The shifting sands of U.S. Foreign and Trade policy

The shifting sands of U.S. Foreign and Trade policy

The 116 Congress is divided, with Democrats in control of the House of Representatives and Republicans in control of the U.S. Senate. However, division is not new in the realm of foreign and trade policy, where different factions within the Democrat and Republican parties often cooperate, while also disagreeing with the Trump administration. This is seen most frequently on Russia policy.  Other times, Republicans in Congress and the White House align, such as on the creation of the U.S. International Development Finance Corporation (IDFC). Some Democrats even align with the Trump administration from time to time, especially on protectionist trade measures, which are usually attacked by more traditional, pro-business Republicans.

U.S. foreign and trade policymaking remains complex and often unpredictable, with a shifting alignment of positions driving outcomes more than consistent strategy. As a result, the Trump administration will still have wide discretion to execute foreign policy as it sees fit, at least until there is unified Congressional opposition. However, where there is alignment between the Trump administration and Congress, policy will be more sustained and long-lasting.

There are three key areas where these shifting dynamics can be observers: U.S. sanctions on Russia, the renegotiation of trade agreements/relations, and the creation of the IDFC. More examples abound, especially around U.S. policy towards North Korea, the Middle East and Levant, and the Trans-Atlantic relationship. We are clearly in a period of turbulence and a nuanced understanding of the various U.S. policy players, and their interest will remain essential for anyone seeking to navigate it.

Russia – Possible Bipartisan Cooperation

The split Congress means that neither party will be able to unilaterally advance, or curtail, the Trump administration’s priorities. While this likely means that the Trump administration will still be primarily driving foreign policy, some issues retain the possibility of bipartisan support in both the House and Senate. Confronting Russia and China’s aggressive foreign policy actions are areas where both parties have alignment, though not always with the White House.

Republican and Democratic foreign policy continue to come together on finding ways to restrict and punish Russian malign activities, especially in Ukraine and Syria and towards democratic elections in the United States and Europe. On February 13, a group of U.S. Senators led by Lindsey Graham and Robert Menendez introduced the Defending American Security from Kremlin Aggression Act (DASKA). The bill, if passed, would impose sanctions on numerous Russian companies and actors, as well as those non-Russian companies that support them, and establish new policies and tools to respond to Russia.

In parallel, the U.S. and EU are reported to be planning new sanctions against Russia for its seizure of Ukrainian ships and sailors in the Kerch Strait. It is unlikely these actions will go as far as the Senate bill, which targets European energy projects, but they will still be an important step in the same direction.

However, just because Democrats, Republicans and Congress agree on Russia policy, there is not necessarily always agreement with the Trump administration policy. This became clear around the recent action to list sanctions on several of Russian Oligarch Oleg Deripaska’s companies, including Rusal, which led to criticism from both parties that President Trump was watering down U.S. sanctions. Amongst Democrats, this decision was used to support their claims of collusion between the 2016 Trump election campaign and Russia, which is the core of the Mueller investigation.

On December 19 2018, the Department of the Treasury’s Office of Foreign Asset Control (OFAC) notified Congress that it would lift sanctions on three of Deripaska’s companies, noting that the companies had agreed to corporate governance and restructuring changes. Deripaska himself would remain under sanction.

In response, Democrats drafted a bill that would stop the proposed plan and keep Deripaska’s companies on the sanctions list. The House passed this measure with strong Republican support by a vote of 362-53. The Senate Democratic leader, Chuck Schumer, was able to force a vote on the measure in the Senate. The bill received all Democrat votes and split the Republicans, with 11 GOP senators crossing over to support the measure. Even with these defections, the measure failed to garner the necessary 60 votes to force OFAC to keep the companies on the sanctions list.

The message to the White House was clear though: Congress has its own mind and willingness to act on Russia.

Trade Policy – Trump and Congress Clash, except on China

Trade relations remain a flashpoint between Congress and the White House, as President Trump continues to upend existing trade relations and renegotiate trade deals. The more traditional wings see renegotiation of existing trade deals and the imposition of tariffs as potential sources of economic harm to businesses and the economy. Although, labour-backed Democrats in the House and anti-trade Republicans may be more ideologically inclined to support President Trump’s reform goals, intense political acrimony will prevent widescale cooperation with the Democrats.

Congressional approval of the U.S.-Mexico-Canada trade agreement (USMCA), a key piece of President Trump’s trade agenda, cannot be assumed. Concerns over tariff renegotiation, labour standards, and Section 232 investigations against Canada and Mexico all threaten its passage.  Should Congress decline to pass it, the Trump administration would be forced to renegotiate or act on the President’s threats to withdraw from the current NAFTA. The U.S. International Trade Commission’s economic analysis, due by March 15, could make or break necessary Democrat support.

U.S.-EU trade is also currently undergoing renegotiation. Agricultural products remain the obstacle to agreements in this realm. The EU has declared agriculture to be a “redline,” but Members of Congress have indicated that they must be included for any chance of the agreement gaining necessary votes. With an agreement needed with the UK post-Brexit, the Trump administration may face more questions about trade priorities as the relationship with some of the United States’ oldest trade partners is cast into doubt.

Facing such concerns, Congress may look to more directly exert influence over trade measures, including by taking control of the Section 232 tariff investigation process. Senate Finance Chair, Chuck Grassley, has already announced plans for greater Congressional oversight into the process, while a bipartisan group of Senators introduced legislation to give Congress greater control over the imposition of tariffs, especially when national security concerns are invoked. While these reforms may not have enough support to override a presidential veto, they could still pit the President against his staunchest allies in Congress and further gridlock the trade process.

Conversely, one area of clear cooperation is China. President Trump, national security hawks, and those seeking to protect U.S. companies have reached alignment on China. There is strong support across the majority of policymakers in both parties that significant changes to the U.S. trade and security relationship with China is necessary. This has generated significant changes to defence and foreign policy, as well as empowered trade negotiators to take a harder line than their predecessors in other administrations. However, should negotiations breakdown, it is unclear how much support President Trump will have for expanding and increasing tariffs on China, especially as U.S. businesses and consumers feel the negative economic effects of U.S. tariffs and reciprocal Chinese acts more acutely

IDFC: A New U.S. Government Agency to Support Overseas Investment

In October 2018, Congress created the framework for a new $60 billion overseas investment agency called the U.S. International Development Finance Corporation (IDFC), which will take over the existing operation of the Overseas Private Investment Corporation (OPIC) and add substantial new investment capabilities. The IDFC will provide significant commercial diplomatic opportunities that the U.S. has typically delegated to multilateral investment organisations. By providing a range of development finance tools, including equity investment, debt financing, risk insurance, first-loss guarantees, feasibility studies financing, grants for technical assistance and development credits, the IDFC represents a significant increase in the U.S. commitment to overseas development.

The slated $60 billion budget represents an important increase over OPIC’s existing infrastructure, and an about-face for U.S. foreign policy. The Trump administration previously suggested closing OPIC completely. Instead, the U.S. is doubling its investments. This change stems from a recognition that the U.S. needs to compete with China’s Belt and Road Initiative, which has flooded developing countries with investments in infrastructure projects, new railways and highways, and real estate development projects. Correspondingly, China has overtaken the United States in the past few years as the largest trading partner for many developing countries.

Whether the IDFC will be successful as both an organisation and in countering China’s influence remains to be seen, but it is an area where bipartisan support should be possible. The Trump administration and Congress will need to make strategic decisions on how best to utilise the new organisation. While the U.S. Government will not be able to match the amount of capital that China has invested into the Belt and Road Initiative, IDFC co-investment could be a key to unlocking large amounts of private U.S. capital. The future of the IDFC looks to be a promising source of investment for development projects, as private sector organisations can more confidently invest in projects with the benefits of shared risk. The IDFC – and the U.S. role in overseas investment – could be revitalised in the coming years.

By Matt Oresman, Partner, Pillsbury Winthrop Shaw Pittman, Zachary M. Kessler, Associate at Pillsbury Winthrop Shaw Pittman LLP.