How a Shutdown Would Hinder Critical Trade Functions of the U.S. Government

Introduction

It now seems highly likely that the U.S. government will shut down on Sunday as members of Congress have failed to pass legislation to fund the government past September 30. Millions of federal employees will be furloughed and government services will be delayed or suspended as federal agencies are forced to operate at a reduced capacity. During a shutdown, the Executive Office of the President has directed agencies to continue only essential activities:

• “Providing for the national security, including the conduct of foreign relations essential to the national security;
• Protection of personnel and property; and
• Support of the President’s discharge of Constitutional duties.”

Agencies that are responsible for critical trade functions of the United States, including the Office of the United States Trade Representative (USTR), the Department of Commerce, and the Department of Treasury, will start operating at a significantly reduced capacity on October 1. In the immediate term, a government shutdown will only reduce GDP by 0.2 percentage points each week it lasts. However, halting critical trade functions of the United States will also undermine the United States' overall credibility as a commercial partner, impede ongoing negotiations, and hinder export control enforcement capabilities. Several aspects of the United States’ ability to formulate and implement trade policy, all critical to the country’s economic prosperity, are at stake.

Ongoing Negotiations

In the event of a shutdown, the USTR will implement its Contingency Plan for Shutdown of Agency Operations in the Absence of Appropriations, significantly limiting its staff to only “excepted employees” who are deemed essential by Ambassador Katherine Tai. Activities that are given a high priority to continue are World Trade Organization (WTO) disputes, critical trade negotiations, and the enforcement of trade agreements. All other activities deemed nonessential will cease, including routine engagements with partners on Bilateral Investment Treaties and Trade and Investment Framework Agreements. During the shutdown, the already lean USTR would go from 200-plus employees to just 14. Ambassador Tai and her spokesperson have warned that a government shutdown would, in short, bring the USTR’s work to a “grinding halt.”

Notably, negotiations over the Global Arrangement on Sustainable Steel and Aluminum (GASSA), which expires on October 31, would limp along at a significantly reduced pace. When asked what the biggest obstacles to an agreement on GASSA were at a CSIS event, Ambassador Tai replied, a “government shutdown." While progress has been fraught with challenges for months, a shutdown would further complicate negotiations. Failure to reach an agreement could lead to the reimposition of U.S. tariffs on aluminum and steel, provoking retaliatory duties on U.S. goods into the European Union. Similarly, negotiations for the Indo-Pacific Economic Framework would be scaled back. The next negotiating round is taking place in Malaysia in October, and U.S. officials are aiming to have positive outcomes on the trade, climate, and labor pillars by the APEC Leaders' Summit in November. However, the government shutdown would likely challenge the USTR’s ability to do so as it must furlough some of its negotiators.

Trade

Aside from the USTR’s activities, a shutdown would also hinder the work of other government agencies that contribute to the foreign commercial activities of the United States, given their responsibilities responsible for key trade and transportation services. That list includes U.S. Customs and Border Protection, the Department of the Treasury's Office of Foreign Assets Control, the Department of Commerce's Bureau of Industry and Security, the Department of State's Directorate of Defense Trade Controls, the Department of Transportation, the Census Bureau, and the Federal Maritime Commission. Essential work from agencies such as Customs and Border Protection’s cargo processing and inspection at ports, or the Federal Aviation Administration’s air traffic control services, would continue, but functions less essential to day-to-day work but ultimately critical to these agencies’ long-term capabilities like training activities would be suspended.

Likewise, federal government activities related to imports and trade monitoring, such as tariff exclusion request processing or antidumping duty and countervailing duty investigations, would likely cease. As JD Supra points out, during the previous government shutdown nearly five years ago, the International Trade Administration furloughed much of its staff and stopped antidumping duty and countervailing duty investigations, in addition to administrative tasks such as annual reviews of current antidumping and countervailing duty orders. During the last shutdown, nearly 90 percent of the Department of Commerce’s staff was furloughed. The International Trade Commission was closed, suspending their investigative activities.

National Security

On the national security side, a shutdown would hinder implementation of the CHIPS and Science Act currently underway. During a House Committee on Science, Space and Technology hearing, Secretary of Commerce Gina Raimondo argued that a shutdown would be “crushing” to the funding allocations process necessary to roll out the policy package. The timing would be particularly inopportune for the CHIPS implementation, which according to Raimondo has made “significant progress” in the past year: as evidence of that for CHIPS, the Commerce Department “received more than 500 statements of interest from companies who want to participate and about 100 applications for the incentive programs. So, [the Commerce Department is] on track to launch the National Semiconductor Technology Center this fall.” She also highlighted the national security implications of a shutdown given its effects on the Department of Commerce’s day-to-day activities, as export control policy formulation and enforcement would be hindered.

Economic Analysis

Other aspects critical to the United States’ economic prosperity would be suspended indefinitely. The publication of major U.S. economic data, such as employment and inflation reports that inform the decisions of policymakers and investors, would be delayed. Government agencies such as the Labor Department's Bureau of Labor Statistics and the Commerce Department's Census Bureau and Bureau of Economic Analysis assist work at all levels of the U.S. economy, from the Federal Reserve to small businesses aiming to make the right decisions based on market conditions. Biden administration officials confirmed the shutdown’s consequences on these agencies speaking to Reuters, stating that under a lapse in funding, the Bureau of Labor Statistics would cease all program operations. The September jobs report and the Consumer Price Index would therefore not be released. In addition, a majority of services provided by the Census Bureau would stop, including the release of Economic Census data, economic indicators, and the American Community Survey.

Private Sector Concerns

Businesses across the United States are thus bracing for impact. Neil Bradley, the U.S. Chamber of Commerce's chief policy officer, voiced that the private sector was “deeply concerned.” He said this concern is growing by the day because there is no clear path out once the shutdown is in effect. Unlike the threat of government debt default threat earlier this year, Wall Street is not too anxious about the shutdown’s potential impact on the economy. Stocks surged by over 10 percent over the course of the last—record-breaking—35-day shutdown, and Goldman Sachs already informed clients that the economic impact from a shutdown would be manageable. Nevertheless, the chamber warned members that the shutdown would yield significant micro disruptions, as time-dependent services such as tourism or passport issuance would be disrupted. The chamber’s foundation gave the example of Riverview Hotel, a small family-owned business that relied on a park-service operated ferry to transport guests to its island, as a casualty of the previous shutdown as it resulted in income losses of tens of thousands of dollars and permanent employee layoffs. 

Conclusion

A functional U.S. government is critical to the country’s trade and economic interests. A shutdown would therefore impact work at all levels of the U.S. economy, such as high-level negotiations of trade agreements, ongoing ITC investigations ensuring U.S. businesses face a level playing field, and BIS export control enforcement efforts essential to national security. The shutdown is in itself a negative marker for the country’s prosperity because it signals further political uncertainty, which may result in a Moody’s credit rating downgrade. In addition, the longer the shutdown lasts, the more harm it will do to the United States’ reliability and leadership in international trade.

Hannah Grothusen is a program manager and research associate with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Thibault Denamiel is a research associate with the Scholl Chair in International Business at CSIS. William Reinsch holds the Scholl Chair in International Business at CSIS.