The "Poison Pill" in the USMCA: The Erosion of WTO Principles and its Implications under a US-China Trade War.

• Author: Lan, Gil
• Position: Free Trade Agreement, 2020, United States-Canada-Mexico

TABLE OF CONTENTS I. INTRODUCTION 1267 II. THE USMCA POISON PILL--A TROUBLING TRADE-RESTRICTIVE EXPULSION CLAUSE 1273 A. Functionally an Expulsion Clause--Not an Exit Clause 1274 B. Poison Pill Compared to Withdrawal Clauses 1276 C. Poison Pill Converts the USMCA into a True "Private Club" 1279 D. Poison Pill as an Instrument of US Coercion 1280 1. Political Context: The US-China Trade War 1280 2. Poison Pill as Cautionary Tale to Other Nations 1285 III. POISON PILL--THE WTO CONTEXT 1288 A. The Poison Pill Violates the WTO Agreement 1288 1. Textual Analysis: MFN and the Exception for FTAs 1289 2. Application of WTO Jurisprudence: The Turkey--Textiles Case 1291 B. How the Poison Pill Derives Its Power from the WTO Agreement 1296 1. Limits to Freedom of Contract: Classic American Jurisprudence 1296 2. Robert Hale's Powerful Insight: Coereive Power and Normative Baselines 1298 3. Applying Hale's Insights to the Poison Pill 1300 IV. THE POISON PILL: EROSION OF WTO PRINCIPLES AND IMPLICATIONS 1301 A. Poison Pill as a Trade Diverter 1302 B. Coercion in FTAs: National Security and Abuse of "Voluntarism" 1306 1. Coercive Use of National Security Grounds in USMCA Negotiations 1306 2. Poison Pill as Newly Incarnated Type of "Voluntary Restraint" Agreement 1308 C. Implications and Strategies for Middle Powers and Developing Nations 1312 1. Join or Create Overlapping Multilateral FTAs 1314 2. Develop Relationships Outside of an FTA: BRI and Alternate WTO Dispute Resolution 1317 V. CONCLUSION 1324 I. INTRODUCTION

The United States, Canada, and Mexico have now each ratified a multilateral trade agreement (the USMCA) (1) that contains a highly unusual provision--a clause intended to deter any of the signatories from entering into a free trade agreement with any non-market country. Article 32.10 of the USMCA (2) (Poison Pill) states that if any signatory enters into a free trade agreement with a non-market country, then the remaining signatories may terminate the USMCA (upon provision of 6 months' notice) and carry on a bilateral agreement between themselves on substantially the same terms as the USMCA. This unusual provision quickly became known as the "poison pill"--a term which was used by U.S. Commerce Secretary Wilbur Ross himself. (3)

Although the Poison Pill does not explicitly single out any country as being a non-market country, (4) it is generally viewed as being directed at China (5) and was introduced into the USMCA by the United States. In an interview with Reuters, Ross confirmed that the provision was intended to counter China's trade practices. (6) This is unsurprising in light of the trade war between the United States and China, which started in 2018 with an "opening salvo" (7) of tariffs imposed by the United States on China. Moreover, the clause did not go unnoticed in Canada or China. One Canadian perspective was that the Poison Pill was an affront to Canada's sovereignty. (8) In Canada, the Chinese Embassy directly denounced the Poison Pill as "hegemonic action" which "blatantly interferes with other country's sovereignty." (9) Editorial opinion pieces on several Chinese media websites also expressed displeasure with the Poison Pill. The Poison Pill was viewed as a desperate attempt by the United States to maintain global dominance (10) by sabotaging China's attempts to build an array of FTAs. (11) As one commentator noted: "Unmistakably it is an attempt to isolate China." (12)

The United States, Canada, and Mexico are each members of the World Trade Organization (WTO). (13) As members of the WTO, they are also subject to the trade-liberalizing regime established under the General Agreement on Tariffs and Trade (GATT). (14) Since the Poison Pill is directed at deterring USMCA members from entering into a FTA (15) with China (the second largest economy in the world in terms of GDP (16) and a WTO member itself), it represents a significant attempt to restrict international trade. Thus, the USMCA brings into sharp focus an important but relatively unexplored issue in international trade law literature--the permissible extent, if any, of trade-restrictive clauses in regional and multilateral trade agreements under the WTO. (17)

In an article on a related theme, Daniela Caruso comments that there is a developing body of scholarship that focuses on the harm suffered by nations who are not party to a trade agreement. (18) Caruso's article advances this body of scholarship by demonstrating the limitation of private law doctrines in addressing the plight of those excluded "from deals struck by other parties" (19) (i.e., FTAs), particularly developing nations. (20) The Poison Pill intensifies that theme in two important ways. First, like all FTAs, the USMCA excludes nonmembers from the benefits of membership (e.g., preferential tariff rate). However, the Poison Pill expands the exclusionary nature of the USMCA by requiring that all its members refrain from entering into an FTA with "non-market economy" nations. Second, the Poison Pill can affect relatively powerful or wealthy countries (as opposed to Caruso's concern with less affluent nations). The primary excluded nonparty is China--a formidable economic power. The other affected parties are Canada and Mexico--both of whom are relatively wealthy though not nearly as powerful as the United States.

The core claim of this Article is that the Poison Pill is a trade-restrictive expulsion clause that violates the WTO Agreement. Regardless of the Poison Pill's immediate impact, if any, on Canada, the most troubling concern is the coercive manner in which it was imposed by the United States. This Article's secondary claim is that, under the current US-led erosion of the WTO, the Poison Pill incentivizes middle-power nations (like Canada) and developing nations to craft international trade strategies to counterbalance the unilateral use of trade sanctions by the United States. These strategies include forming an overlapping network of multilateral and bilateral FTAs and entering into non-FTA economic relationships with other nations. The result is a trend towards alienation of the United States while nations turn to China, the EU, and multilateral relationships to counterbalance a United States that does not credibly commit itself to a rules-based trade order with even its long-standing allies.

This Article proceeds in three parts. Part II submits that the Poison Pill is a trade-restrictive expulsion clause. It may appear that the Poison Pill is irrelevant because there is a separate general withdrawal clause under the USMCA which allows any party to unilaterally withdraw from the USMCA upon six months' notice (the same length of notice period as the Poison Pill). The Article analyzes the USMCA's provision to draw attention to an important distinction--functionally, the Poison Pill expels the member that enters into an FTA with a non-market economy nation. This is significantly different because it preserves the status quo in favor of the party (e.g., the United States) objecting to the non-market country free trade agreement--thus saving that party from the costs of renegotiating trade agreements with the remaining party (e.g., Mexico). The Article then reviews the literature on withdrawal clauses, particularly the work of Laurence Heifer, to conclude that the Poison Pill's power exceeds that of a general withdrawal clause and truly turns an FTA into what FTA critics term a "private club."

From a Canadian perspective, it is fortunate that Canada and Mexico already have a free trade relationship in another multilateral treaty--the newly formed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (21) (CPTPP). This may appear to render the Poison Pill a partially moot point for Canada. Even if Canada were expelled from the USMCA, Canada would still at least have an FTA with Mexico. This Article argues that this does not render the Poison Pill irrelevant. It simply reinforces why it is important for middle powers and developing nations to participate in overlapping multilateral FTAs to counter aggressive, non-WTO compliant US trade sanctions. If there were no CPTPP or other overlapping multilateral FTA, then Canada's position would be markedly different. Therefore, the analysis continues as if there were no CPTPP (or other overlapping multilateral FTA) to protect Canada in order to draw out the implications for nations where there may not be any overlapping multilateral FTA to insure against an expulsion provision like the Poison Pill. Moreover, the United States has already indicated that it may well attempt to insert clauses like the Poison Pill into its other trade agreements. (22) For example, in the recent negotiation of a trade agreement between the United States and United Kingdom, it has been reported that the United States seeks to have a clause like the Poison Pill inserted into the agreement. (23) Therefore, an analysis of the Poison Pill is relevant to all nations who may enter into trade agreements with the United States, as well as the WTO, because of the American threat of proliferating such restrictive trade clauses.

Part III asserts that the Poison Pill violates the USMCA parties' obligations under the WTO Agreement. This violation is demonstrated through an examination of the relevant provisions under the WTO Agreement (GATT Article XXIV). This Article applies the principles from WTO jurisprudence to the Poison Pill to conclude that the Poison Pill contravenes GATT Article XXIV. This Article also suggests that the WTO cannot take a neutral position on the Poison Pill. To illustrate this point, this Article draws upon the work of American Legal Realist--Robert Lee Hale. (24) Hale's writings serve as a theoretical foundation for the proposition that normative baselines can endow parties with coercive market power--despite the illusion that authorities appear to have not intervened at all. Similarly, the Poison Pill...