Trade Turmoil Likely to Continue into 2019
Following the course of US-China trade discussions has been a whiplash-inducing experience, with things seemingly headed for derailment one day, only to appear back on track the next. At least for the moment though, there seems to be cautious optimism that some type of a “peace settlement” — or at least an agreement to keep talking — will be possible by the March 1st deadline. With growth slowing to levels not seen in decades, China needs to secure at least some measure of relief from punitive tariffs, and as stock market wobbles continue in the US, and 2020 electoral considerations top of mind, President Trump is said to be pressing for a deal as well. The Administration is being pressured however not to let China “off the hook” too easily. The US Chamber of Commerce and the American Chamber of Commerce in China have just delivered a 143 page report to the Administration outlining in detail the variety of ways China tilts the playing field to its advantage, and urging the Administration to secure specific and enforceable commitments on structural issues. Ministerial level negotiations between the US and China will take place in Washington on January 30-31. The hope is for progress, not a resolution. My take: I continue to believe that any agreement reached within 90 days will be a superficial, face-saving agreement that will leave the core underlying issue – how do you reconcile these two fundamentally different economic systems – largely untouched. Keep your eye not on where things are headed over the next few weeks, but instead on the factors that will drive where the US-China relationship will head over the next few years. The traditional conventional wisdom policy narrative in the US is breaking down. Trade and investment with China is decreasingly seen as mutually beneficial. Instead, the playing field is seen as tilted to China’s advantage, and the wisdom of deeper, across-the-board economic integration is increasingly being questioned. Importantly, these sentiments were not created by Donald Trump, and they are likely to outlast the Trump Presidency.
In May 2018, the Trump Administration opened an investigation into whether US national security interests were being threatened by automotive imports, pursuant to Section 232 of the Trade Expansion Act of 1962. This is the same authority the Administration has used to apply global steel and aluminum tariffs, although some exemptions were subsequently granted. The steel and aluminum tariffs sparked strong condemnation – and retaliation — from trade partners who viewed the national security argument as a contrivance designed to justify protectionism and create leverage to squeeze concessions from partners. If anything, the possibility of automotive tariffs being applied under the same national security pretense has elicited even higher levels of criticism and concern. The long awaited Commerce Department report on automotive imports under Section 232 is due on February 19th. Early drafts of the reports indicated several options are being prepared, including automotive tariffs in the 20-25 percent range, as well as more narrowly focused action on high technology subsectors, which would be aimed at China’s Made in China 2025 program. An affirmative ruling by Commerce on the threat to national security posed by automotive imports would clear the way for the President to apply tariffs or impose other restrictions — if he so chooses. My take: Don’t attach too much importance to the rapidly approaching report deadline. The President still has an additional 90 days to make a decision. And the Trump Administration has demonstrated a willingness to dissemble when tactically prudent. The auto tariffs would be a major hammer to drop, and if dragging out the decision to allow discussions with trade partners to play out further (while the sword of Damocles hangs overhead) is deemed expedient, there is no reason why the White House won’t do so. In terms of the considerations being weighed by the Administration, moving forward with the auto tariffs would cause a major rupture with key trade partners (and traditional allies) at the precise time the US is trying to bring maximize pressure to bear on China. Antagonizing the EU, Japan, and other key partners — whose support could be useful — might seem counterintuitive. Yet, the President was advised of precisely these same considerations when weighing the steel tariffs, and decided to move forward nonetheless. And there are indications that the President might view automotive tariffs as leverage to extract stronger support from the EU and Japan in confronting China. On top of that, automotive issues seem to have a special saliency for the President. Going back more than 30 years as a private citizen, Mr. Trump has railed against automotive trade as one of the most egregious examples of how US trade partners “take advantage” of the US. By all accounts, it is a deeply held personal conviction. The President also sees automotive tariffs as a useful cudgel to pressure the EU into including agriculture in a potential US-EU trade deal, allowing talks to commence on terms more desirable for the US. For its part however, the EU has indicated that the imposition of auto tariffs will scuttle the talks entirely. There are still a number of steps ahead before the dance on automotive tariffs is complete. But the potential implications are profound. If the final decision is in fact to move forward with global automotive tariffs, key trade partners will almost certainly respond with the imposition of commensurate retaliatory tariffs on US products. In that case, the so-called “trade war” which has thus far been largely a US-China affair would edge a bit closer to being a truly global trade war.
Section 232 report on automotive tariffs
As I pointed out when the revised NAFTA was agreed, the NAFTA story is far from finished. A complex and perhaps rocky path to ratification in the US Congress is still ahead. The subsequent flipping of the House to Democratic control and coalescing opposition to the accord only serve to accentuate the challenges facing President Trump’s signature trade initiative. Congressional concerns about the revised NAFTA (principally but not exclusively from Democrats) have been expressed in several areas including enforcement, labor, environment, and more recently, pharmaceuticals. For relatively minor changes (or in the case of issues entirely within US purview, such as government funding for agencies with enforcement responsibility) modifications could be handled in the implementing legislation, or in an annex or side letter. This would not require reopening the agreement for negotiation, and all the complications that would entail. Beyond a certain point however, changes insisted on by Congress could result in negotiators being sent back to the table. Looming over all of this is the fact that President Trump continues to have the “nuclear option” at his disposal: He has threatened to terminate the existing NAFTA, leaving Congress with the stark binary choice of either approving the revised NAFTA, or unleashing the severe dislocations that would result from having no NAFTA at all. My take: Ever since the 2018 Congressional election results rolled in, it’s been inevitable that NAFTA ratification would get caught up in the broader political chess game being played by the Democratic House of Representatives and the Republican White House, as both parties eye the 2020 Presidential election. Democrats will not want to present the President with a “victory” on NAFTA unless they can demonstrate that they’ve responded to the interests of their base. Expect Democrats to press hard for at least some “modifications” (especially on enforcement, labor and environment), although presumably every effort will be made to limit the scope of the modifications so they can be handled in implementing legislation (or other means) rather than reopening negotiations. Whether that will ultimately be possible remains to be seen. But if negotiations are reopened, a successful conclusion cannot be assumed. Author: Stephen Olson – Research Fellow at the Hinrich Foundation. Follow Stephen Olson on Twitter @StephenOlsonHF