On October 19, 2017, USTR announced that imports of Peruvian wood from the exporter Inversiones Oroza would be banned. Notably, the ban isn’t being executed pursuant to environmental laws such as the Lacey Act – it’s being executed pursuant to an annex to the U.S.-Peru Trade Partnership Agreement. That agreement gives the United States the authority to block imports of certain Peruvian wood.
Why does it matter that the authorization to ban the imports originated with the trade agreement? Because trade agreements typically do not expressly authorize one party to take unilateral action without first going through dispute settlement proceedings.
The Peru Agreement is unusual in that it includes an annex on forest sector governance. That annex was included as part of a renegotiation of the agreement that occurred when Democrats took back the House in 2007. House Democrats insisted on the annex out of concern that illegal logging in the Peruvian Amazon was so serious as to adversely affect the climate, and that increased trade flows resulting from the agreement might induce still more illegal logging. The annex is designed to empower the Peruvian government to improve forest management, through, for example, better domestic institutions. But the annex also includes teeth – enforcement mechanisms that allow the United States to block imports from an exporter for failing to comply with Peruvian harvesting laws.
The push for the United States to use the enforcement tools in the agreement began in earnest in 2012, when the Environmental Investigation Agency, a well-respected NGO, pressed the Obama Administration to use the Annex to investigate illegal logging from Peru. That request was denied, but with heightened Congressional interest in the issue, the Obama Administration ultimately requested a verification of a Peruvian exporter’s shipments. The verification results indicated that the shipments did not comply with Peruvian law.
The verification results alone would have allowed the Administration to block those specific shipments. However, the Annex goes a step further: it permits the United States to block future imports from the exporter if the exporter has knowingly provided false information to either government. On that basis, the Trump Administration exercised its right under the agreement to block future imports from that exporter.
In this regard, some criticisms of the Administration have been misguided. Some are minimizing the importance of the ban, calling for the Administration to invoke the dispute settlement provisions of the Agreement to address the issue more systemically. It is true that as much as 90% of Peru’s shipments of timber are illegally logged. However, there are few tools in the toolbox more powerful than banning imports – something that a dispute settlement panel is not necessarily authorized to permit.
While there may be grounds for a broader dispute against Peru (for example, NGOs have complained Peru has rolled back environmental protections contrary to its obligations under the agreement, and Peru has failed to conduct mandatory audits of its producers and exporters, as required under the annex,) it is a mistake to underestimate the power of an import ban. Precisely because of the systemic problems in Peru, it seems highly likely that more than one exporter subject to a verification will have a difficult time proving the legality of the shipment. The bans could multiply.
Are there broader implications? Yes. We know the Trump Administration is skeptical of dispute settlement panels, and in the NAFTA negotiations has proposed making compliance with panel reports optional. This blog has expressed its own concerns with ceding too much decision-making to panels. Will the Administration try to include analogous provisions, on other subject matters, in NAFTA? In that way, the Administration would begin to reclaim some of the sovereignty it believes has been lost through trade negotiations.
These tools could indeed be considered for supply chains other than Peruvian timber. When trade promotion authority was passed in 2015, it included language to
obtain fairer and more open conditions of trade, including through the utilization of global value chains, by reducing or eliminating . . . policies and practices of foreign governments directly related to trade that decrease market opportunities for United States exports or otherwise distort trade.
USTR can avail itself of that language to argue that supply chain compliance with labor and environmental standards, for example, should be subject to verification. As it is, the United States in 2015 closed a loophole that allowed imports made with forced labor, including forced child labor, and Customs and Border Protection’s implementation of rules to enforce that provision were the subject of the confirmation hearing of the nominee to head CBP. These mechanisms are a way to enforce global supply chain standards that can hold businesses to similarly high standards. Modern trade policy has been criticized for facilitating a race to the bottom by tolerating imports from countries that enjoy a cost advantage due to suppressed worker and environmental standards; verifications are a way to address that criticism.
In this regard, it is worth noting that USTR has also launched a new approach to enforcing the rules in the Generalized System of Preferences, a U.S. program that gives one-way trade benefits to eligible developing countries. Because the benefits flow only one-way, the United States decides, unilaterally, whether to grant the benefits. In turn, those countries must comply with basic criteria, including labor rights (but not, as we have noted in the past, environment). If the Trump Administration is serious about holding countries to those standards, then we will either see a marked improvement in conditions in those countries, or their preferences will be revoked.
(The Administration’s latest action on GSP is in contrast to its decision to allow countries such as the Philippines to get GSP preferences for travel goods. The Obama Administration had limited those benefits to the poorest among the developing countries, hoping to incentivize more production there. Some importers complained loudly, preferring to source from developing countries that don’t need the benefit to compete – and, like the Philippines, have particularly dubious regimes.)
Some businesses will complain. “Global value chain” is, for some, a euphemism for taking advantage of suppressed labor and environmental standards in developing countries. Note that the TPA language quoted above expressly references exports, but not imports, which are instead captured by the concept of trade distortion. These businesses usually defend their approach on the basis of consumer welfare: U.S. buyers benefit from poor conditions overseas, in the form of lower prices. Yet there is a dearth of empirical evidence showing that these cost savings are actually, rather than theoretically, passed on to consumers.
However, there are businesses that believe appropriate labor and environmental standards should be taken seriously, rather than occasionally invoked as corporate social responsibility talking points. These businesses are already involved in supply chain certifications. “B Corp,” for example, provides a certification that companies are complying with social and environmental performance, accountability, and transparency standards. These companies would benefit from a trade regime that improves supply chain accountability.
It’s time to stop framing these issues simply as “social” issues. The Trump Administration did not invoke the Annex because it is concerned about the environment. The Trump Administration invoked the Annex because illegal logging puts American companies, and workers, at a disadvantage. That is a window into how to discuss these standards in a way that will appeal to trade skeptics on both sides of the aisle.