Misunderstanding a Memorandum of Understanding

Donald Trump answering questions on the negotiations for a trade agreement between the US and China:

I think the MOU is going to be very short term.

I don’t like MOU’s because they don’t mean anything. To me they don’t mean anything. I think you’re better off just going into a document. I was never a fan of an MOU.

He was then contradicted by his top trade representative Robert Lighthizer:

A memorandum of understanding is a binding agreement between two people.

This was in front of  a Chinese delegation.

They obviously have different ideas about how to negotiate trade deals. They may both be wrong.

Investipedia: Memorandum of Understanding:

“A memorandum of understanding (MOU) is a nonbinding agreement between two or more parties outlining the terms and details of an understanding, including each parties’ requirements and responsibilities. An MOU is often the first stage in the formation of a formal contract.”

A memorandum of understanding (MOU) is not legally binding but is viewed as a serious document by the law. In the United States, an MOU is the same as a letter of intent, which is a nonbinding agreement stating a binding agreement will soon follow. MOUs are most often used as part of multinational international relations because, unlike treaties, they are quick and can be kept secret.

An MOU signals a legal contract is imminent. However, an MOU itself is not legally defensible but should still clearly outline specific points of an understanding. An MOU should describe the parties are, the project on which they are agreeing, the scope of the document, each parties’ roles and responsibilities, and more. An MOU can help two parties move in the right direction toward an agreement.

An MOU, while not an enforceable document, still holds a lot of power because of the time, energy and resources needed to draft an effective and fair document. An MOU forces the participating parties to reach a semblance of a mutual understanding, and, in the process, the two sides naturally mediate and figure out what is most important in moving toward an eventual future agreement that benefits both sides.

The misunderstanding about an MOU:

There were mixed responses, from:

Much as I hate to say this, but Trump is right. Any MoU I have negotiated included clauses that made it clear it was non-binding. It’s not a contract. Poor choice of a Trade Rep who doesn’t understand this though. The below is the official UK government definition.

To:

Jesus Christ Dom…. this is Government not commercial law…. MOUs are how trade deals are made functional. They bind countries.

It doesn’t surprise me that Trump gives no weight to an MOU – he dumps full trade agreements he doesn’t like, and starts trade wars as a way of forcing changes to trade practices and regulations.

The understanding from this is that anything goes with Trump, regardless of normal practice on negotiating trade agreements.

I don’t think that Trump’s rubbishing of the value of an MOU will give the Chinese any confidence about trade negotiations, and will negate the value of any Memorandums of Understanding.

Analysis of USMCA trade agreement (aka NAFTA 2.0)

While Donald Trump portrayed the new US-Mexico-Canada trade agreement as the best in modern history (it should at least be an improvement on NAFTA) it looks largely like pro-trade/globalisation business as usual with some weak tweaks.

Stephen Jacobi:

Despite tweaks here and there, USMCA is unlikely to disturb unduly the extensive integration between the three amigos in North America, except perhaps in terms of the motor vehicle industry where the changes are a little more extensive. Mostly though some of the world’s most competitive supply and value chains will continue as before and that is a good thing for industry, workers and consumers in that part of the world.

Financial Times: Nafta Is Salvaged From Trump’s Wrecking Ball

It could have been a lot worse. When Donald Trump arrived in the White House, it was on the back of frothy rhetoric about the awfulness of trade agreements. He had a special animus against the North American Free Trade Agreement with Mexico and Canada, which he called “the worst trade deal maybe ever signed anywhere” and which he promised either to change fundamentally or to destroy.

Nearly two years later, Nafta has suffered neither of those fates. Late on Sunday night the US and Canada agreed to revise the deal, clunkily renamed the US-Mexico-Canada Agreement. To be sure, the agreement is generally the worse for these revisions. The US Congress, which needs to approve the deal, should try to improve it, or at least not impair it further. But thanks largely to the determined effort by Canada to keep the pact alive and functional, severe damage has been averted.

Scott Lincicome (@scottlincicome) via Twitter says the agreement is more for (Trump’s) political purposes than practical trade improvements:

“By no means is this a perfect (even great) update to an old FTA. BUT it’s not devastating, maintains free-ish trade in most goods/services, modernizes, and reduces uncertainty.”

“For the US, it’s a missed opportunity to liberalize further & probably makes us less competitive. But the bigger issue is: was the last 21 mos of uncertainty/hostility worth what’s basically “NAFTA+TPP+minor good/bad changes” when you could have just had TPP (maybe even amended)?”

Seems obvious to me the answer is “no,” especially since we’re now gonna do the same song-and-dance with Japan and will (for now) miss out on the TPP’s much-larger AsiaPac integration (and China balancing – the clear, unstated point of much of this).

Meanwhile, the 232 tariffs/retaliation remain, & POTUS may be emboldened to use more “national security” threats to get “deals” that are worse than what we could’ve had BUT help him politically (at our allies’ & long-term expense). That may be the worst USMCA precedent of al.

2) There’s actually some trade liberalization in this deal! (Crazy, I know) Canada opens its dairy market a little (keyword: a little – 0.34%); the US in exchange opens up a little on dairy, peanuts, & sugar. Good for consumers (though not ideal free trade). De minimis raised too.

3) NAFTA was old and needed updating; this deal – just like TPP (more on that later) – includes new, relatively-uncontroversial “modernization chapters” on things like SMEs, e-commerce, non-tariff barriers, etc. Needed to be done, though one can quibble on the margins.

4) Finally, it seems (see caveat above) the USA’s WORST demands – procurement, mandatory US content, 5-yr sunset, guest worker visas, “seasonal” trade remedies, safeguards, etc – were either removed entirely or softened to the point of being practically harmless.

I imagine the US dropping these demands, perhaps more than anything else, is why the deal (which looked dead) got done. Remove the “poison pills,” and the bad/ugly stuff is annoying but (probably) worth nixing the uncertainty & keeping NAFTA alive.

Now, the Bad:

1) Ex investment, the deal includes (and in some cases even expands) many of the “regulatory” FTA provisions often criticized by free marketers because they are intrusive, costly or even protectionist: labor, environment, IPR, etc. Some like IP go beyond TPP.

Whether you like these things or they’re dealbreakers is really gonna depend on your litmus tests & the specific provisions. For me, I don’t see anything in these chapters (so far!) that makes me hope the deal dies in Congress.

2) The deal doesn’t kill most of the protectionism NAFTA left. Eg, many US/Canada agriculture (even dairy) restrictions; services & investment “non-conforming measures” (incl the US Jones Act, sigh). Big missed oppty to *expand* trade in a once-a-generation negotiation.

It also doesn’t fix NAFTA’s broken dispute settlement system (Grumble: maybe if certain parties weren’t so focused on making the deal more protectionist, arguing about “national security” & tweeting insults, they could’ve fixed this stuff. Bah.)

3) The 232 side letters. Yes, quota levels are so high 232 tariffs might never apply to Canadian/Mexican autos/parts, but cmon: these are still quotas that still contemplate NATIONAL SECURITY tariffs on CARS in the NA supply chain. That’s bad on multiple (law, econ, principle) levels.

And the 60-day “consultations” letters implicitly accept a finding that NATIONAL SECURITY TARIFFS could apply to close allies and integral parts of our industrial base. I get the politics, but, systemically, this stinks. This should be a blanket exemption. Full stop.

Finally, the Ugly:

1) Rules of Origin. The automotive ROO are managed trade on steroids, requiring originating (duty free) vehicles/parts to have high levels of not just total regional content, but also steel/aluminum purchases, & “high wage” labor. Many other onerous regulations.

Libertarian principles aside, this will likely decrease the competitiveness of the NA auto sector, accelerate offshoring of small car production & increase consumer costs. It also creates new precedent for other US FTAs & cements these rules into the North American supply chain.

2) The glaring omission: US steel/aluminum NATIONAL SECURITY tariffs, plus Can/MX retaliation, remain in place. So the pain (for almost everyone) continues, even though Trump got his “trade deal” – wasn’t that the point? I guess not (not yet at least).

BIG PICTURE:

By no means is this a perfect (even great) update to an old FTA. BUT it’s not devastating, maintains free-ish trade in most goods/services, modernizes, and reduces uncertainty. YES, Trump caused the uncertainty, but it’s better than where we were 2 months ago

Some of the worst provisions, moreover, are delayed or just side letters or could be amended in the future (ROO by proclamation in the USA). Seems Can/MX “caved” in that they found a deal they could live with and just wanted Trump to Leave North America Alone. OK.

For the US, it’s a missed opportunity to liberalize further & probably makes us less competitive. But the bigger issue is: was the last 21 mos of uncertainty/hostility worth what’s basically “NAFTA+TPP+minor good/bad changes” when you could have just had TPP (maybe even amended)?

Seems obvious to me the answer is “no,” especially since we’re now gonna do the same song-and-dance with Japan and will (for now) miss out on the TPP’s much-larger AsiaPac integration (and China balancing – the clear, unstated point of much of this).

Meanwhile, the 232 tariffs/retaliation remain, & POTUS may be emboldened to use more “national security” threats to get “deals” that are worse than what we could’ve had BUT help him politically (at our allies’ & long-term expense). That may be the worst USMCA precedent of all.

Stephen Jacobi (Executive Director of the NZ International Business Forum) has a New Zealand perspective in “The greatest FTA ever negotiated”

The deal does have some implications for New Zealand interests though:

  • US dairy farmers will gain some additional access to the Canadian market, not a great deal more than under the former TPP and certainly not enough to bring down Canada’s extensive supply management for dairy
  • Canada will phase out its “special milk class 7” scheme under which Canada was able to supply subsidised milk powder to global markets – that will be welcomed by New Zealand exporters
  • Canada will rein in British Columbia’s scheme to allow sales of BC wine in supermarkets, while imported wines were relegated to speciality stores – this was a WTO dispute in the making and will assist NZ exporters. It remains to be seen whether Canadian restrictions on the distribution of wine in other provinces will be reformed
  • The operation of controversial investor-state dispute settlement (ISDS) will no longer apply between the United States and Canada (but will continue between the United States and Mexico)
  • The US has extended the intellectual property provisions of the former TPP which were stripped out of CPTPP.

The latter two elements make it both easier and harder to negotiate a future FTA between the US and New Zealand. While the elimination of ISDS will be welcomed by the NZ Government, intellectual property remains a real sticking point.

Implications for China and Asia/Pacific:

One other provision is potentially hu-uge. The USMCA parties have agreed to consult and potentially withdraw commitments if one of them negotiates an FTA with a non-market economy (read: China). This is unusual for an FTA and calls into question future Canadian and Mexican support for the Free Trade Area of the Asia Pacific (FTAPP) which has been on APEC’s agenda for over a decade.

Preliminary US-Mexico trade deal, Canada uncertain

The United States and Mexico have reached a preliminary trade agreement designed to replace NAFTA, but there is uncertainty over where this puts Canada, who were also a part of NAFTA.

Fox (via Christian Whiton, whowas a senior advisor in the Donald Trump and George W. Bush administrations): Trump replaces NAFTA and triumphs — New trade deal with Mexico is YUGE win for both countries

President Trump won a major victory on trade on Monday, supplanting the North American Free Trade Agreement (NAFTA) and replacing it with something far more beneficial. The new deal will help American workers and manufacturers. It’s also a win for Mexico.

One of the most fundamental parts of Trump’s campaign for president was his promise to change America’s deeply flawed trade arrangements.

Second only to the booming economy, Monday’s announcement of a deal with Mexico is the most visible manifestation of Trump’s fulfilment of his campaign promises.

This victory will lead to others.  The leftwing government of Canada, the other member of NAFTA, had refused to negotiate seriously, perhaps believing their friends in the progressive commentariat predicting Trump’s demise.

Canada’s foreign minister, Chrystia Freeland, spent most of her time on visits to the U.S. lobbying governors and congressmen rather than talking seriously to our trade negotiators.  Her boss, Prime Minister Justin Trudeau, even though it was a good idea to antagonize Trump at his failed G7 summit in June.

Canada must now return, hat in hand, for a deal.  If not, Trump will advance the deal with Mexico and leave Canada behind.

The European Union and China will also be greatly concerned about the Mexico deal—and more likely to negotiate seriously.

I’m not sure why the European Union and China will be concerned by this.

The deal with Mexico and Canada’s likely about-face puts pressure on Europe to level the playing field for trade or face higher tariffs.

The same factors apply to China, which is dependent on selling goods to the USA and stealing our companies’ intellectual property.

Trump has utterly flipped the script with China, which our elite effectively told us would supplant us economically and strategically, and with which we had to accept unfair trade factors. Now, China is reeling and American is ascendant. Those who bet on China over the USA chose poorly.

I’m not sure that repairing relations with Mexico and reaching a preliminary trade agreement with them will have that much impact.

New York Times has less of a cheerleader report: Preliminary Nafta Deal Reached Between U.S. and Mexico

The United States and Mexico have reached agreement to revise key portions of the 24-year-old North American Free Trade Agreement, a crucial step toward revamping a trade pact that has appeared on the brink of collapse during the past year of negotiations.

The agreement with Mexico gives Mr. Trump a significant win in a trade war he has started with countries around the globe but it falls far short of actually revising Nafta. The preliminary agreement still excludes Canada, which has been absent from talks held in Washington in recent weeks.

“They used to call it Nafta,” Mr. Trump said. “We’re going to call it the United States Mexico Trade Agreement,” adding that the term Nafta had “a bad connotation” for the United States, which he said had been taken advantage of by the trade deal.

Typically odd comments from Trump. NAFTA was a three country agreement, this is a two party agreement.

In a series of tweets on Monday, Mr. Nieto said that he had also spoken to Justin Trudeau, the Canadian prime minister, and that he was working toward a three-way agreement with the United States and Canada by the end of the week.

“I expressed the importance of his reinstatement in the process,” Mr. Peña Nieto said in Spanish about Mr. Trudeau, “in order to conclude a trilateral negotiation this week.”

Odd also that this has been announced before agreement has been reached with Canada. Their inclusion may be some time away.

Mr. Trump, however, seemed to hedge the possibility, saying “we’ll see if Canada can be part” of any deal, and that separate negotiations would start soon.

Mr. Trump said that he would be calling Mr. Trudeau “very soon” but then immediately groused that the country issued 300 percent tariffs on American dairy products. The president suggested that the United States might add tariffs to Canadian car imports in response, reiterating a threat he has used frequently to push trade partners to the negotiation table.

While Canada has not been a party to recent discussions, the potential for a two-country deal appears highly unlikely, given opposition by Mexico, American lawmakers and North American industries whose supply chains rely on all three countries.

Instead, Mr. Trump’s threats against Canada could prove to be a negotiating tactic.

On Monday, Adam Austen, a spokesman for Canadian Foreign Minister Chrystia Freeland, said that Canada is “encouraged” by progress between Mexico and the United States but that “we will only sign a new NAFTA that is good for Canada and good for the middle class.”

On Friday, Ms. Freeland said that Canada would be “happy” to rejoin the talks once the United States and Mexico had made progress on their specific issues. “Once the bilateral issues get resolved, Canada will be joining the talks to work on both bilateral issues and our trilateral issues,” Ms. Freeland said.

This sounds like an odd way to work towards a three country trade agreement.

Both the Mexicans and Americans have been eager to reach a fully revised Nafta deal by the end of August, a date that would give the Trump administration enough time to notify Congress that a deal had been finalized and still have that deal be signed by the outgoing Mexican administration of Enrique Peña Nieto. That goal now looks doubtful, given Canada’s recent absence from the negotiating table.

Still, progress in the negotiations with Mexico will come as a relief to American businesses that depend on trade agreements and have been shaken by Mr. Trump’s confrontational approach to America’s biggest trading partners.

So this looks like a promising step, but it hardly looks likely to lead to a world trade revolution.