Trade agreements versus memoranda of understanding

Given the recent public contretemps between Donald Trump and USTR Robert Lighthizer over the difference between a memorandum of understanding and a trade agreement, I thought a brief blog post would be in order.

Lighthizer is right that it doesn’t matter what you call the agreement, but Trump is not totally off base in his instinctive feeling that MOUs are usually intended to be non-binding at least in part. But Trump is coming from the private business context where the distinction makes sense, because there is an external enforcement body (the court system) to which that distinction matters. In international agreements, the binding/nonbinding distinction is less salient. In this case (unlike in, say, the WTO), it’s totally meaningless. If the agreement has specific promises that are intended to be taken seriously, then it doesn’t matter what it’s called. You judge the seriousness of the promise by its specificity and susceptibility to monitoring (i.e., can we know whether the promise was kept or not?), not by the label of the document in which it appears.

People sometimes say categorically that MOUs are not binding. You just can’t generalize like that on the basis of the document’s label. Consider the business MOU. What’s the value of a non-binding agreement? Actually, a lot. In business, an MOU is something you enter into as a precursor to serious negotiations to make sure everyone is basically on the same page and that it’s worth spending time and resources on further negotiations. You don’t bind yourself to specifics because you don’t yet have enough information, but you do make some promises that you are open to a deal along certain general lines. Those promises are too vague to be legally enforceable and are not intended to be legally enforceable, but if Side A, in the opinion of Side B, reneges on the vague promise, that’s an important signal to Side B that maybe they don’t want to do business with Side A because they are not proceeding in good faith.

Moreover, parties to an MOU will often insert some sections that are intended to be enforceable. If the MOU is a precursor to negotiations, those negotiations may involve the disclosure of business secrets by one party to the other. Thus, the disclosing party will want enforceable provisions regarding confidentiality. And where there are enforceable provisions, there’s going to be a dispute settlement clause that’s meaningless if it’s not legally binding.

The key proof that the “MOU” label doesn’t govern anything is that a business MOU will typically specifically label those parts it intends to be non-binding as well as those it intends to be binding. That’s because lawyers have seen cases where promises in an MOU were held to be legally enforceable in spite of the document’s label. What matters is what the parties intended, not the label. The label can be one piece of evidence of the parties’ intent, but it’s not conclusive and doesn’t trump whatever the document specifically says. Bottom line: real MOUs in business often contain sections intended to be binding and sections intended to be non-binding.

Now let’s look at agreements between states. If two states enter into an agreement that they label “MOU”, it may or may not be similar in intention to a business MOU—i.e., a precursor to further negotiations that simply sets parameters for what can be considered good faith differences and what should count as reneging. It could also be the memorialization of a particular specific agreement between those states. My general sense is that if the agreement is comprehensive, it gets labeled “agreement”, whereas if it’s specific and relatively short, it gets labeled “MOU”. (If it is something the executive wants to send to the Senate for approval by a 2/3 vote, then it’s labeled “treaty”.) The question of enforceability simply doesn’t enter into it, since there is no enforcement body.

In the US-China case, if we end up with a deal (I’m deliberately using a generic term here) in which China makes a specific promise the fulfillment of which can be monitored and assessed, then regardless of whether the piece of paper on which it’s written down is labeled “MOU” or “agreement,” the US can legitimately expect that promise to be fulfilled, and China cannot excuse non-fulfillment by saying, “Hey, it was only an MOU.” The US’s menu of response options to non-fulfillment of the promise is the same regardless of whether the promise is contained in a document called “MOU” or “agreement.”

Finally, I have been asked whether calling an international agreement an MOU instead of an agreement is something the executive branch might wish to do in order to avoid the need for Senate ratification. No. You need Senate agreement (2/3) only for something that you decide to call a “treaty”, and the executive branch enters into many international agreements it doesn’t call a “treaty” and doesn’t get 2/3 Senate approval for. This is true of both NAFTA and US membership in the WTO.

In effect, the only thing that triggers the requirement for 2/3 Senate approval is the desire by the executive to call something a treaty because it wants to make and demonstrate a firm national commitment to the agreement and/or because it wants certain domestic legal consequences to follow, since treaties are the law of the land in a way that executive agreements are not.