2018 in trade: China on defensive; TPP-11 underway

The year 2018 is ending with the Trump administration having usefully set China’s hostile trade policy back on its heels but only at considerable cost to US exports – a cost that could been avoided by concerting the anti-China measures with its EU and Japanese allies from the beginning. It is also the 20^th anniversary of the euro-dollar, which has greatly facilitated trade within Europe – although at the cost of increased political friction.

Importantly, the year’s end marks the beginning of a major new trade pact among US allies bordering the Pacific Ocean, the eleven-nation Trans-Pacific Partnership (TPP-11 or CPTPP). Yesterday, December 30^th, the first tariff phase-out step came into force for Australia, Canada, Japan, Mexico, New Zealand, and Singapore. The group will be joined by Vietnam on January 14^th. As of New Year’s Day (April 1^st in the case of Japan) a second tariff-phase-out step will take effect for the ratifying countries. Further tariff phase-out steps are set to take place annually after that, until the final tariff rate is reached. Brunei, Chile, Malaysia, and Peru have not yet completed ratification, so their tariff reductions have been delayed.

The US would have been a member of the TPP had President Trump not pulled the country out of the free-trade pact as one of the first steps of his new administration. Rescuing the TPP after the US pullout was primarily a Japanese achievement. It has raised Japan’s status as an important player in the global economy at a time when most countries are worried about the rise of protectionism and fallout from the US-China trade war.

This week brought media attention to complaints by US farmers that they are going to be cut out of the important Mexican market as tariffs on their exports will remain high while their main competitors – Australia, Canada, New Zealand – will see tariffs reduced. The EU will pose additional competition as of February 1^st, which is when the EU-Japan free trade agreement (FTA) takes effect.

This is putting intensified pressure on the White House to reach a quick deal with Japan in the trade talks that are set to begin on January 20^th. Japan is expected to seek a quick but narrow deal on goods, including agriculture, one that doesn’t go beyond what the TPP countries and the EU were given and protects Japanese automotive exports from a potential Section 232 tariff. Washington wants something more comprehensive. Tokyo is countering that if the US wants a broader deal, it can always apply to rejoin the TPP. But the US almost surely won’t seek entry while Trump is president.

That the TPP-11 is taking effect well before the Regional Comprehensive Economic Partnership (RCEP) is likely to be implemented puts further pressure on China – as well as India and other RCEP countries not in the TPP – to conclude the RCEP negotiations as quickly as possible because they too will be disadvantaged in Japan and other markets by the TPP tariff cuts.

IEEPA to be revived and aimed at Huawei and ZTE?

According to a December 27th Reuters report, President Trump is considering using the 1977 International Emergency Economic Powers Act (IEEPA) to prevent US companies from using telecommunications equipment made by China’s Huawei or ZTE. This would be a big step up from banning the use of their equipment by the US government, a restriction included in the National Defense Authorization Act signed into law in August.

If the President takes this action, it would mean that he has made use of the only long-retired US trade law he has not yet invoked that gives him authority to act unilaterally (without Congress) to impose trade barriers. This law, however, does give Congress the power to overturn any measures he imposes through a concurrent resolution (though that power could be challenged). The law also requires him to consult with Congress.

Unlike some of his other unilateral trade moves, a ban on Huawei and ZTE would probably find bipartisan support, since legislators of both parties have been urging tougher restrictions on these companies, and Sen. Marco Rubio has even said he plans to introduce legislation to bar the companies from doing business in the US.

If the President decides to use the IEEPA, he would issue an executive order declaring a national emergency. That would give him, under the law, the authority to regulate commerce posing a threat. He would have wide discretion under the law in terms of the measures he imposes. The order probably would not name the two Chinese companies but state that the Commerce Department can bar all US businesses from using equipment and services from foreign entities that could pose an unacceptable national security risk; the Commerce Department would then interpret this as applying to Huawei and ZTE.

But using the IEEPA by declaring that there is a national emergency would be a portentous move. It would exacerbate the Chinese government anger already caused by the US indictment of Huawei CFO Meng Wanzhou. It would also enrage Beijing because cutting all Huawei and ZTE transactions with the US would pose an existential threat to the two companies, which depend on US inputs such as semiconductors and also make considerable sales in the US, especially in rural areas.

Invoking the IEEPA for use against Chinese companies could disrupt the ongoing 90-day trade talks with Beijing, which just started to look more promising. But there is urgency on the matter. With the US about to adopt 5G technology that will permeate not just wireless phone networks but also the Internet of Things, a decision must be made regarding whether to allow Chinese technology and its surveillance and espionage mechanisms into the infrastructure of the new telecommunications standard or keep it out from the beginning.

There are other considerations the US must look at, including the blow that some important US tech companies would suffer if they can no longer sell semiconductor and related products to Huawei and ZTE, which are huge purchasers. Alternatively, US sales to the two companies could be permitted but not purchases from them.

Some upbeat news on the US-China trade front?

In a December 29th tweet reporting on a phone call with Chinese President Xi Jinping, President Trump gave a surprisingly upbeat assessment of where things stand in US-China trade negotiations “Just had a long and very good call with President Xi of China. Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!”

Conceivably, the US president’s remarks were mainly aimed at obtaining an upbeat year-end finish to the recently battered US stock market. The happy talk comes at a difficult time for US-China relations, given Washington’s hardening line against China’s worst offenses on the technology theft and espionage fronts. Meanwhile in China the private sector is suffering from the government’s championing of state-controlled enterprises as well as its effort to insinuate Community Party influence over private businesses.

To appease foreign concerns, Beijing announced more liberalization moves this week. These involve a third round of tariff cuts and discussion of new laws to ban forced technology transfer and better protection of intellectual property rights. The December 24th tariff announcement made by the Finance Ministry was far-reaching. Tariffs on over 700 products will be cut, some to zero. The affected imports include many advanced technology products, including medical devices, robots, and aerospace components.