Experts: Excess Capacity Tariffs May Come Late in Summer; USMCA May Take Until July 2027

Commenters generally get about a month to comment, and then the staff at the Office of the U.S. Trade Representative digests them before a tariff is announced.

Chris Padilla, a former undersecretary of Commerce for international trade under President George W. Bush, noted that the administration doesn't have to add those tariffs by July 24, because a 10% tariff on some partners and 12.5% on most other partners will at least match the 10% Section 122 tariffs that expire in late July.

Kelly Ann Shaw, who worked on trade in the first Trump term, agreed it's possible that the USTR won't try to compress the comment period to complete the process by July 24. The USTR could let it slip a few weeks, Shaw added.

"Two weeks here or there doesn't really matter in terms of the president's broader agenda," she said. "I think this will be wrapped up over the summer, though."

What the panelists don't expect to get wrapped up this summer is the USMCA review, which is coming up to the July 1 deadline fast. On that date, the U.S. could say it will renew the pact for 16 more years, but no one expects that. Canada and Mexico have already said they would like to renew the trade deal for 16 years.

"I think, you know, the worst-case scenario is, of course, some sort of withdrawal or breakdown in negotiations or removal of a preferential treatment for USMCA-qualified goods, particularly from Canada," Shaw said on the Washington International Trade Association's Friday Exchange podcast June 5. She said the vibes after the first official round between a USTR delegation and Mexican officials were good, and so she doesn't expect that to happen with Mexican goods.

"Best-case scenario is a fully reviewed renegotiated proclamation, or protocol of some sort with Mexico and Canada wrapped up by the end of the year."

Shaw said that at the round in Mexico City, the U.S. negotiators shared text for the first time at those in-person meetings, including rules of origin changes in automotive, some electronics, and steel and aluminum. Reports are that the U.S. is asking for 82% North American content in the auto sector, up from 75%, and 50% U.S. content. If that's the case, it's similar to the opening request of USTR Robert Lighthizer when NAFTA was renegotiated. That time, Canada and Mexico united to get a U.S.-specific content requirement changed to a labor value content requirement at $15/hour.

Shaw said she expects agriculture, environment and labor to be on the agenda during the next round with the Mexicans, which comes next week.

She added, "Even though the Canadians were in town this week, there's still no formal launch to the U.S.-Canada negotiations. And if I'm the administration, I'm not really in a rush to launch those. I think I've got Canada where I want them. I'm negotiating well with Mexico. I think once that deal is concluded, or near conclusion, we could see the Canadians brought back into the process."

She noted that's how it went when NAFTA was renegotiated.

Padilla said, "I don't think there's any reason to panic. My sense is that there seems to be consensus that we want to keep a trilateral architecture."

Panelist Ed Gresser, who was a career staffer in economics at USTR before joining a center-left think tank, said he thinks the fact that USMCA-qualifying goods are carved out of the Section 301 tariffs on forced labor, even though those are relatively modest at 10%, is "a sign that they'd be nervous about a very heavy imposition of tariffs on Canadian and Mexican goods."

Moderator Mike Smart, of Rock Creek Global Advisors, asked what would be the action-forcing event to get USMCA finished by the end of 2026.

Padilla said he couldn't think of one, so it might drag out until July 1, 2027, the next deadline.

Shaw said the 50% tariffs on steel and 25% tariffs on aluminum and cars are what Canada really wants to change in the negotiations, "And that's not going to come until the end. So if I'm the administration, I'm not going to show any sort of flexibility on steel or aluminum or autos until I have a deal in hand."

So, she said, although she initially said it could be done by the end of the year, she thinks Mexico could be done as soon as the fall, but Canada might go into 2027.

"There's a lot of things that are going to happen over the next few months when it comes to USMCA," she said. "I think the admin has the upper hand, though."

Smart asked how we should look at the fact that the U.S. has said Mexico is being constructive in the negotiations, but that USTR Jamieson Greer also recently said that the trade deficit with Mexico has grown, and that needs to be addressed.

Padilla said the U.S. is going to try to change the auto rules of origin to try to make it harder to produce cars and car parts in both Mexico and Canada.

"They want more of that in the United States, and they're going to push hard on it," he said.

Canada does not have a trade surplus in autos with the U.S., because it buys more parts from the U.S. than it sells to manufacturers there, and those figures outweigh the surplus in finished vehicles it does have.

Smart said it's surprising that a tighter auto rule of origin is dominating the coverage of talks with Mexico, because in a written report on the USMCA review in January, Greer said the U.S. had already done a lot on the auto rules of origin, and said his focus would be to impose stricter rules of origin in other sectors, so that a simple tariff shift wouldn't be the way to qualify for benefits.

Shaw said the administration still wants to create stricter rules of origin for all strategic supply chains. She said it doesn't derisk if "everything can be Chinese content, but you substantially transform it in Mexico and you get duty-free treatment."

However, she said, "I do think changing rules of origin for every single product that the United States imports all at once would be much more disruptive to U.S. trade than tariffing everything at 20%. So I think this has to be a bit of a process, right? So, for certain supply chains, automotive, steel, aluminum, certain electronic parts, or maybe we start getting into things like semiconductors and ... other strategic sectors."

She said she expects those rules of origin to eliminate Chinese content or sharply reduce it.

She noted that the U.S. is approaching supply chain rules as a national security issue, as the EU is looking at it in terms of climate policy.

"This is the direction of travel of trade policy over the next decade, but we're starting with a few key sectors," she said, with USMCA the testing grounds.

The panelists debated how well-done the Section 301 report on forced labor was, and whether it would be vulnerable to a court challenge.

Shaw called it robust, and Padilla called it a joke.

"It's a pretext and an artifice to do what the administration wants to do, which is to impose a global 10% or 12% minimum tariff. That's what they wanted to do. That's what they've done," Padilla said.

He added, "The case studies that they give are frankly not very strong. I mean, one of them is China buys more beef from Brazil than they buy from the U.S. because Brazil has forced labor in its beef industry. I mean, that's just silly. The reason China's not buying U.S. beef is because they deliberately stopped buying it after we put 145% tariffs on Chinese imports last year."

Moreover, with a historically small cattle herd, U.S. producers don't have a lot to send, he said. "Trying to argue that that's a justification for forced labor being unfair in Brazil, it just doesn't hold up."

He also noted that because Pakistan and Bangladesh reached reciprocal trade agreements, their forced labor tariff rates will be lower than those for Australia, Norway and Japan. "Really? I mean, the argument you're going to seriously argue to me that Pakistan and Bangladesh have undertaken more serious measures to protect against forced labor?"

Padilla predicted the countries that have bans on imported goods made with forced labor will never receive a lower rate from the Trump administration.

"They could have the best enforcement in the world against forced labor imports. They're never going below 10%," he said.

"The question is: Will it hold up in court? Maybe."

Shaw pushed back, and said if countries effectively enforce bans, the factual basis for the tariffs will be eliminated.

Padilla responded that if the tariffs stay that will be proof it's a pretext.

Gresser sided with Padilla, saying that the report's argument is that a lot of countries import goods made by forced labor, and those goods are used to produce cheaper goods that either compete with U.S. exports or are sold to U.S. consumers, because the practice of forced labor means you can sell at a lower price.

"The report, in my opinion, does not even try to demonstrate either of those things," Gresser said. He said that an International Labor Organization report that the USTR relies on to quantify the cost of trade in forced labor goods said that there's no price advantage to those goods. Rather, the ILO's premise is that employers who exploit labor either take all or a significant amount of the wages that should have gone to workers, and that pads their profits.

He said the report doesn't attempt an analysis of prices that forced labor goods might be sold at. And, he noted, that tobacco from Zimbabwe and Mozambique is similar in price to tobacco from Malawi, which was the target of a withhold release order, and is a case study for why Poland should be hit with a 10% tariff.

"And I think once this goes to court, that will come out very clearly that they haven't made the case that they claim to be making at all," Gresser said.

Padilla responded, "Don't you think that the law gives the administration so much discretion in these reports that it'll hold up in court?"

Smart replied, "I am not predicting success for future plaintiffs necessarily. I'm just saying I think the possibility of that is being discounted too much. I think it's ... a harder question than people realize."