Failing the Character Test

This week’s column begins with a new development but ends with a familiar message about the importance of institutions and U.S. leadership. The new development is that, as expected, the United States lost another dispute resolution case, this time with Canada and Mexico over automobile rules of origin.

That dispute was over how to interpret the rules on measuring the regional content of parts and components as they are incorporated into a vehicle. Canada and Mexico argued that negotiators had agreed on rules that followed the NAFTA precedent permitting “roll-up,” meaning that parts that met the regional content standard for parts were considered wholly regional for purposes of meeting the final vehicle content standard, even if their actual regional content was less than 100 percent. The United States interpreted the rules as not permitting roll-up.

The dispute resolution panel found that the negotiators had, in fact, agreed on the roll-up rules as claimed by Canada and Mexico. More interesting, they also found that the United States had agreed with that interpretation both before and after the agreement was signed. It was only later that the United States unilaterally changed its interpretation.

The good news is the United States’ reaction, which was more restrained than its reaction to the two World Trade Organization (WTO) cases it lost last year on steel and aluminum tariffs and Hong Kong labeling. In those, the United States, which had made a national security argument to the panels, angrily rejected the panel decisions as infringing on U.S. sovereignty and compromising its security. While the United States did not say explicitly that it would appeal those cases, it was clear that the administration does not intend to comply.

The automobile case is different. The United States did not make a national security argument, and there is no appeal process in the United States-Mexico Canada Agreement (USMCA). (The appeal process in the WTO is broken, but members still have the right to appeal “into the void,” which effectively stalls final resolution of a panel’s decision.) The U.S. response was to express disappointment in the decision, although in a milder tone than the other two cases, and to indicate it would begin negotiations with Canada and Mexico on a resolution of the dispute, which is what the agreement requires.

This is good news because it signals the United States is not going to undermine the agreement, as it has done with the WTO. All in all, it would have been better if the United States had just said it would comply and then had proceeded to change its interpretation of the rules (which would not require congressional action).

Compliance is important because it reinforces the rules-based trading system. It also reinforces the United States’ leadership role in that system. Nobody likes to lose—we certainly saw that in the 2020 election—but when dispute settlement is employed, somebody has to, and right now our number has come up.

Arbitration and dispute resolution procedures were developed to get away from the law of the jungle and to give countries a way to settle their differences without going to war. In the wake of World War II, the United States was instrumental in developing the postwar institutions and rules designed to make sure that war never happened again. The initial conference on that was at Bretton Woods, New Hampshire, in 1944. Out of it grew the International Monetary Fund, the World Bank, and the General Agreement on Tariffs and Trade, which became the WTO.

The world continues, unfortunately, to have regional conflicts and violence within countries, but a global conflict has not recurred, and the institutions and rules that began in 1944 have played an important role in that. And the United States has played a leadership role in maintaining that system. In doing so, we have learned, painfully, that leadership sometimes requires taking one for the team. If the rules and institutions are to survive, leaders need to set the example in complying with them, if only to preserve their credibility when they call out others for violating them. Losing is important because it is a test of character, whether of the individual or the nation.

Sadly, right now the United States is failing that test and demonstrating an uncharacteristic weakness of character. Our actions have undermined the WTO and made restoration of its full dispute settlement process more difficult to accomplish. If we do not comply fully and quickly with the automobile decision, we will do the same with the USMCA.

The counterargument is that compliance is not in the economic interest of our workers. I don’t think that’s true over the long term, but even if it were, it must be weighed against the cost of unilaterally undermining the institutions that have preserved the trading system, a system that has provided exceptional economic and political benefits to the United States. Right now it looks like the United States is myopically making decisions in its short-term political and economic interest, but they are at the expense of our long-term economic interests and our position of global leadership. We are failing the test of character that losing represents, and we will come to regret it.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.        

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