Whether the U.S.-China Trade Deal is a MOU Doesn’t Matter, But Its Legal Status Might

It is not often that the U.S. President and his chief trade representative debate fine points of international law in the Oval Office in front of the world’s press and senior Chinese officials.  But President Trump and the U.S. Trade Representative Robert Lighthizer did just that last Friday when they publicly debated whether the possible US-China trade deal would be called a “memorandum of understanding” (MOU) or a “trade agreement.” Here is the exchange, per Bloomberg.

Trump told gathered reporters that the memorandums would “be very short term. I don’t like MOUs because they don’t mean anything. To me, they don’t mean anything.

Lighthizer then jumped in to defend the strategy, with Trump looking on. “An MOU is a binding agreement between two people,” he said. “It’s detailed. It covers everything in great detail. It’s a legal term. It’s a contract.”

But the president, unswayed, fired back at Lighthizer. “By the way I disagree,” Trump said.

The top Chinese negotiator, Vice Premier Liu He, laughed out loud.

“The real question is, Bob,” Trump said, “how long will it take to put that into a final binding contract?

Lighthizer quickly backed down and simply agreed to call the forthcoming deal with China a “trade agreement.” (Apparently, all draft agreements have already been retitled.)  The video of the exchange is actually more clarifying than the written account, because it shows that Trump and Lighthizer are having a terminological rather than a substantive disagreement.  Both seem to want a legally binding agreement with China. Their disagreement is about whether something called a MOU can be such a binding agreement.

This is actually an interesting legal academic question (see this thread between Rob Howse and Duncan Hollis, for example), since both Trump and Lighthizer have good reasons to have a different understanding of what a MOU means. Like many business folks, Trump is probably familiar with the term MOU as a preliminary agreement between business parties that precedes a final detailed legally binding contract. In most business contexts, MOUs are not legally binding although they might commit the parties to negotiate in good faith to reach a legally binding agreement. (See the Investopedia definition here for a typical business understanding of MOU). Given this definition of a MOU, it is not surprising Trump does not like using this term to describe what he is touting as a key achievement of his administration.

On the other hand, prior to acceding to Trump’s wishes, Lighthizer was explaining that MOUs are “legally binding” and are “contracts”.  This description of MOUs does not accord with the business understanding of MOUs, but Lighthizer is right that MOUs between governments can be legally binding under international law.  As the U.S. State Department’s guidance on international agreements explains,

While the use of a title such as “Memorandum of Understanding” is common for non-binding documents, we caution that simply calling a document a “Memorandum of Understanding” does not automatically denote for the United States that the document is non-binding under international law. The United States has entered into MOU’s that we consider to be binding international agreements.

Indeed, the U.S. and China just recently entered into what appears to be a legally binding MOU on restricting trade in China-origin archeological artifacts.  The two countries have also entered into numerous MOUs to resolve trade disputes. It would be odd for those important agreements to be deemed nonbinding.

So Lighthizer is right that MOUs are used as legally binding contracts in the trade context, even if Trump is right that MOUs in the private business context typically connote preliminary non-binding promises. Both want a legally binding deal, and are simply quibbling over terms.

But given that the US-China trade deal will probably not be subject to judicial interpretation in the WTO Dispute Settlement Body or anywhere else, one might rightly ask whether the deal is “legally binding” even matters?

There are at least three ways that legality matters here.

First, there are some lingering doubts under U.S. constitutional law as to whether the president can make a binding international agreement on any subject without congressional authorization or approval. The better view, at least in trade matters, is that the president (and the USTR) can make such binding agreements, but such agreements don’t have any domestic legal effect at the federal level.  Thus, they cannot supersede U.S. legislation or even U.S. regulations.  Such agreements have been held to preempt inconsistent state law, however, whereas a nonbinding agreement might not have such domestic effect. (Chinese domestic law has historically treated international agreements as preempting domestic law, but they have made a clear exception for trade related agreements.)

Second, there are serious doubts as to the consistency of any US-China bilateral agreement with the WTO agreement to which both countries are also bound.  Depending on the substance of the agreements, other countries might allege the US and China are violating the “most favored nation” principle that guarantees all WTO members equal trade treatment.  Of course, there are permitted exceptions to the MFN agreement, but a non-legally binding agreement might be somewhat less vulnerable to WTO challenge. (For an excellent study of the legality of such WTO-minus agreements, see Professor Vidigal’s study here.)

Third, and perhaps more importantly in this context, a legally binding agreement can clarify the expectations for measuring compliance and implementation of the trade deal.   A not legally binding agreement will only throw another factor into the already charged political debate over the benefits of the agreement, and the necessity of complying with it.  Legality can provide a system for interpreting obligations, determining “breaches”, and shaping remedies. It useful, though perhaps not essential.

In any event, it is also worth clarifying the legality point because China has in other contexts, adopted a broader definition of a legally binding international agreement than the U.S. has.  For instance, it repeatedly calls on the U.S. to abide by the three Joint Communiques leading to normalization of US-China relations in 1979.  But the U.S. has never treated those communiques as anything other than nonbinding “political commitments.”  The U.S. has also treated other important agreements as “nonbinding” such as the Paris Agreement and the Iran Nuclear Deal (Joint Comprehensive Plan of Action).  China might claim it is not legally bound by the MOU (like the US has claimed in those contexts).

It bears repeating that the form of the trade deal with China, and its legal status, will be much less important than the substance of those agreements.  But legality is a nontrivial matter that, if left unresolved, could undermine or weaken whatever substance emerges.