but I think some research by Professor Diana Mutz supports this view.

Somewhat relatedly, on pp. 78-79, Chad and Soumaya raise the issue of certain voters shifting from Democrat to Republican because of Bill Clinton's support for the NAFTA. I feel like I debunked this suggestion here and here, and I'm curious how they would respond to those posts.

Finally on these same populism themes, on p. 79 they say, "[i]n 2016, the [China shock] effect was big enough to tip the vote and bring President Trump into office." Here, I feel obligated to note that Trump lost the election to Hillary Clinton by several million votes. Maybe populism in the U.S. was all just an electoral college illusion?

My favorite chapter of the book was the one on trade deficits, where I have strong feelings (along with a good deal of uncertainty, because as they point out, economists have some different views on the specifics here, even if they agree on the general points). In this context, on p. 94, I was glad to see them highlight the problem of U.S. government borrowing. I know there's a lot going on in the world right now, but I think this deserves more attention. Then on pp. 97-98, they get into the issue of Chinese consumption, and talk about how it is lower than American consumption. That's true, although American consumption is above international averages, so I'm not sure this is the best comparison. Basically, as I understand it, China is below average and America is above average. That, I think, is a key part of the explanation for U.S.-China trade imbalances.

In terms of solutions to imbalances, on p. 100 they seem skeptical that currency adjustments could help, and maybe they are right politically. Nonetheless, in my view, we really should be pushing for this sort of adjustment (i.e., market-based currency depreciation/appreciation).

The issue of imbalances is one where I think a lack of understanding of particular aspects really hurts the policy debate, and if policymakers had a better sense of the issue, they might approach it differently. Or they might not, of course. But explaining it to them is worth a try!

Turning to Chapter 7 on rules, this is the chapter for the lawyers. Here, I will complain once again about the lack of the optimism promised on the book cover! Their take seems to be that while a rules-based system sounds good, it can't actually work these days. I'm going to push back here and say that perhaps a few more years of trade wars will remind everyone of the benefits of a rules-based system, and we'll see a resurgence in support for the old system, or something like it at least. Yes, the old system had problems, but is the current approach working out for those who are pushing it? I'm not sure it is, and at some point that may lead to some pining over what has been lost.

And anyway, even today many people still believe in a rules-based system: Governments keep signing trade agreements with dispute settlement mechanisms, and using them on occasion to bring formal complaints; and despite all the difficulties with WTO dispute settlement, China has filed two panel requests against India in recent months, marking the first WTO disputes between those two countries.

So, even if there is no going back, the present situation is not ideal, and we need to think about a way forward that incorporates some of what we used to have. (Maybe I really do need to write that optimistic pro-free trade book.)

Some other points on the rules:

• On p. 112, I think they are underestimating the chances of a successful WTO complaint on Chinese subsidies. Of course, maybe the problem is me overestimating the chances! But I don't think I am. (There's tons of evidence that has been gathered as part of domestic CVD cases. It seems like this would be useful in SCM Agreement Article 5 adverse effects complaints.)
• On p. 114, this is a great line about zeroing: "This is an abuse of math that delivers a higher tariff rate."

Next up were chapters on subsidies and stockpiling that I thought were very sensible (yes, subsidies are "a sprawling mess"). But then we get to a chapter on "import barriers," which they call "the good stuff" (p. 173). They seem to think everyone is excited about the import barriers chapter, but I read it like I watch horror movies, with my hand covering my eyes and taking only quick peaks at the text! But I do agree with them that import barriers "can be unwieldy, blunt, and prone to abuse."

And then in the conclusion chapter, on p. 215 they encourage readers "to treat this as an exciting opportunity to come up with a vision of the future." They are practically begging me to write a book! I will note that there are hints of their own vision in this chapter, and I think some aspects of it could help with the path forward. For example, they play up the importance of safeguards, and I agree that this should be a key part of a revised and resurgent rules-based trading system.

They also make a point about creating an "international competition authority" to deal with "market dominance." Here I'm more skeptical. A practical problem I see is that in today's world market, this would probably apply to U.S. big tech dominance, which means the U.S. government is likely to be opposed. Of course, a future U.S. administration could be skeptical of big tech, and it may also be that U.S. big tech dominance is beginning to fade, which would change the dynamics. Still, I'm not sure an international organization like this one could get off the ground.

Overall, the book provides a reflection, done in the moment rather than after the fact, on a chaotic time in trade policy. At this point, with so much uncertainty about how current U.S. trade policy efforts will turn out, it can be hard to assess the state of things. Chad and Soumaya seem to be doing a bit of that, but also holding people's hands as they try to make sense of everything going on. It is, as they put it, a "guide" to the trade wars. While the book is sort of about "how to win a trade war," perhaps it's better thought of as a self-help/therapy book on the questions of "how to process a trade war" or "how to stay sane in the midst of a trade war."

Let me also note that Chad and Soumaya are doing a Peterson Institute event on the book later today, and if they say anything that triggers additional reactions, I'll add them to this post. (And here they are on The Daily Show with Jon Stewart, if you want a more comedy-focused book launch.)

Finally, separately from the book, but presumably tied to its release so I think I can bring it in here, in a NYT op-ed they published on Sunday Chad and Soumaya weigh in on a possible China-U.S. trade peace:

In our dream scenario, Mr. Trump would accept that his government could help to redress global economic imbalances by borrowing less. For its part, the Chinese government would strip away the incentives it provides that lead its companies to overproduce, while encouraging its citizens to spend and import more. The United States and China would agree that mutual dependence makes them both safer — and then exchange hugs.

Sounds good! Let's make all that happen! (Although I remain skeptical that Chinese consumers – or German, Japanese, etc. consumers – are suddenly going to spend significantly more). But before you start feeling too optimistic, here's some cold water they are throwing on you:

For this to happen, however, Mr. Trump and Mr. Xi would need personality transplants. So more realistically, any future deal must reckon with three facts: First, the Chinese government is no more willing to transform its subsidy-soaked economic model than the U.S. government is keen to make veganism the national diet; second, both the U.S. and China have considerable leverage in any negotiation; and third, the bilateral U.S.-China trade relationship involves the rest of the world, too.

They then suggest the possibility of "formally giving up on any idea of a grand, permanent détente in the near future, and establishing a goal of resetting expectations at least once a year." Maybe that's the most realistic approach. But I'm still holding on to my optimism, in part because I see so much that hasn't been tried, and I would like to convince policymakers to give it all a shot.

Details of the Trump Administration’s recent deals with China have yet to be released, but a few key goals have been announced by the White House. 

✔ China will meet its 2025 pledge to buy 25 million metric tons of U.S. soybeans in 2026, 2027, and 2028. This should be an easy goal to reach. With the exception of the trade war years of 2018–2019 and 2025, soybean exports to China topped that amount for every year since 2014. 

✔ China will buy at least $17 billion per year of U.S. agricultural products in 2026 (prorated), 2027, and 2028, over and above its soybean purchases. If met, this will be a significant export increase above the 2022 peak of $14 billion for agriculture, fishing, hunting, and forestry exports to China other than soybeans. It would be an even bigger increase from last year’s non-soybean agricultural exports to China of just $2.5 billion. 

✔ China will purchase 200 U.S.-made Boeing aircraft. It is not yet clear which models China will purchase or when the delivery dates will be. The previous high for deliveries was 202 aircraft in 2017. At the time, Boeing announced an agreement to sell 300 aircraft during a trade mission to China. Most of those sales never materialized. Hopefully this deal will be more durable.

✔ China will address U.S. concerns regarding critical minerals. Regardless of what actions China may undertake, the United States can take several steps to improve our position. These include adopting domestic permitting reforms to facilitate domestic production and ending tariffs on imports of aluminum, copper, tin, and other critical minerals supplied by trading partners that are not U.S. adversaries. 

✔ The United States and China will create a Board of Trade to manage trade in non-sensitive goods and a Board of Investment to discuss investment-related issues. Establishing forums to head off potential conflicts may be helpful, but creating a new U.S.-China agency to “manage” trade in goods like toys and clothing is unnecessary. Managed trade tends to create new bureaucracies and increase barriers. Mutually beneficial trade in non-sensitive products should be freed, not managed. 

What to look for next:

Related issues to watch include the proposed renewal of Section 301 tariffs on China that were imposed during his first term. The Biden Administration determined that China’s policies failed to improve in response to Section 301 tariffs, and then took the unprecedented action of extending them for an additional four years.

The Office of the United States Trade Representative (USTR) has initiated a second review of existing Section 301 tariffs and launched investigations into “excess capacity” and forced labor. However, USTR has yet to dispute a single Chinese action at the World Trade Organization (WTO). This is a missed opportunity, given the poor track record of unilateral Section 301 actions compared to WTO disputes initiated by the United States.

The Trump Administration should take this opportunity to build on recent successful policies such as its waiver of the Jones Act to facilitate transportation of oil, natural gas, and other resources that Americans rely on, and its decision to exempt many goods from its 10% Section 122 tariffs, including certain critical minerals and fertilizers, tomatoes, pharmaceuticals, and cars and trucks. Additional steps to increase the flow of goods would demonstrate a commitment to affordability and would provide an economic boost to mitigate costs related to conflict in the Middle East

Dominik A. Leusder:

Right. Let’s assume that the current administration actually reduces the fiscal deficit. What happens to the trade deficit?

Michael Pettis:

Let’s say Donald Trump reduces the American fiscal deficit. What most American economists will tell you — because I think Americans don’t really believe that foreigners have agency — is that if the US fiscal deficit goes down, then savings go up by definition. If savings go up, the US trade account contracts. This assumes that net foreign inflows into the United States will also contract.

But if you were a Chinese or British or Swiss or Malaysian investor, or a Belgian dentist or the central bank of Korea, would a reduction of fiscal deficits make you less likely or more likely to invest your surpluses in the United States?

I would say you’re probably more likely to invest in the United States, because suddenly American debt has become much more valuable and much safer. In that case, you could actually see the trade deficit rise. So the question is: Is the American trade deficit driven by low American savings or by high foreign savings? If it really is all about low American savings, then I agree that raising the American savings rate and the trade deficit will come down. But if it’s driven by foreigners, then reducing the American fiscal deficit will probably be balanced by a rise in unemployment, not a reduction in foreign inflows.

This idea that trade imbalances are "driven by foreigners" is, I think, fundamental to his view. The high savings of foreigners, he argues, are the cause of imbalances, and relatively low American savings are of less interest to him (you may think this is all about China, but he tends to bring in Germany, Japan, South Korea, among others, as well). Consequently, his proposals for changes to the system involve new rules for the high savings/trade surplus countries only (from the perspective of a low savings/trade deficit country such as the U.S., this would mean only foreigners are subject to any new constraints):

I would argue that the most efficient way to do this is to have a new global Customs Union along the lines that Keynes proposed at Bretton Woods, in which you penalize countries that run deep and persistent imbalances. Keynes’s argument was: I don’t want to tell you how to run your economy. You can be communist, capitalist, fascist, socialist, whatever you like, but whatever your domestic problems are, you cannot externalize them through the trade account. So we will not allow you to create persistent imbalances. That would be the best solution — a new form of globalization.

We don’t want a world in which real economies must adjust to hot money flows. So anything that reduces them is good for the global economy.

Many people say this can’t be done: at Bretton Woods everybody hated everybody, and the United States ruled the world. Back then only one country needed to be convinced, now it’s many. But I think that’s a little pessimistic. If you include the United States, Canada, England, and a few other developing countries with deficits, such as Mexico or Colombia, then you’ve got 80 percent of global deficits. If you create a Custom Union that says “if you trade with us, you cannot run surpluses,” that will force the whole world to adjust.

To me, one of the biggest problems with the Pettis approach is that he seems to be looking for one side to blame here, in effect asking the question: "Is the American trade deficit driven by low American savings or by high foreign savings?" In his mind, it has to be one or the other – either the Americans or the foreigners are to blame. He then decides to put the blame for imbalances on the foreign surplus countries that have high savings, with low-savings deficit countries such as the U.S. being innocent victims. The surplus countries save too much, he says, and that's the source of all the troubles.

As I see it, however, explaining the existence of imbalances requires more than just looking for one side to blame. The trade imbalances at issue here are more accurately described as resulting from differences in savings levels (both government and private), rather than coming just from the savings behavior of one side. There is no particular savings level that is the objectively correct one. With government savings, there is disagreement about what constitutes an appropriate fiscal policy; and with private savings, my sense is that the role of cultural factors is pretty strong (and that Pettis and others underestimate it). Thus, it doesn't make sense to blame the countries with high savings rates for trade imbalances (or, for that matter, to blame the countries with low savings rates). The issue is simply that differences in savings rates can have an impact on the trade balance, especially when governments have policies that get in the way of the currency adjustments that could help bring things into balance.

Relatedly, I think this is part of why the Pettis view appeals to many people across the political spectrum in the U.S.: They can use his arguments to put the blame for U.S. trade deficits on foreigners. However, if someone is genuinely concerned (for whatever reason) about trade imbalances, I think it's important to emphasize the differences in savings levels, in combination with factors such as policies that affect the exchange rate, as the explanation. That's not likely to be a popular approach among U.S. politicians, but it seems to me that it's the right way to think about the issue.